X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Honeywell Automation: A confused conglomerate - Outside View by Luke Verghese

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Honeywell Automation: A confused conglomerate
Jun 10, 2011

A confused conglomerate

Honeywell Automation is an 81.2% subsidiary of the American giant Honeywell International. It has been operating in the Indian geography for over 27 years now. (The non management shareholding is a mere 1.7 m shares). It is only one of the several Honeywell group companies doing business in India, and the only publicly listed company with the Honeywell name in India. The company seems unsure on how many fellow subsidiaries it has operating in India. In the schedule of 'Fellow Subsidiaries' It has detailed the names of 63 fellow subsidiaries worldwide. This list includes apparently the names of four Indian offspring. They are Honeywell Technology Solutions Lab Pvt. Ltd, Honeywell Electrical Devices and Systems India Ltd, Honeywell Investment India Pvt Ltd and probably one other such. However in the schedule of 'Transactions with Related Parties' it has given the names of three Indian companies - Honeywell Turbo Technologies (India) Pvt. Ltd, Callidus Technologies India Pvt Ltd, and Honeywell Turbo India Ltd - which are listed as fellow subsidiaries in this schedule - but whose names do not find any mention in the earlier stated list. How can this be? Or do they belong to some other separate category? And Honeywell Asia Pacific Inc, the immediate holding company of the Indian sibling, is shown as Honeywell International Asia Pacific Inc. in the fellow subsidiary list!

A potpourri of activities

The total turnover of all the Honeywell companies in India in a given year is not known, but this entity has registered a gross sales of Rs 13.7 bn in 2010 (Rs 11.9 bn previously) and rustled up a pre-tax profit of Rs 1.4 bn (Rs 1.8 bn) to boot. The profits of the Indian subsidiary are not decided by its manufacturing or operating efficiencies for sure. As a matter of fact it does very little manufacturing in India and is merely a pre-paid post office for its worldwide operations. So the extent of the profits that it is allowed to show in its books is decided by the paterfamilias or some such.

It has extensive sideway deals going you see, with its fellow subsidiaries in India and with the affiliates that dot the globe. It does not have a direct investment in any of the other Honeywell group companies. As a matter of fact it does not even boast of a schedule called investments. The company has two geographical segments in its sales generation. The domestic tariff area accounted for 63% of its sales generation in 2010 (53% previously), while exports brought in the balance. The exports were affected to group companies. As can be expected, it also purchases goods, services, and fixed assets from its parent and from other fellow subsidiaries based out of India and elsewhere. This amounted to Rs 2.5 bn in 2010 (Rs 2.5 bn previously). The exact trifurcation of these purchases is not known. Then there is the sharing of expenses which appears to be 'two-way traffic', with the company contributing its share of expenses reimbursement to the global kitty, and receiving its share of expenses from the global kitty. It paid out Rs 610 m (Rs 226 m) in 2010 and received Rs 378 m (Rs 433 m) in return. There does not appear to be any set pattern in the working of this schedule. It is however all laid out down to the last T in some apparent predetermined programming. Given its bundle of excess cash that it possesses it also lends moneys to its group companies in India.

What its operations are all about

For the matter of record, as its name plate suggests, it is the business of automation solutions for a variety of industries and also sells the complex software that goes with the hardware, along with related services. It has five business units to cater to its income -Process Solutions/ Building Solutions/ Environment and Combustion Control/ Sensing and Control and, Global Services. In the financial year 2010 the manufacturing income (made up of Systems and Transmitters) constituted a mere 9.4% of all sales revenues, while bought outs and traded products brought in the vast bulk of the top-line at 63.7%. (Whether it adds any value to these items of purchase before they are sold is not known.) Services rendered tossed in the balance 26.8% to the kitty. This in a nutshell is what this company is all about. The company makes do with a manufacturing block of Rs 1.2 bn just to rustle up a manufacturing related revenue of Rs 1.3 bn. But the makeup of this fixed asset base is also a trifle interesting. The depreciable gross block is 50% depreciated and the company depreciates assets to the bone before selling them. During the year it sold plant and machinery and such like with a face value of Rs 274 m and having a depreciated value of Rs 19 m for a pitiable Rs 2.3 m, and realised a loss of Rs 17 m.

How the bottom-line adds up

The company states that the profits in 2010 took a hit due to several reasons - a competitive environment leading to lower selling prices, investments made by the company, increase in employee costs, and higher charge on the company by the parent as a part of the international expenses. Yes and No. The only reason for the fall in profitability seems to be the higher charge under 'Material and manufacturing expenses' which grew by a shade over 29% to Rs 8 bn compared to the 15% growth in gross sales. Since the company outsources the bulk of its material costs and its sales are also substantially affected to group companies it appears that this was not a particularly good year for the company - as the parent decided to squeeze it a little more out of its sibling both on the cost front and on the sales front as compared to the preceding year. Okay, it also got doubly squeezed in 2010 due to a sharp hike in the allocation of fees payable to the parent, as stated earlier. Actually it got squeezed three times over if one factors in the 100% dividend that it declared and paid - a shade over 81% of the dividends went into the parent's coffers. In any event nobody is complaining about the state of affairs.

Given the niche business that it operates in and the clientele that it boasts of, it somehow also takes a huge hit on the bad and doubtful debts front. It has made a provision of Rs 417 m towards doubtful debts during the accounting year. Furthermore it has separately provided for another Rs 69 m on this account in the P&L (profit and loss) account, besides writing off Rs 16 m as bad debts, all in all amounting to Rs 502 m. The company had written off Rs 553 m on this count in the preceding year.

Irrespective of the manner in which the company is made to conduct its business it is sailing on high seas, no less. It has a surfeit of cash amounting to over Rs 2 bn and with nowhere to invest for one. Add to this a very conservative dividend policy. The dividend payment of 100% on the face value was a mere 8% of the after tax profit. The Reserves & Surplus at Rs 5.2 bn is some 59 times the paid up equity!

A very difficult call

It is indeed very difficult to take a call on a company which has an operating portfolio like the one that Honeywell Automation has. Its primary dependency is in outsourcing goods and services also from group companies and then selling them also to group companies. Furthermore It is a contract manufacturer for other companies in the group and therefore entirely dependent on the dictates from the powers that be. Suffice to say that the company will be assured that is operations will result in a decent enough profit margin at the end of the day. The only real attractive aspect of this company is the brand.

Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme

This column Cool Hand Luke is written by . Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Equitymaster requests your view! Post a comment on "Honeywell Automation: A confused conglomerate". Click here!

  

More Views on News

HONEYWELL AUTOMATION Announces Quarterly Results (2QFY19); Net Profit Up 32.1% (Quarterly Result Update)

Nov 12, 2018 | Updated on Nov 12, 2018

For the quarter ended September 2018, HONEYWELL AUTOMATION has posted a net profit of Rs 974 m (up 32.1% YoY). Sales on the other hand came in at Rs 8 bn (up 16.2% YoY). Read on for a complete analysis of HONEYWELL AUTOMATION's quarterly results.

HONEYWELL AUTOMATION 2017-18 Annual Report Analysis (Annual Result Update)

Sep 20, 2018 | Updated on Sep 20, 2018

Here's an analysis of the annual report of HONEYWELL AUTOMATION for 2017-18. It includes a full income statement, balance sheet and cash flow analysis of HONEYWELL AUTOMATION. Also includes updates on the valuation of HONEYWELL AUTOMATION.

HONEYWELL AUTOMATION Announces Quarterly Results (1QFY19); Net Profit Up 65.6% (Quarterly Result Update)

Aug 8, 2018 | Updated on Aug 8, 2018

For the quarter ended June 2018, HONEYWELL AUTOMATION has posted a net profit of Rs 917 m (up 65.6% YoY). Sales on the other hand came in at Rs 8 bn (up 16.1% YoY). Read on for a complete analysis of HONEYWELL AUTOMATION's quarterly results.

Garden Reach Shipbuilders and Engineers Ltd: Is This PSU Shipbuilder Worth Betting On? (IPO)

Sep 24, 2018

Should you apply for the IPO of Garden Reach Shipbuilders and Engineers Ltd?

H.G Infra Engineering Ltd. (IPO)

Feb 24, 2018

Should you subscribe to the IPO of H.G Infra Engineering Ltd.?

More Views on News

Most Popular

These Are the Kind of Blue Chips You Should Invest In(The 5 Minute Wrapup)

Nov 9, 2018

All blue chip companies are large caps but all large caps are not blue chips.

Get this Small Cap Logistics Company at a 16% Discount Right Now...(Profit Hunter)

Nov 6, 2018

If you turn the clock back, the current macroeconomic climate is nothing new. The markets have seen them all, and every downcycle has been succeeded by gravity defying gains...more so in the small cap space. This time will be no different.

Insider Buying: These Owner Operators Are Taking Advantage of the Correction(Chart Of The Day)

Nov 2, 2018

We believe insider buying is one of the strongest smart money indicators.

Are You Among The 35% Parents Who Will Not Be Able To Finance Their Child's Future?(Outside View)

Nov 1, 2018

PersonalFN explains the importance of being prepared for your child's future.

Are Fund Houses Opening Up Their NFO Factories Again?(Outside View)

Nov 2, 2018

PersonalFN sheds light on FY 2018-19 so far, the mutual fund industry has collectively launched 84 New Fund Offers (NFOs), of which some are still open for subscription.

More

Small Investments
BIG Returns

Zero To Millions Guide 2019
Get our special report, Zero To Millions
(2019 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

HONEYWELL AUTOMATION SHARE PRICE


Nov 14, 2018 (Close)

TRACK HONEYWELL AUTOMATION

  • Track your investment in HONEYWELL AUTOMATION with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
  • Add To MyStocks

MORE ON HONEYWELL AUTOMATION

HONEYWELL AUTOMATION 5-YR ANALYSIS

COMPARE HONEYWELL AUTOMATION WITH

MARKET STATS