YES Securities

Honeywell (Buy)

Target ₹36,310

CMP: ₹31,007.85

Honeywell Automation (HWA) reported resilient set of results with beat on all fronts.We like HWA based on its ongoing product portfolio upgradation, focus on software industrial business model, faster adoption of automated solutions by domestic market post Covid-19 episode & relentless execution on cost control.

HWA would be able to mitigate the slowdown risk arising out of crude prices volatility through its diversified business exposure. Strong installed base of HWA in core sectors would aid higher services sales. Its parent has set a margin target of 25 per cent by CY25, and we believe HWA too will follow a similar trajectory in margins, given the high entry barrier and access to parent’s superior technology.

During CY07-FY15, HWA traded at average one-year forward P/E multiple of 21x & delivered average adjusted RoE (ex-cash)/Core RoIC of 29 per cent/22 per cent respectively. However, post FY15, its valuations got a significant re-rating, as it had strong profitability growth, free cash flow generation with average adjusted RoE/Core RoIC of 51 per cent/39 per cent respectively over FY15-FY20. HWA’s continued earnings outperformance among its peers, asset light tech model & robust return ratios justify its premium valuations.

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