IGI Logo

Slower catch-up; better clarity awaited

Honeywell (HAIL) has missed estimates line-by-line for a couple of quarters in a row in contrast with its MNC peers. While part of the miss could be linked to higher services revenue versus short-cycle products, which fared far better, there exists some gap that calls for clarity.

In our view, the miss by HAIL in recent quarter implies a much slower/back-ended catch-up in revenue, especially profitable exports (services/products etc). Our hypothesis of a better domestic cycle/higher outsourcing remains intact given improving capex cycle in India and parent’s growth approach. But we are lowering near-term growth assumptions building in the recent weakness. Retain ‘BUY’.

H1: Slower revenue catch-up; mix adds to OPM pressure

HAIL’s Q2 miss across line items reflects a persistent miss for a few quarters, which is our view shows slower catch-up—both domestic and exports. Sharper EBITDA drop for H1 reflects the impact of adverse revenue mix, some input cost pressure and adverse operating leverage. If one compares HAIL with parentco or some MNC peers such as ABB and Siemens, HAIL’s lower growth could be attributed in part to higher services/lower short-cycle products, limited exposure to high-growth segments for parent (warehouse automation etc). 

What’s key to HAIL’s re-rating; some relevant aspects for investors

The two key variables to HAIL’s earnings/valuation re-rating are: i) rising value addition and role in parentco’s HGR (high growth regions); and ii) an expanding domestic market TAM. Recent weakness in quarterly numbers though raisesinvestor discomfort on growth, making a sequential revenue pick up critical over the coming few quarters, especially as global supply chain, domestic cycle seems to be faring better. Management comments around H1 results indicate a cautious outlook on large capex by customers and HAIL’s focus on improving execution, however, clarity on exports will remain critical given HAIL’s higher exposure than peers.

Outlook and valuation: Some challenges along the path; retain ‘BUY’

Factoring in the recent top-line miss, we are lowering FY22/23E earnings by 18%/6%, which brings down the TP to INR50,150 (from INR50,700) as we roll over to Mar-23E. Clarity on HAIL’s role in parentco’s growth remains key as it is an important variable apart from domestic capex, which is linked to a few large sectors. Retain ‘BUY/SO’.

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://www.edelweiss.in/disclaimer
SEBI Registration No. INH000000172

Above views are of the author and not of the website kindly read disclaimer