Sharekhan Sees Fresh 52W-High On This LIC-Backed Stock: Buy?

In the capital goods industry, Honeywell Automation India is a large-cap firm. One of the top suppliers of integrated automation and software solutions is Honeywell Automation India Limited (HAIL). In addition to offering a broad range of environmental, combustion, sensing, and control products, it also offers technical services for automation and control to clients across the world.

The scrip reached a 52-week-high of Rs 44,100.00 on (12/07/2023) and a 52-week-low of Rs 34,383.00 on (14/03/2023). However, the brokerage firm sees a fresh 52-week-high on the stock by initiating a buy recommendation for a target price of Rs. 45,000 which implies a potential upside of 22.57% from the current market price of Rs 36711.

Commenting on the Q2 financials of the stock, the brokerage firm Sharekhan said in a note that, "Revenues were better than expected although they continued to disappoint on OPM during Q2FY2024. Net revenues were up 39% y-o-y to Rs. 1104 crore which is likely to have been driven by higher execution domestically.

However, OPM at 12.5% (down 356 bps y-o-y and 41 bps q-o-q) came in lower than our estimate of 13.5%. Miss on OPM was mainly led by lower gross margins (down ~10 percentage points y-o-y and q-o-q to 38.7%. The company's long cycle contracts are likely to have felt sustained pressure on gross margins led by higher input costs since Q1FY2024. Consequently, operating profit was up just 8.3% y-o-y at Rs. 138 crore. Lower OPMs along with lower other income (down 11% y-o-y) led to meagre 3.3% y-o-y growth in net profit which stood at Rs. 122 crore."

Commenting on the share price target of Honeywell Automation India, the brokerage stated "HAIL continued to report strong revenue growth led by its robust expansion in domestic market while exports have been remaining stable. The company is expected to see strong growth and is domestically aiming to grow twice of GDP. However, OPMs have remained under pressure as increased input costs affect its long cycle business contracts in a highly competitive environment.

It continues to focus on industrial digitalisation, automation and sustainability which is expected to drive revenue growth for a longer period. A wide and rich portfolio of products, solutions, digital-software and services enables it to participate in multiple opportunities, thereby helping it wade through the downturn in some sectors.

An asset-light model (nil debt), strong cash position, healthy free cash flow generation, and promising long-term growth prospects in the automation space justify the stock's premium valuation. We have introduced our FY2026E earnings in this note. We expect a revenue/PAT CAGR of ~17%/~20% (FY2023-FY2026E). We retain a Buy rating on the stock with a revised price target (PT) of Rs. 45,000 led by cut in net earnings partially getting offset by rolling forward our valuation multiple to September 2025E earnings."

As per the shareholding pattern of Honeywell Automation India Limited (HAIL) for the July to September quarter or Q2FY24, insurance giant LIC held fully paid-up equity shares of 1,41,372 or 1.60% stake in the company.

Disclaimer

The recommendations made above are by market analysts and are not advised by either the author, nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.