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Honeywell: Top down, bottom up
Nov 9, 2012

Honeywell Automation India Ltd (HAIL) has announced the third quarter results of financial year 2012 (It is a December ending company). The company has reported 1% YoY decline in sales. However, net profits have grown by 34.9% YoY. Here is our analysis of the results.

Performance summary
  • Top line declined by 1% YoY during 3QCY12.
  • Operating profits increase 17.3% YoY with margins expanding by 110 bps to 7% during 3QCY12.
  • Strong performance at the operating level and fall in interest, depreciation & tax expenses boosted the bottomline which increased 34.9% YoY.

Consolidated financial snapshot
(Rs m) 3QCY11 3QCY12 Change 9MCY11 9MCY12 Change
Sales 4,122 4,079 -1.0% 11,113 12,070 8.6%
Other operating income 3 1 -69.2% 4 2 -51.3%
Expenditure 3,881 3,794 -2.2% 10,102 11,371 12.6%
Operating profit (EBDITA) 243 285 17.3% 1,015 702 -30.9%
Operating profit margin (%) 5.9% 7.0%   9.1% 5.8%  
Other income 51 29 -44.0% 117 80 -31.9%
Interest 3 1 -81.5% 6 2 -71.2%
Depreciation 38 35 -10.2% 110 103 -6.6%
Profit before tax 253 279 10.1% 1016 677 -33.4%
Tax 96 67 -30.4% 283 182 -35.6%
Profit after tax/(loss) 157 212 34.9% 733 495 -32.5%
Net profit margin (%) 3.8% 5.2%   6.6% 4.1%  
No. of shares (m)         8.8  
Basic earnings per share (Rs)         56.0  
P/E ratio (x) *         28.4  
* On a trailing 12-months basis

What has driven performance in 3QCY12?
  • Net sales declined 1% YoY in 3QCY12 (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 17.3% YoY with margins expanding to 7% in 3QCY12. Increase in other expenses was offset by fall in cost of raw materials (both as a percentage of sales) resulting in margin expansion. The total raw material cost as a percentage of sales fell from 65% in 3QCY11 to 56.6% in 3QCY12. However, other expenses increased from 10.6% in 3QCY11 to 17.4% in 3QCY12.

  • Due to strong performance at the operating level, bottom line increased 34.9% YoY. Also, a fall in interest, depreciation and tax expenditure by 81.5% YoY, 10.2% YoY and 30.4% YoY respectively supported the growth in bottomline.

What to expect?
At the current price of Rs 2,680, the stock trades at 28.4 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.

We believe that the industrial capex cycle is in a cusp now. If interest rates fall, the capex cycle will get the much needed push. And the indirect beneficiary of this capex push will be HAIL, since it has a strong and diversified presence in multiple user industries. Also, with 81% promoter stake, the company is a strong delisting candidate. It 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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