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Honeywell Automation - Is this a secular growth story?

Honeywell Automation is an MNC capital goods company which has various business lines like Process Solutions, Building Solutions, Building Management Systems, Global Services, Global Manufacturing.

Process Solutions Business:

Wide portfolio of industrial automation products and solutions that help customers operate safe, reliable, efficient, sustainable and more profitable facilities. Some new offerings include process control, process safety, process optimization, process simulation, connected IIoT solutions, and industrial cyber security. This business would grow well if thrust for India moving towards gas-based economy increases.

Poor economic environment, slow recovery in industrial production growth over the years are affecting this business’ growth. The company is planning to explore new industries such as pharmaceuticals and specialty chemicals.

Building Solutions Business:

Building management systems, Fire detection and alarm systems, Access control systems, Video surveillance systems, Integrated security systems, Integrated building management systems…

This business has been growing well due improving IT, pharmaceutical and commercial space in the country. The company is also planning to provide value-added services like analytics in this segment.

Building Management Systems Business:

I’m not super sure how exactly this is different from the Buildings Solutions Business but the Annual Report of the company seems to differentiate them both. Some product offerings which fall here are Mechanical PICVs, Variable Frequency drives and Piston type PRVs. The products in this segment serve for verticals like airports, stadiums, metro stations, IT, residential, industrial and hospital buildings. Some new initiatives in this segment include connected buildings.

Sensing and IoT Business:

Pressure sectors, limit switches, construction equipment shifters, pressure switches and basic switches for vehicle body controls. Steady demand for gas instruments and pollution monitoring equipment drove growth for our gas sensor portfolio, and growth in automated vending machines and other automation devices drove our OEM scan engine portfolio. Focused on market verticals such as industrial, transportation, military, aerospace and medical equipment.

Global Services / Manufacturing Business:

This business is mainly focused on delivering high quality products and project solutions right and fast to global Honeywell entities as well as the India market. Honeywell exports these services to non-Honeywell entities too.

Unfortunately, Honeywell doesn’t conduct conference calls and I don’t have deeper insights than what I could get from the Annual Reports. If anyone has ever attended any AGM of this company / tracking from many years, please do share your thoughts on the company.

Past performance of Honeywell Automation has been quite impressive as can be seen in the CAGR numbers below:

Strong Financials:

Current Ratio > 2 consistently
Net Debt is negative. Company has >1500 Rs cash per share.
High ROCE at 30%+ consistently
Negative working capital cycle consistently.

Year (lakhs) 2018 2017 2016 2015 2014
Total Income 324561 273126 248275 224550 242611
Cost of materials consumed 134598 113711 108704 110092 116560
Purchase of stock-in trade 31797 25564 20705 16908 19709
Changes in inventories -1525 777 605 509 -526
Excise duty 0 0 3465 3391 0
Employee benefits 53980 45835 41393 35897 42851
Finance costs 348 28 26 38 44
D&A 1589 1520 1635 1540 1686
Other expenses 48285 46752 41011 33559 40563
Exceptional item 0 0 0 0 -4002
Profit before tax 55489 38939 30731 22616 17722
Current tax 19536 13874 10468 8490 7684
Deferred tax 69 -724 3318 7 -1382
Profit for the year 35884 25789 16945 14119 11420

Current market cap is 24588 crores => Trailing P/E of 68.

Year (lakhs) 2019 2018 2017 2016 2015
Profit for the year 35884 24973 16945 14119 17722
Operating Profit before WCC 48991 37178 30271 22160 17378
Net cash from operations 30877 26289 21534 16637 1302
Capex -2320 -1876 -1233 -1011 -3755
Cash through MFs / FDs / Divs -41962 -15545 -7290 5631 -10229
Net cash used in investing -44282 -17421 -8523 4620 -13984
Net cash used in financing (div) -3408 -1063 -1064 -1330 -1078

As can be seen, the company is oozing cash like crazy. Minimal cash is used for capex over the past couple of years.

Risks / Concerns / Questions:

  1. Related Party Transactions
    Lots of sales is coming from Related Parties. It is about 28% in FY19 of total sales. The driver for this must be Global Services where operations are pushed to India from US for cost-cutting purposes. This used to be 17% of total sales in FY12 and increasing at 20% CAGR over the past seven years. Total sales were growing at 10% CAGR during this period.
  2. Breakup of revenues across businesses
    Unfortunately no breakup is provided in the annual reports.
  3. Fellow subsidiaries in India
    Lots of fellow subsidiaries in India under Honeywell International. So the parent company may be diverting new business to fully owned entities.
  4. Margins at all time high
    The margins of the company are at all time high at 17.7% (EBITDA). Without much insight into the business, difficult to understand if this is sustainable or not.
  5. Why are travelling and conveyance expenses so high?
    Travelling and conveyance expenses are whopping 7.3% of sales at 236 crores. Unable to comprehend why so much expenditure is needed on travel side for this business. It used to be 5.9% in 2012 and keeps increasing YoY almost consistently.
  6. Businesses like Environmental and Energy solutions, solar water heaters are mentioned in previous annual reports upto FY17 but not in the latest ones. What happened to these businesses?
  7. Prolonged slowdown in private capex
  8. High valuations

Discl: No holdings. Just started tracking.

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This is a great pick! Do you know what exactly is their product portfolio?

Honeywell Automation India Limited is engaged in the manufacture of electronic systems and components; repair and maintenance, and trading of machinery, equipments and supplies. Its business units, as mentioned in detail by @lingalarahul7 include Honeywell Process Solutions, Honeywell Building Solutions, Environmental & Energy Solutions, Sensing & Productivity Solutions.

The Company operates through the Automation & Control Systems segment. And it has successfully reinvented itself to cater to the paradigm shift in capital goods and infrastructure opportunities in order to meet the fast changing operatng needs of the industry through digitalization and automation.

Building up an investment case for secular growth story we need to look at the company’s fundamentals holistically, encompassing various Growth, Performance & Safety parameters as follows :
Let’s first consider Growth parameter such as revenue. The following chart shows the revenue history of Honeywell Automation for last 10 years :


Above chart tell us that Honeywell Automation has proven track record as a company which has successfully minted its topline growth over the years signalling its capability in meeting the ever changing needs of the industry , particularly in last five years.

Along with the revenue, the net profit of the company should also grow because it is the profit that matters at the end of the day. Which can be looked upon as follows :


As we can see , net profit for Honeywell Automation is increasing consistently over the years. Moreover it has achieved bottom-line growth of 43 percent in the prior year, with its most recent earnings level surpassing its average level over the last five years. This strong earnings growth paints a buoyant picture for the company.

Another aspect for Growth is Dividend which historically depicted in this chart :


As seen above there is the consistent dividend payout throughout the last ten years by Honeywell Automation with signfificant rise in dividend per share in last three years. This indicates that Honeywell return gains to shareholders by redistributing a decent portion of earnings as dividends.This thereby quickly tells you what you can expect from Honeywell as an investment.

On Safety front , current ratio of Honeywell is consistently maintained above the safer level of 2 for most part of last ten year span as shown in the following graph :


This points to the ability of the company to maintain an adequate level of cash to meet upcoming liabilities which is a good sign for its financial health. This suggests prudent control over cash and cost by management.

Another Safety concern for Honeywell Automation is its debt levels, about which investors need not worry about because company has none! As it has no debt so coverage of interest payment is not a concern which means a significant operating cash flow. IT also implies that the company is running its operations purely on off equity funding which is rather impressive from investor’s point of view. So there is the ability to raise debt rather easily should it need to in the future.

On the performance front, here is the chart for return on equity for Honeywell Automation :


As we can see RoE for Honeywell Automation has a downfall in initial years of last ten years period. But it is showing gradual yet consitent improvement in the last seven years to give a latest RoE figure of almost 21 percent in the last year. This indicates the steady improvement in the ability of Honeywell Automation to squeeze out profits relative to its net worth. Which again can be termed as an impressive feet in terms of financial performance.

Another Performance metric is free cash flow :


Above charts presents strong free cash flow pattern for Honeywell , particulary well in last five years. From investors perspective its a very good indicator as company can redistribute this cash among investors or it also can be used for the purpose of future strategic expansions to scale new growth horizons .

Above analysis indicates that Honeywell Automation has excellent fundamentals in more than one areas suggesting that it is a financially-healthy company with a great track record and an optimistic growth outlook which provides plenty of headroom for secular growth story.

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@lingalarahul7 Does the listed Honeywell Automation include Honeywell Home & Smart Home product portfolio?
https://www.honeywellhome.com/
https://www.honeywellsmarthomes.com/

Thank you for your question Sujay.

From my understanding, Honeywell has lots of unlisted entities in the country. The listed entity is mainly for the capital goods sector than B2C sector.

They used to mention about B2C solar heaters some years back in the annual reports while there is no mention of that in recent annual reports. Highly possible that business is moved to some other unlisted entity… but I’m speculating.

From my best guess, the above mentioned products by you are sold by the unlisted entities. I find it difficult to confirm due to lack of conference calls and also short annual reports.

Thanks!

Discl: Tracking position

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Thanks and understood :+1:.
Where then should one get any of this kind of information? Can these be asked during AGM?

Yes, if someone from the group attends AGM this year, then we can extract more information. The AGM would be in Pune.

Thanks!

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Thanks. I’ve also just sent an email to the Investor Services contact. Will inform if I get any reply.

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