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Honeywell: Weak performance
May 8, 2013

Honeywell Automation India Ltd (HAIL) has announced the first quarter results of financial year 2013 (It is a December ending company). The company has reported 6.6% YoY decline in sales while net profits have declined by 7.7% YoY. Here is our analysis of the results.

Performance summary
  • Top line declined by 6.6% YoY during 1QCY13.
  • Operating profits decline by 1.4% YoY. However, margins expand by 30 bps to 6.2% during 1QCY13 from 5.9% in 1QCY12.
  • Muted performance at the operating level and fall in other income saw the bottomline falling by 7.7% YoY.

Financial performance snopshot
(Rs m) 1QCY12 1QCY13 Change
Sales 4,126 3,854 -6.6%
Expenditure 3,884 3,615 -6.9%
Operating profit (EBDITA) 243 240 -1.2%
Operating profit margin (%) 5.9% 6.2%  
Other income 25 22 -12.2%
Interest 1 0 -66.7%
Depreciation 34 35 2.6%
Profit before tax 232 225.7 -2.8%
Tax 67 73 9.0%
Profit after tax/(loss) 165 153 -7.5%
Net profit margin (%) 4.0% 4.0%  
No. of shares (m)                8.8  
Basic earnings per share (Rs)   17.3  
P/E ratio (x) *   26.9  
* On a trailing 12-months basis

What has driven performance in 1QCY13?
  • Net sales declined 6.6% YoY in 1QCY13 (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 1.4% YoY with margins expanding to 6.2% in 1QCY13 from 5.9% in 1QCY12. Fall in the total raw material cost (adjusting for inventory changes and purchase of stock in trade) as a percentage of sales from 59.8% in 1QCY12 to 53.5% in 1QCY13 resulted in margin expansion. However, other expenses increased from 17.9% in 1QCY12 to 22.7% in 1QCY13. Employee expenses also increased from 16.5% of sales in 1QCY12 to 17.6% in 1QCY13. We believe the massive fall and rise in raw material cost and employee & other expenses respectively is due to reclassification of certain costs amongst these heads.

  • Due to muted performance at the operating level, bottom line fell 7.7% YoY in 1QCY13. Fall in other income by 12.2% YoY also hurt net profits. Depreciation expenses grew at a modest pace while the tax rate stood at 32% in 1QCY13 compared to 29% in 1QCY12.

What to expect?
At the current price of Rs 2,450, the stock trades at a multiple of 26.9 times its trailing twelve month earnings. We had last recommended the stock in November 2010. Since then, the stock appreciated quite a bit amidst delisting news before settling down to the current levels. However, the performance over the last couple of years especially on the bottomline front is not that encouraging. The net profits have declined at a CAGR of 10.1% due to increasing cost burden. Slowdown in the end user industries like oil & gas, power generation, sugar etc has impacted the volumes and constrained revenue growth. We do not see the situation improving dramatically over the next 2-3 years due to muted growth expectations for the industry.

Even if we assume an optimistic scenario about the growth in earnings the stock does not leave much upside from current levels. Also, lack of communication on management's behalf (no conference calls etc) makes the forecasting job all the more difficult. As such, we recommend a sell on the stock and discontinue our coverage on it. Please note that we will put a detailed note over discontinuing coverage tomorrow.

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