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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.

17 Likes

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