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Honeywell: Revival in margins
Feb 12, 2013

Honeywell Automation India Ltd (HAIL) has announced the fourth quarter results of financial year 2012 (It is a December ending company). The company has reported 9.5% YoY decline in sales. However, net profits have grown by 5.5% YoY. Here is our analysis of the results.

Performance summary
  • Top line declined by 9.5% YoY during 4QCY12.
  • Operating profits increase 18.6% YoY with margins expanding by 270 bps (2.7%) to 11.5% during 4QCY12.
  • Strong performance at the operating level and fall in interest & depreciation expenses boosted the bottomline which increased 5.5% YoY.
  • The board of directors have recommended a dividend of Rs 10 per share for the fiscal under consideration.
  • HAIL had no debt on its books as at the end of the year.

Consolidated financial snapshot
(Rs m) 4QCY11 4QCY12 Change CY11 CY12 Change
Sales 5,012 4,534 -9.5% 16,125 16,604 3.0%
Other operating income 2 1 -35.0% 5 3 -40.7%
Expenditure 4,573 4,012 -12.3% 14,680 15,383 4.8%
Operating profit (EBDITA) 441 523 18.6% 1,451 1,225 -15.6%
Operating profit margin (%) 8.8% 11.5%   9.0% 7.4%  
Other income 40 32 -20.8% 163 112 -31.4%
Interest 3 2 -34.6% 9 3 -60.0%
Depreciation 38 37 -1.9% 148 140 -5.5%
Profit before tax 441 516.3 17.1% 1,457 1,193 -18.1%
Tax 103 159 55.4% 386 342 -11.5%
Profit after tax/(loss) 339 357 5.5% 1,071 852 -20.5%
Net profit margin (%) 6.8% 7.9%   6.6% 5.1%  
No. of shares (m)         8.8  
Basic earnings per share (Rs)         96.3  
P/E ratio (x) *         26.5  
*On a trailing 12-months basis

What has driven performance in 4QCY12?
  • Net sales declined 9.5% YoY in 4QCY12 (Company has only one reporting segment automation & control and hence it is under no obligation to provide a complete breakdown of revenues as per Accounting Standard 17).

  • Operating profits increase 18.6% YoY with margins expanding to 11.5% in 4QCY12 from 8.8% in 4QCY11. Increase in other expenses (from 13.3% of sales in 4QCY11 to 15.2% in 4QCY12) was offset by fall in cost of raw materials resulting in margin expansion. The total raw material cost (adjusting for inventory changes and purchase of stock in trade) as a percentage of sales fell from 63.2% in 4QCY11 to 56.1% in 4QCY12. However, employee cost increased from 14.7% in 4QCY11 to 17.3% in 4QCY12.

  • Due to strong performance at the operating level, bottom line increased 5.5% YoY in 4QCY12. Also, a fall in interest and depreciation expenses by 34.6% YoY and 1.9% YoY respectively supported the growth in bottomline.

  • For the full year, profits fell 20.5% YoY. However, it may be noted that other expenses for CY12 included an expenditure of Rs 48.7 m in respect of services rendered by other group companies during prior period. Adjusting for that, profits fell 16.0% YoY.

What to expect?
At the current price of Rs 2,555, the stock trades at a multiple of 26.5 times its trailing twelve month earnings. Slowdown in the end user industries like oil & gas, power generation, sugar etc impacted the volumes and thereby revenue growth for the quarter. However, decline in raw material costs boosted margins.

With interest rate cuts announced in the recent monetary policy, we believe that the industrial capex cycle is at a cusp now. This will benefit HAIL, since it has a strong and diversified presence in multiple user industries. The company also has strong return ratios and cash generating capability. Based on these factors we maintain our BUY rating on the stock.

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