Honeywell Automation - Is this a secular growth story?

lingalarahul7 · November 7, 2019, 4:49pm

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:

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.
Breakup of revenues across businesses
Unfortunately no breakup is provided in the annual reports.
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.
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.
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.
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?
Prolonged slowdown in private capex
High valuations

Discl: No holdings. Just started tracking.

asinha · November 8, 2019, 8:11am

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

sujay85 · January 18, 2020, 6:00pm

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

lingalarahul7 · January 18, 2020, 9:46pm

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

sujay85 · January 19, 2020, 3:42am

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

lingalarahul7 · January 19, 2020, 3:51am

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

Thanks!

sujay85 · January 19, 2020, 5:11am

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

Harsh1 · February 26, 2020, 3:53pm

Hello @sujay85 and @lingalarahul7

The Website looks looks like its a global website and belongs to Honeywell US

The above website looks like Indian and possibly belongs to Honeywell Electrical devices and systems India LTD.

My reasoning is that when i google for Honeywell Electrical devices and systems India LTD Annual Report then it leads me to Honeywell Smart Home website

Coming to answer i dont think Honeywell Smart Homes comes under Honeywell Automation (if my assumption of Honeywell Smart homes is/belongs to Honeywell Electrical devices

Novar ED&S LTD looks like to be UK company

Honeywell has maze of companies in India and abroad and i am groping in dark as well. The Annual Report are not at all informative

To make water muddier , here is another Screenshot

Take what you will.

I’ll post another another reply of my understanding of Honeywell Automation in few days. The Listed entity Balance sheet seems to be drenched in cash and its piling up. The revenue from Contract work (Major breakup of sales) is converted into cash as can be seen in recievables day and cashflow statement. Honeywell Automation looks like Classic Fixed Asset Light (and working cap heavy due to tonnes of cash it hoards) and continues spitting cash

Disclosure: Honeywell automation forms about 12% of my portfolio and i will buy more in next few days

Edit:went through Honeywell Automation Annual report and both Honeywell Electric Devices & System India Ltd and Novar ED&S LTD are listed as fellow subsidiaries. so Honeywell Smart Homes doesnt come under Honeywell Automation

dd1474 · May 4, 2020, 4:41am

@Investor_No_1

I thought it would be not correct to clutter the thread hence replying you thorugh Honeywell thread.

You are correct that prima facie both Honeywell and 3M does not have similar business. However, the underlying factor which drive sales in both companies reveue in India is industrial growth. Hence, I considered same as in my approach. I always believe that investing is more of art and it shall be customised to individual requirement. There are mutilway to analyse business, I consider 3ASH (3M/ ABB/Siemesn/ Honeywell) as MNC gaining for Capacity relocation from China. The extent of gain would definitely differ based each company’s unique position/offering and management approach. So you can device your model to approach investing and like life, there is no prefect generic solution to investing.

Wish you happy investing.

Likeadiamond · May 5, 2020, 5:25am

Friends,

To best understand Honeywell India business, there is no better source than the annual report. ‘Relocation to China’ is a favorite theme shared these days by market participants to support their claim.

I believe stories only if it is supported by data. Yes, in select pockets in the chemical industry, greenshoots are visible, but companies are generally reluctant to move facilities to other geographies unless similar product quality is available from suppliers.

Therefore, any benefits possible on account of businesses (orders and facilities) relocating from China should not be trusted blindly unless confirmed by the company management.

All the best in your investment journey.

saumya2010 · May 6, 2020, 8:20am

A thread that focus on ground realties vs china to india story.

Nothing against Honeywell they can still perform decently even without this story playing out or not.

dd1474 · May 7, 2020, 2:33am

@Likeadiamond

Thanks for your useful and necessary insight. Everything is good at a value. As you correctly point out, things are never going to be simple for India to walkover and take away China share. Indian have similar confidence about textile and apparel sector when WTO dismantled quota restriction by Developed countries and we thought India to be major beneficiary. While the trade pattern did shifted, but to least developing nation like Vietnam and Bangladesh and China were the major gainers. As a consolation, even India managed to maintained market share. So your point is valid.

However, equity is never about extrapolating past. One need to mindful of cycle being played out and having impact on valuation.

There would be always uncertainty about future and market does discount valuation in much advance before we even see grass root of visible pattern.

Why I feel that prospect of capacity shifting from China are more reality then talk is as under:

For last decade or so, Global MNCs developed template of design in developed countries and outsource manufacturing to China. As a result, China has become most power trading partner and at times used its power to burden/ threaten other partner. There has to be retaliation and for last 4 years, Trump is already expressed his concern publicly.
Taking that argument forward WITH BIG ASSUMPTION that capacity need to relocated in Asia (given labour skill and technological advances) or Eastern Europe, the Capital goods requiement would need to be state of art coming from developed countries. The MNC which I named are among global industrial tech provider along with some Japanse names.
If that being situation, whether this Capital goods MNCs would like to depend on Chinese subsidiary to provide technology to new business? This one has also need to look in context of arm twisting by Chinese government on seeking IP and localising same.
If not China, the most manpower intensive business for most of these companies outside Their home country and China is India. Hence, I see big benefit flowing to Indian subsidiaries (listed/unlisted)

I know my scenario has too many moving parts and any one moving part materialise against my expectation, whole hypothesis would collapse. Hence, we need to worried about valuation and management and seek margin of safety.

I personally get my solace and conviction to invest in these companies (3M and Honeywell at a reasonable price) What is nectar for me may be poison for others (and also may be for me if my hypothesis go wrong).

Once again appreciate your efforts to bring this it missing rationale data point to support hypothesis and i agree that I have none to justify my viewpoints (except some articles on the subject which are mere intentions then actions). Having said that, I would still like to venture, invest and see how event unfold.

Disclo: hold 3M and Honeywell, views are BIASED due to my holding not recommend investing in stocks and not a sebi registered advisor

Likeadiamond · May 8, 2020, 12:27pm

Hello Friend,

Great to read your balanced statement.

I respect your mental wiring, but slightly beg to differ. Being part of the market and not the market, I prefer discounting only proven facts than unproven news. Valuation is important but secondary to qualitative facts.

As you rightly pointed out, Honeywell is a pristine quality building solution provider where fundamentals speaks volumes for itself. Also, if tailwinds exist, it is likely to be a key beneficiary. But unless, profound benefits are visible from strategic business shifts, it is safe not to jump to any conclusion

I would like to chew my words - shall be great if some data on ‘China to India shift’ supporting Honeywell growth story could be shared. It will be great help for me to research further on these lines.

Thus far, the theme appears to be playing well in select speciality chemical companies, which is also confirmed by respective company managements. But this doesn’t gurantee that every chemical maker is going to be a beneficiary. Benefits have been possible not only due to comparable manufacturing cost augmented by cheap labour, but also due to achieving precision in product quality vis-a-vis Chinese players.

Just want you to check how much FDIs and FIIs flows went into China vs India in 2019. This data is so far contrast to the story. Foreigners still prefer Chinese due to innovative and differentiated product offerings at reasonable price.

Superimposing one industry success on another is not a productive strategy. Yes, the underlying template could be similar but still lot of work needs to be done to take away business from China.

Recent tax reforms have been a big step in this direction, but land and labour laws needs to changed significantly to encourage foreign companies to set up and operate facilities in India.

All the best in your investment journey.

Regards,

MuraliKS · May 8, 2020, 2:09pm

During last two days, MP & UP seem to be taking some steps towards labour reforms. However, we need to see the actual implementation on the ground to assess the outcome! Our Babus don’t leave their hold so easily

sujay85 · May 11, 2020, 6:46am

Honeywell Connected Plant is HONAUT’s primary IIoT (Industrial Internet of Things) solution that allows manufacturing companies to enable digitisation for seamless integration of the entire value chain — from supply to the end consumer. This transformative solution helps improve the efficiency and profitability of their operations.

In a manufacturing set-up, IIoT helps reduce manual processes; however, the worker remains a critical element. While work can now be managed remotely from a safe environment, it still takes a person to run the plant.
To fit into these new opportunities the workers will require different skill-sets – one among them is data visualisation. The workers will benefit from new control rooms using advanced technologies like touchscreen, integrated large displays, and better interfaces to make sense of the data being presented.

I personally believe that after this huge COVID-19 induced disruption more & more industries would prefer to embrace automation, which in addition allows to better implement physical distancing norms. It may take time but I can surely visualize more business opportunities for HONAUT in near future.

Source:

Leveraging the power of IoT.pdf (23.2 KB)

Disc: Invested & Biased.

Investor_No_1 · May 11, 2020, 7:34am

Hi Sujay, completely agree with you. Can you pls help with direct competitors for Honeywell auto for iiot, specially in listed space? Thanks

sujay85 · May 11, 2020, 9:22am

Hi, I haven’t studied its competitors in detail but am aware that not many have the broad spectrum of offerings as HONAUT has.

Honeywell supports this initiative with its ability to combine advanced software with physical products to provide value to customers across a wide variety of verticals. In the Internet of Things, we have the unique advantage of being on the ‘things’ side as much as on the ‘internet’ or software side.

Indian peers like TCS, Infosys, HCL Tech etc. provide only the software, and thus partner with product companies to offer the complete solution.

Only ABB, Bosch, Schneider Electric & Siemens seem to possess the complete offerings. However, if some anecdotes are to be believed HONAUT seem to have the best customer-centric solution and thus preferred over other providers.

Investor_No_1 · May 11, 2020, 9:51am

Somehow when I researched, I was disappointed by how much we can find about these MNCs indian subsidiary from public domains. Abb india doesn’t seem to have its own website also and what they offer in India…very strange.
I see you did not mention L&T technology services which are also into engineering services and products, research. I though they maybe closest competetor in listed space. In unlisted, I guess Hitachi Vantara is a leader in IOT products as well and there recent merger with Hitachi consulting brings both product and services under one roof.
RIL had big vision to play on IIOT, not sure how he will execute. Regret I missed Honeywell automation when I last checked on IIOT 3 years back.
Thanks

sujay85 · May 11, 2020, 10:08am

You are right. Whatever I found was from some news reports and interviews.

Yes, I missed to mention it. And, they also seem to offer the software only.

JIO/RIL will get a big additional advantage from providing the internet connectivity solution too. I believe they will go the inorganic route to implement it.

Price may have ran up a lot but the multiples are in reasonable levels compared to last 5 year averages. And, IIoT is only beginning to find its feet in India.

sammy11 · May 11, 2020, 5:36pm

Have been invested in Honeywell for more than a year and half. Since there is not much info available on the company, I am putting out whatever I have compiled for benefit of the forum. Thanks.
https://www.industr.com/en/boosting-the-indian-manufacturing-sector-2333260

https://www.outlookbusiness.com/specials/the-outperformers_2018/connecting-the-dots-4563

Some broker notes:
Honeywell Automation 1QFY20 result update - 190813 (1).pdf (115.9 KB) Honeywell Automation company update - 180808-1 (1).pdf (886.6 KB) MNC report - volume II - 191213 - Antique Research.pdf (2.6 MB) Engg_BnR - VN - 26 Nov 2019 - Axis Capital.pdf (471.1 KB) AMP - 191030 (1).pdf (886.8 KB) Capital Goods - MOSt.pdf (777.7 KB)

Hope this is useful to understand the company a little better.