Sweet as honey

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:

1. 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.
2. 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
3. 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.
4. 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.
5. 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.