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Broadly in‐line with estimates; Retain BUY

Key highlights from Q3FY21 results

* Revenues came in at Rs8.7bn, up 15% qoq & down 3% yoy (in‐line with estimates).

* Gross margin was at ~47.3%, contraction of ~183bps yoy led by unfavorable sales mix.

* However, EBITDA margin expanded by 53bps yoy as Honeywell Automation (HWA) continues to focus on rationalization of discretionary spends, productivity drives etc.

* Employee cost & other expenses declined by 74bps/162bps yoy respectively. EBITDA was largely flat yoy, 7.2% ahead of estimates.

* Other income increased by 48% yoy to Rs285mn (+1.6% vs our est.)

* PAT marginal beat (+5.5% vs our estimates) & it came in at Rs1.5bn, up 3.6% yoy

Our View: We like HWA based on its ongoing product portfolio upgradation, focus on software industrial business model, faster adoption of automated solutions by domestic market post Covid‐19 episode & relentless execution on cost control. As India moves to add more smart cities, drive a gas‐based economy, and build digital infrastructure for the future, HWA would have tremendous business opportunities. We believe domestic market recovery to happen at faster rate than exports as its parent indicated that performance of the Global Services segment would improve in H2CY21.

We expect domestic revenue CAGR of 16% over FY21E‐23E led by, i) Planned investments into Data Centers, Metro, Airport & Smart Infra projects, ii) HWA’s focus on double digit connected software growth, iii) Major beneficiary of India’s move to build energy security, drive gas‐based economy by encouraging digital solutions & iv) Gaining traction from buoyant sectors like Pharma & Chemical sectors via new product launches.

Export revenue CAGR of 13% over FY21E‐23E driven by, i) Business integration with Parent’s entities by leveraging cost efficient services, ii) New portfolios, offerings and geographic expansion supporting Honeywell's global growth agenda & ii) Supply chain localization. Average OCF/EBITDA ratio was strong at 0.67x (one of the best in industry) during FY15‐20, expect it to ~1x by FY22E. HWA’s continued earnings outperformance among its peers, asset light tech model & robust return ratios (RoE ex‐cash/ RoIC at 71%/58% in FY20) justify its valuations. Retain ‘BUY’ rating on the stock with TP of Rs48,258 at 55x FY23E EPS as we introduce FY23 estimates.

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