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Honeywell: Margin shocker
May 7, 2012

Honeywell Automation India Ltd. (HAIL) has announced the first quarter results of financial year 2012 (It is a December ending company). The company has reported 17.4% YoY growth in sales. However, net profits have declined 47.9% YoY. Here is our analysis of the results.

Performance summary
  • Top line increased by 17.4% YoY during 1QCY12.
  • Operating profits decline 39.7% YoY with margins compressing to 6.0% during 1QCY12.
  • Poor performance at the operating level impacted bottomline, with the same declining 47.9% YoY. Decline in other income and rising tax rate impacted profits during the quarter.


Consolidated financial snapshot
(Rs m) 1QCY11 1QCY12 Change
Sales 3,515 4,126 17.4%
Other operating income 15 5 -64.2%
Expenditure 3,119 3,884 24.5%
Operating profit (EBDITA) 411 248 -39.7%
Operating profit margin (%) 11.6% 6.0%  
Other income 27 20 -26.0%
Interest - 1  
Depreciation 35 34 -0.9%
Profit before tax 403 233 -42.3%
Tax 85 67 -21.0%
Profit after tax/(loss) 318 166 -47.9%
Net profit margin (%) 9.0% 4.0%  
No. of shares (m)   8.8  
Basic earnings per share (Rs)   18.7  
P/E ratio (x) *   24.4  
* On a trailing 12-months basis

What has driven performance in 1QCY12?
  • Net sales increased 17.4% YoY in 1QCY12 (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 decline 39.7% YoY with margins registering a fall of 560 bps in 1QCY12. Increase in overall expenditure as a percentage of sales resulted in margin erosion. Total expenditure as a percentage of sales increased from 88.7% in 1QCY11 to 94.1% in 1QCY12. However, it may be noted that the other expenditure for the quarter included Rs 47 m charged in respect to services rendered by the group companies during the prior period.

  • Due to rising taxes and lower other income bottom line declined 47.9% YoY.

What to expect?
At the current price of Rs 2,540, the stock trades at 24.4 times its trailing twelve month earnings. While the company has been delivering on the top-line front over the last four consecutive quarters it is the profitability growth and margins that have come under significant pressure. But we believe that once the one off prior adjustments (regarding services rendered by the group companies) culminate, margins will go back to the past averages. Taking into considering the long term growth prospects and delisting opportunity on offer (parent, Honeywell Ltd owns 81% in the Indian subsidiary) we maintain our positive view on the stock.

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