4 Recommendation SUBSCRIBE SUBSCRIBE FROM A LONG TERM VIEW CMP (14/12/2012) Rs. 2,335 Target Price Sector Stock Details N/A Automation BSE Code 500033 NSE Code Bloomberg Code HONAUT HWA IN Market Cap (Rs crs) 2121 Free Float (%) 18.76% 52- wk HI/Lo (Rs) 3391.8/1620 Avg. volume BSE (Quarterly) 7499 Face Value (Rs) 10.0 Dividend (FY 12) 100% Shares o/s (Crs) 0.88 Relative Performance 1Mth 3Mth 1Yr Honeywell -12.9% -6.43% 32.7% Sensex 3.64% 7.53% 20.95% 3500 3300 3100 2900 2700 2500 2300 2100 1900 1700 1500 Shareholding Pattern 30 th Sept 12 Promoters Holding 81.24% Institutional (Incl. FII) 5.49% Corporate Bodies 2.02% Public & others 11.25% Silky Jain Research Analyst (022 3926 8178) silky.jain@nirmalbang.com Sunil Jain HOR Retail (022 3926 8196) sunil.jain@nirmalbang.com (HAIL) has 81% of its stake held by the promoters implying 19% public share holding. Promoter has announced to reduce their stake through an offer for sale (OFS) to comply with minimum 25% public shareholding requirement. As such Honeywell Auto India (HAIL) proposes to sell an aggregate of 5.51 lakh shares representing 6.24% of the total share capital of the company. The offer for sale opens today at a floor price of Rs 2,150. At this price the share is trading at PE of 23x on trailing EPS. The company has witnessed declining results in the past two years on account of slow down in the overall capex cycle in various sectors considering the slowdown in economic environment. HAIL had witnessed EBITDA margins of 16% in CY09 which declined to 10.6% in CY10, 9.3% in CY11 and further to 5.8% in 9MCY12. Similarly, the return ratios have also declined from 30.3% in CY09 to 17% in CY11. The near term results may not be great considering the slowing capex cycle. However, a revival in the overall capex cycle will lead to an improvement in the results of the company and the stock can generate a substantial return in the long run. Moreover, considering the strong parentage and strong market leadership position of the company in the segments where it operates, the current offer for sale provides an excellent opportunity to generate decent returns in the long term. We recommend subscribing to the offer for sale from long term perspective. The stock had appreciated significantly on hopes of delisting (52 week high of Rs 3,391). Post the announcement of offer for sale the stock witnessed significant pressure and has corrected 29% since the announcement. However, we believe that this correction offers an attractive level to enter the stock from a long term perspective as we expect the price decline overhang to diminish substantially. Higher threat and awareness for security along with focus on energy conservation will lead to growth in the segment of Industrial security and safety applications where HAIL has a strong product and solution portfolio. HAIL is a debt free company and has cash balance of Rs ~Rs 176 Cr in CY11. Thus it has the ability to generate healthy cash flows to meet investment and financing needs thereby not relying on external sources of funds. HAIL has delivered decent RoE in times of good capex cycle of ~30%+ which has declined in the past two years. Going forward, we expect the company to improve back to its historical levels of performance. HAIL has been paying 100% dividend to its shareholders. HAIL enjoys a strong parentage of Honeywell International which is a Fortune 100 global diversified technology and manufacturing leader. Honeywell International has a market capitalization of US$47,864 mn as on 30 th September 2012. Honeywell International is a component of Dow Jones Industrial Average and S&P s 500 Index. Year Net Sales (Rs crs) Growth (%) EBITDA (Rs crs) Margin (%) PAT (Rs crs) Margin (%) EPS (Rs) PE (x) EV/Sales EV/EBITDA CY09 1,175 20.7% 188 16.0% 133 11.3% 150.23 15.81 1.70 10.58 CY10 1,355 15.3% 144 10.6% 105 7.7% 118.83 19.99 1.39 13.12 CY11 1,613 19.0% 151 9.3% 107 6.6% 121.20 19.60 1.19 12.73 1 P a g e
Company Description Honeywell Automation India Limited (HAIL) was incorporated in 1987 as a JV between the Tata group and Honeywell. Honeywell is a Fortune 100 company and is a leading provider of integrated automation and software solutions. It operates in the products and services business. HAIL is headquartered at Pune. Honeywell Auto operates through five business units, which are as follows: Honeywell process solutions (HPS): It provides knowledge-based process solutions to core industrial sectors of power, oil and gas, refining, paper, sugar industry. Nearly 65% of the total revenue comes from process solutions, including those provided in the exports business group. Honeywell building solutions (HBS): It provides various building automation solutions for commercial and industrial buildings, IT, retail outlets, hospitals, airports etc. Environmental and combustion control (ECC): This unit provides environmental and combustion products and solutions to various commercial, hospitality and industrial segments. Sensing and control (S&C): It provides various electronic sensors and electromechanical switches to OEMs in various manufacturing industries, including auto, medical instrumentation and aerospace. Exports business group (EBG): The unit caters the manufacturing and engineering service needs of Honeywell International as well as non-honeywell customers and organizations across the globe. Offer for Sale Announcement: (HAIL) has 81% of its stake held by the promoters implying 19% public share holding. The company has announced that the promoters intend to reduce their stake through an offer for sale (OFS). Honeywell Auto India (HAIL) proposes to sell an aggregate of 5.51 lakh shares representing 6.24% of the total share capital of the company at a floor price of Rs 2,150. Name of the seller (Promoter) Honeywell Asia Pacific Inc Date and time of opening and closing of sale The sale shall take place on December 14 2012 at 9.15 am to 3.30 pm Allocation Methodology The allocation shall be on a price-priority basis at multiple clearing prices A minimum of 25% of the sale will be reserved for allocation to mutual funds and insurance companies subject to receipt of valid bids. In the event of any under subscription by them, the unsubscribed portion will be available to other bidders. Name of the seller s broker Deutsche Equities India Private Ltd 2 P a g e
Investment Rationale Diversified business mix HAIL operates in a diversified business environment wherein it operates in 5 major business segments as discussed in company description. HAIL is the market leader in most of the business and caters the needs and demands of various sectors like power, automobiles, metals, paper, oil and gas, sugar etc. Such a huge client network ensures that a downturn in any of the sector will not have a significant impact on the performance of the company and it will be able to maintain its revenue growth momentum. Strong Parentage HAIL enjoys a strong parentage of Honey Well Inc which is a Fortune 100 global diversified technology and manufacturing leader. Honey Well International operates in segments like aerospace products and services; automation and control solutions; transportation systems; and specialty materials. It has a market capitalization of US$47,864 mn as on 30 th September 2012. Honeywell International is a component of Dow Jones Industrial Average and S&P s 500 Index. Honeywell International has a cash and cash equivalent to US$5,471 mn and free cash flow of US$2,727 mn with EBITDA margins of 11% and Net profit margin of 6.31%. We believe that such a strong parentage group will augur well for the company in the long term. Zero Debt and Cash Rich HAIL is a debt free company and has cash balance of Rs ~Rs 176 Cr in CY11. Thus it has the ability to generate healthy cash flows to meet investment and financing needs thereby not relying on external sources of funds. Moreover, the company has successfully delivered RoE of ~30%+ in times of good capex cycle and 17% in CY11. In addition the company has been paying 100% dividend to its shareholders. Strong Client Base In CY11, HAIL bagged orders from OPAL Petrochemicals, Reliance Industries and NOCL. The Honeywell building solutions (HBS) unit s customers include Kolkata Airport, Tata Consultancy Services, Cognizant Technology Solutions, AIIMS, Sahyadri Hospital, Dr Reddy s Laboratories and Royal Bank of Scotland. The environment and combustion control (ECC) division saw double digit growth in CY11 driven by increasing demand in Tier 2 and Tier 3 cities and revival in hospitality and commercial real estate. The sensing and control (S&C) unit saw growth across all lines of business, viz, electromechanical, electro sensing, test & measurement; the transportation vertical bagged orders from Mahindra & Mahindra, Kirloskar Oil Engines etc, during FY12. 3 P a g e
Financial performance 1700 Sales & Sales growth 40.0% 1500 34.8% 35.0% 1300 30.0% 25.0% 1100 900 700 500 19.0% 20.0% 17.3% 15.4% 15.3% 15.0% 10.0% 8.6% 5.0% CY07 CY08 CY09 CY10 CY11 9MCY12 Sales growth 140 120 PAT & PAT Growth 62.2% 80.0% 60.0% 100 40.0% 80 60 12.1% 26.2% 1.9% 20.0% 0.0% 40-21.1% -20.0% 20 CY07 CY08 CY09 CY10 CY11 9MCY12-32.2% -40.0% PAT growth 210 190 170 150 130 110 90 70 50 EBITDA & EBITDA Margins 17.0% 16.0% 15.0% 12.4% 13.0% 11.7% 10.6% 11.0% 9.3% 9.0% 7.0% 5.8% 5.0% CY07 CY08 CY09 CY10 CY11 9MCY12 EBITDA Margins 4 P a g e
9MCY12 Result Analysis Particulars 9MCY12 9MCY11 YoY Net sales 1207.0 1111.3 8.6% Other operating income 0.2 0.4 (51.3%) Total income 1207.2 1111.7 8.6% RM cost 713.3 653.7 9.1% RM cost % of sales 59.1% 58.8% Employee cost 219.1 209.7 4.5% Other exp 204.7 146.8 39.4% Total expenditure 1137.1 1010.2 12.6% EBITDA 70.2 101.5 (30.9%) EBITDA margin 5.8% 9.1% Other income 8.0 11.7 (31.9%) Interest 0.2 0.6 (71.2%) Depreciation 10.3 11.0 (6.6%) PBT 67.7 101.6 (33.4%) Tax 18.2 28.3 (35.6%) Tax rate 1.5% 2.5% PAT 49.5 73.3 (32.5%) PAT margin 4.1% 6.6% EPS 56.0 82.9 N/A Sales grew 8.6% YoY to Rs 1,207 cr in 9MCY12 while EBITDA declined 30.9% YoY due to higher % of RM cost leading to 330 bps decline in EBITDA margin. PAT witnessed a decline of 32.5% YoY as compared to 9MCY11. We believe that the decline in performance was owing to slow down in the overall capex cycle in the industry coupled with higher raw material cost. Going forward, we do not expect the company to report significant improvement in results in near term as there are no visible signs of improvement in the capex cycle. However, in the long run with a revival expected in the capex cycle, the overall sentiment will witness an improvement leading to improvement in sales and EBITDA levels. 5 P a g e
Financials Profitability (Rs. In Cr) CY09 CY10 CY11 Balance sheet (Rs. In Cr) CY09 CY10 CY11 Net Sales 1,175 1,355 1,613 Share Capital 9 9 9 Other op income 1 1 7 Reserves & Surplus 430 525 621 Total Income 1,175 1,356 1,619 Share Holder's Funds 439 533 630 Total Cost 987 1,212 1,468 Loans Funds 0 0 0 EBITDA 188 144 151 Total Liabilities 439 533 630 Dep 12 13 15 Net Fixed Assets 75 76 77 Op Income 177 131 136 Total Investments 0 0 0 Interest 1 0 1 Current Assets 640 818 1,009 Other Income 4 8 10 Sundry Debtors 289 322 366 Extraordinary 2 Cash & Bank 106 211 177 PBT 182 139 146 Contracts in Progress 0 101 235 Tax 49 34 39 Inventories 81 79 83 PAT (reported) 133 105 107 Loans and Advances & Others 164 105 148 Shares o/s ( No. in Cr.) 0.9 0.9 0.9 Current Liabilities & Provision 305 391 496 EPS 150 119 121 Net Current Assets 335 426 513 Adj Cash EPS 164 133 138 Deffered Tax Asset 28 31 40 Quarterly (Rs. In Cr) Mar.12 June.12 Sept.12 Total Assets 439 533 630 Net Sales 413 387 408 Performance Ratio CY09 CY10 CY11 EBITDA 25 14 28 Sales growth (%) 20.7% 15.3% 19.0% Dep 3 3 3 EBITDA margin (%) 16.0% 10.6% 9.3% Op Income 21 10 25 PAT margin (%) 11.3% 7.7% 6.6% Interest 0 0 0 ROE (%) 30.3% 19.7% 17.0% Other Inc. 2 6 3 ROCE (%) 40.2% 24.6% 21.6% PBT 23 17 28 Valuation Ratio CY09 CY10 CY11 Tax 7 5 7 Price Earnings (x) 15.81 19.99 19.60 PAT 17 12 21 Price / Book Value (x) 4.79 3.94 3.33 Per Share Data CY09 CY10 CY11 EV / Sales 1.70 1.39 1.19 Reported EPS 150.23 118.83 121.20 EV / EBIDTA 10.58 13.12 12.73 BV per share 496.2 603.4 713.0 EV / Total Assets 4.54 3.54 3.05 Dividend per share 10.0 10.0 10.0 Dividend Yield 0.4% 0.4% 0.4% 6 P a g e
NOTES Disclaimer: This Document has been prepared by Nirmal Bang Research (A Division of Nirmal Bang Securities PVT LTD). The information, analysis and estimates contained herein are based on Nirmal Bang Research assessment and have been obtained from sources believed to be reliable. This document is meant for the use of the intended recipient only. This document, at best, represents Nirmal Bang Research opinion and is meant for general information only. Nirmal Bang Research, its directors, officers or employees shall not in anyway be responsible for the contents stated herein. Nirmal Bang Research expressly disclaims any and all liabilities that may arise from information, errors or omissions in this connection. This document is not to be considered as an offer to sell or a solicitation to buy any securities. Nirmal Bang Research, its affiliates and their employees may from time to time hold positions in securities referred to herein. Nirmal Bang Research or its affiliates may from time to time solicit from or perform investment banking or other services for any company mentioned in this document. Nirmal Bang Research (Division of Nirmal Bang Securities Pvt. Ltd.) B-2, 301/302, Marathon Innova, Opp. Peninsula Corporate Park Off. Ganpatrao Kadam Marg Lower Parel (W), Mumbai-400013 Board No. : 91 22 3926 8000/8001 Fax. : 022 3926 8010 7 P a g e