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Execution improves; supply-chain concerns persist

Honeywell Automation India’s (HAIL) performance in Q1FY23 was ahead of our estimates. Revenue increased both on YoY and QoQ basis by ~15% and 18% to Rs7.9bn, respectively. We believe execution would have improved with increased backlog and gradually opening up of international travel. EBITDA increased 4.5% YoY to Rs1.2bn. EBITDA margin of 15.5%, ahead of our estimates, contracted 160bps YoY but expanded 240bps QoQ. Average cashflow generation remains healthy at Rs2.5bn over the past five years. With government’s ongoing push towards building a holistic infrastructure in the country, we see an increased traction towards automation across multiple industries. Also, the recent spike in crude oil prices augurs well for the company due to its high market share in the oil & gas industry. With improved operating performance in Q1FY23, we raise our FY23E/FY24E earnings by 7%/4%, respectively. However, we believe supply-chain issues, especially related to semiconductors, still persist and may take a few quarters to normalise. Hence, maintain SELL with a revised target price of Rs31,212 (earlier: Rs29,959).

* Ahead of estimates performance: Revenue for the quarter grew 15% YoY / 17% QoQ to Rs7.9bn, ahead of our estimates of Rs7.4bn. EBITDA grew 4.5%/ 40% YoY / QoQ to Rs1.2bn. Gross margin contracted 350bps to 49%. However, higher operating leverage limited EBITDA margin contraction to 157bps YoY at 15.5%, higher than our estimate of 14.5%. PAT grew 11% YoY to Rs1bn (ISECE: Rs867mn) supported by 34% YoY growth in other income and 32% YoY decline in finance costs.

* Industrial production revival to support process automation business: Apart from its core business in process industries, HAIL has been incrementally focusing on strengthening its metal, pharma, life sciences and gas business where it has synergy in product portfolio within the process automation business. Additionally, the company aims at diversifying in the fast-growing renewable energy market

* Increased capital outlay bodes well for building solutions business: The FY23 Union Budget had laid 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 segments such as airports, metro, railways, ports and large-scale data centres. Company is poised to leverage the government’s increased capital outlay towards these segments.

* Maintain SELL: HAIL has longer-cycle orders compared to its peers ABB and SIEM. We expect revival in HAIL’s performance as near-term headwinds wane out. Long term secular growth drivers in process automation and digitisation, building management and cyber security, and constant improvement in product portfolio, will drive HAIL’s long-term growth. We believe supply-chain issues, especially related to semiconductors, still persist and may take a few quarters to normalise.

Outlook and valuation

Honeywell Automation India (HAIL) is in a unique position as a secular play in the domestic process automation opportunity. 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 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 improvement in execution coupled with higher-than-estimated margin for Q1FY23, we raise our FY23E and FY24E earnings by 7% and 4%, respectively. We assign a 60x P/E multiple to FY24E earnings and arrive at a revised target price of Rs31,212 (previously: Rs29,959). Maintain Due to improvement in execution coupled with higher-than-estimated margin for Q1FY23, we raise our FY23E and FY24E earnings by 7% and 4%, respectively. We assign a 60x P/E multiple to FY24E earnings and arrive at a revised target price of Rs31,212 (previously: Rs29,959). Maintain SELL..

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