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Weak execution impacts earnings

Honeywell Automation India’s (HAIL) revenues declined 1.6% YoY to Rs8.6bn in Q3FY22, but was up 17% QoQ. EBITDA fell 35% YoY to Rs1.2bn due to higher input costs while PAT shrunk 40% YoY to Rs897mn due to a 50% YoY decline in other income. Company reported an EBITDA margin of 14.2% (down 730bps YoY, 40bps QoQ). Although near-term execution headwinds remain, we expect pick-up in automation across multiple industries in line with the Infrastructure thrust of the government. However, due to muted performance in 9MFY22 and continued near-term execution challenges, we cut our estimates for FY22E and FY23E by 34% and 35%, respectively. Maintain REDUCE with a revised target price of Rs36,489 (earlier: Rs39,294).

* Muted performance and inflationary input costs impact earnings:

HAIL’s 9MFY22 revenues declined 4% YoY to Rs22.8bn while EBITDA fell 25% YoY to Rs3.5bn. EBITDA margin for the period contracted 420bps to 15.2% due to higher input and overhead costs. Gross margin shrunk 240bps to 47% during 9MFY22 and 430bps in Q3FY22 indicating raw material cost pressure and inability to pass it on through immediate price hikes. Overall PAT for 9MFY22 declined 25% YoY to Rs2.6bn. Despite the execution improving 17% QoQ to Rs8.6 during Q3FY22, lower gross margin and lower other income led to PAT growth of only 5.3% QoQ to Rs897mn.

* Increased capital outlay bodes well for building solutions business:

The FY23 Union Budget has laid an incremental focus towards building a robust civil infrastructure in the country. HAIL, a major player in building automation solutions, provides automation and control technologies to core infrastructure – such as airports, metro, railways, ports and large-scale data centres – and is therefore poised well to leverage the increased capital outlay towards these segments.

* Industrial production revival to support process automation business:

Apart from its core business in the oil & gas, refinery and petrochemical business, HAIL has been incrementally focusing on strengthening its pharma and life science business, where it has synergy in the product portfolio within the process automation business. Additionally, HAIL aims at diversifying in the fast-growing renewable energy market.

* Maintain REDUCE due to rich valuation and muted performance:

The other key domestic competitors of HAIL in the automation space – ABB and Siemens – have recently announced fair performance in their automation segments. However, HAIL has longer-cycle orders than the other two, hence we expect revival in its performance as the near-term headwinds wane out. The long-term growth drivers in process automation and digitisation, building management and cyber security, and constant improvement in the product portfolio, will drive HAIL’s long-term growth. However, due to recent underperformance, we maintain our REDUCE rating with a revised target price of Rs36,489.

Outlook and valuation

Honeywell Automation India (HAIL) is strong domestic player in process automation industry. It is also trying to hedge itself from the oil & gas industry by focusing on other areas such as building automation, ‘smart city’ solutions, cyber security, etc.

The three major focus areas in the near term are: (i) healthcare and pharma, (ii) air quality and hygiene products & solutions, and (iii) products and systems to facilitate remote working and connected buildings.

Due to muted execution during FY22E and near-term macro challenges, we reduce our estimates for FY22E and FY23E by 34% and 35%, respectively. We have introduced our estimates for FY24E and accordingly roll forward our valuations. We assign a P/E multiple of 60x to FY24E due to its strong presence in the process automation space. However, due to rich valuations and near-term headwinds; we maintain REDUCE.

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