If ever there is a true-blue
bluechip in the Indian stock universe, it will have to be Honeywell Automation
India (HAI). I came across this company way back in late 2009 when it was
quoting around 2000, as a part of some research report published by one of the
brokerages/analysts. What I read there was sufficient to perk up my interest in
this company and I did some more digging. What I found certainly appealed to me
and I bought a small quantity of it around Rs. 2000 in Oct ’09, and kept adding
small quantities over the next 2 years till the price reached around 2300. I
did book some profits intermittently, but by and large have held on to my small
holding in this company till date and the results are there for all to see. I
did mention this company to a few close friends back then. If they did take me
seriously, they would be laughing all the way to the bank now!! For today the
price quotes @9600, a CAGR of 30% over 6 years. What more can u ask by way of
returns?
It
must be remembered that 2009 was a year of nervousness following the collapse
of Lehmann Bros. and AIG due to the sub-prime crisis in the US, which had a
domino effect globally. So nobody was seriously looking at the equity asset
class back then, making it the perfect time to buy blue chips, and those in the
making, at very attractive prices. HAI was one of these companies. That time it
was a blue chip in the making and I think the transformation is now complete.
Some of the major points which are promising are:
- Parent
Honeywell holds 75% stake in the company currently, the maximum allowed,
thus giving it access to the parent’s global strength in Automation and
technology.
- Astute
domestic MFs - Birla Sun Life, Reliance and Sundaram, all fund houses with
a proven track record in stock picking as witnessed by the
consistent performance of their equity funds over the years, have close to
12% stake together here
- With
the above 2 groups holding close to 87% of the equity only 13 % is
available to the public, a very low floating stock scenario, so anybody
buying or selling in any significant number, impacts the stock
considerably.
- The
company has a very low equity of only 8.84 crores, less than 1 cr. Shares
(fv 10/-). So a small jump in profits leads to a large jump in EPS,
leading to a jump in price as well. This low equity base also makes it a
prime candidate for a bonus issue, whenever they deem fit. There is no
worry of having to service a large equity post the bonus issue, should the
company decide to do so.
- The
price being unaffordable, in absolute terms, to most retail investors, the
company may just decide to go for a stock-split to reduce the price
thereby increasing the liquidity and public participation (people still have
the mistaken notion about a stock being expensive based on its absolute
price rather than the valuation).
The company is in all the
right businesses from a futuristic perspective – Aerospace, Automation &
Control Solutions,
Transportation Systems& Specialty Materials. They have their manufacturing
facility in Pune spread over 85000 sq. ft. Their major business comes from
process (industrial) and building (commercial- airports, hotels etc.)
automation. About 45% of HAI’s portfolio targets solutions that go into
building needs, about 35% target industrial and work place solutions and about
20% are addressing homes. So with the govt’s thrust on creating smart cities,
‘acche din’ surely loom ahead of HAI. Around the time the govt. was announcing
the smart cities project, HAI teamed up with E&Y and published a white
paper on a universal framework for quick, comprehensive, and easy assessment of
any building. It can be administered across countries with minimal adaptation.
The framework of the Honeywell Smart Building Score™ is also flexible and
adaptable for future enhancements as applications and solutions for smart
buildings will continue to evolve. This is in the public domain, should u
google it.
So this company is in the right
place at the right time. While things may not happen overnight, the govt. would
surely be more than happy to employ the services of tried-and-tested players in
this domain such as HAI, which would ensure another revenue stream for HAI.
Interestingly, Dave Cote, the CEO of Honeywell, has served as the co-chair of
US/India CEO Forum which again should stand the company in good stead with
Modi’s closeness to the US becoming obvious over the last year and a half.
The
numbers for HAI appear to be quite expensive, but being a growth stock, it will
continue to enjoy premium valuations such as those enjoyed by the defensive
FMCG sector, over the years. However, given the business visibility ahead, the
earnings should grow at a pace to justify the premium valuations. Any
disappointment on this front can lead to a sell-off on the stock.
If there is going to be one
beneficiary of the Smart cities project, along with Schneider Electric, another
global technology company in the same mold as HAI, it will be Honeywell
Automation India. And the govt. has gone far down the Smart cities road to now
back down. So irrespective of which govt. comes to power in the next term,
these companies will continue to benefit with their products and solutions
meeting most of such requirements. This is one niche company which qualifies as
a Buy-and-Forget category to reap benefits in the long run.
