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Honeywell: Margins under pressure
Nov 1, 2011

Honeywell Automation India Ltd (HAIL) has announced the third quarter results of financial year 2011 (3QCY11 results). The company has reported 13.2% YoY growth in sales. However, net profits have declined 39.4% YoY. Here is our analysis of the results.

Performance summary
  • Top line increased by 13.2% YoY during 3QCY11.
  • Operating profits decline 16.3% YoY with margins compressing to 6.5% during 3QCY11.
  • In line with the operating performance, net profits decline 39.4% YoY. Increase in tax expenses by 80.2% YoY, impacting the profitability growth.

Consolidated financial snapshot
(Rs m) 3QCY10 3QCY11 Change 9MCY10 9MCY11 Change
Sales 3,640 4,122 13.2% 9743 11113 14.1%
Other operating income  9 29 225.8% 7 43 521.7%
Expenditure 3,327 3,881 16.6% 8765.1 10102 15.3%
Operating profit (EBDITA) 322 269 -16.3% 985 1,054 7.0%
Operating profit margin (%) 8.8% 6.5%   10.1% 9.4%  
Other income 22 25 12.1% 59 78 34.0%
Interest - 3   1 6 353.8%
Depreciation 32 38 21.5% 93 110 19.1%
Profit before tax 312 253 -18.9% 950 1016 7.0%
Tax 54 96 80.2% 157 283 80.5%
Profit after tax/(loss) 259 157 -39.4% 793 733 -7.6%
Net profit margin (%) 7.1% 3.8%   8.1% 6.6%  
No. of shares (m)         8.8  
Basic earnings per share (Rs)         82.9  
P/E ratio (x) *         20.5  
*On a trailing 12 month basis

What has driven performance in 3QCY11?
  • Net sales increased 13.2% YoY in 3QCY11.

  • Operating profits declined 16.3% YoY with margins registering a fall of 230 bps in 3QCY11. Increase in overall expenditure as a percentage of sales resulted in margin erosion. Total expenditure as a percentage of sales increased from 91.4% in 3QCY10 to 94.2% in 3QCY11.

  • Due to higher taxes and increase in interest and depreciation expenses, bottom line registered a fall of 39.4% YoY in 3QCY11.

What to expect?
At the current price of Rs 2,297, the stock trades at 9.0 times our estimated CY14 earnings. The current quarter performance was disappointing especially on the profitability front. As a result, we are likely to revise our estimates downwards. Nonetheless, we believe that the current valuations offer a reasonable margin of safety from a long term perspective. Thus, we maintain our positive view on the stock.

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