honeywell automation india ltd Management discussions

PERFORMANCE OF KEY FINANCIAL INDICATORS AND HIGHLIGHTS 2021-22

	Year ended March 31, 2022	Year ended March 31, 2021	Variation
Revenue from Operations	2,948	3,043	Down 310 bps
Operating Income (%)	17.5%	22.1%	Down 460 bps
Net Income (%)	11.5%	15.1%	Down 360 bps

INDUSTRY OUTLOOK AND OPPORTUNITIES:

Your Company’s operating results are influenced by macro-economic developments including prolonged COVID-19 pandemic which can affect trends such as industrial production, capital spending, commercial and infrastructure construction, commodity prices, and foreign exchange variations.

India Economic Overview

The Indian economy has recovered well in the past year in the aftermath of the COVID-19 pandemic and has come out more resilient than before. GDP has grown by 8.7% YoY in FY2021-22 and all macro indicators like Index of Industrial Production (IIP), Goods and Service Tax (GST) collections and mobility indices have shown steady improvement. We expect the trend to continue in the near term, hoping that a large share of a now fully vaccinated population will help in containing the impact from any further spikes in COVID-19. Further immunization programs to provide booster doses to the vaccinated and to vaccinate younger population will help in the country’s fight against the pandemic. Long-term GDP projections over the next 3-4 years estimate India growing at 6-8% while for FY2022-23, India is expected to grow at 7.2% (Sources: National Statistical Office, CRISIL).

Government of India continues to strengthen key sectors of the Indian economy with capex and policy initiatives to drive long-term sustainable growth. The launch of Gatishakti program is expected to fast track the execution of projects in the National Infrastructure Pipeline. Production Linked Incentives in 14 key sectors such as pharma and solar modules will go a long way in strengthening the local supply base to make India more self-reliant. India is also firmly on a digital transformation journey. Globally, India ranks first in digital transactions and second in smartphone and internet users. India’s data center capacity is expected to double from 2021 to 2023 driven by rising adoption by government, enterprises and public. This will give impetus to key Government initiatives such as of making our cities smarter and safer. It will also drive enterprises to adopt digitally enabled innovative business models. There is also a thrust on developing the ecosystem for green technologies. This is a step in the right direction to ensure responsible growth and keep our environment safe. (Sources: Data Centers: Building blocks of digital revolution in India, A JLL - Nxtra report, Mar ‘22) While India is on a steady recovery path, global geo-political developments such as the Russia-Ukraine war and COVID-19 resurgence in some countries may have some impact on capex investments and consumption amidst uncertainty. Broad supply chain disruptions will continue to cause cost inflationary pressure in the near future. We expect it to be in the short/medium term and are confident on the fundamentals of the Indian economy to achieve growth in the longer term.

COVID-19 Update

Although the financial impact of COVID-19 can be seen in the company’s performance for FY2021-22, we are unable to accurately estimate the duration and future impact of the pandemic on the business due to multiple waves of

COVID-19. However, we will continue to monitor and assess the situation on a regular basis. We have taken action

– and will continue to act – to offset revenue drop by managing our variable cost structure, rationalization of discretionary spends, productivity drives, etc.

Based on the current year’s performance, our operating cash flows are sufficient to meet our future operating cash needs and will not allow disruption of business, while allowing us to continue remain invested with our strategic partners, be it vendors or customers.

The Company’s principal sources of liquidity are cash, cash equivalents and the cash flow that is generated from operations. The Company continues to focus on operating cash flows, has no outstanding borrowings and believes that the working capital is sufficient to meet current requirements.

Employee Health & Safety

We continue to monitor the situation arising due to the prolonged spread of Covid 19 after a decline in numbers during 2022. We are prioritizing the health and safety of our employees. Out of abundant caution for the health of our employees and to support local Government initiatives to stem the spread of the virus, we have implemented several precautions at our facilities in line with applicable WHO and/or local authority guidelines:

Reinstate work from home for all the employees and introduced flexible return to workplace 3:2 model in early

2022.

Onsite vaccination camp for employees and their families during Q3-2021.

Face mask, social distancing, and other precautions per applicable guidelines.

Limit visitors’ site access to business essential purposes.

Additionally, to support employees in this difficult time we have decided to: o Reimburse vaccination cost for all our employees and immediate family members Offer COVID-19 support center in select cities with basic nursing and medical care Launched COVID helpline and COVID micro site for effective help and management o Reimburse all expenses over and above insurance cover as out-of-pocket expenses

Industry Overview

Construction: The industry is estimated to record a recovery of 26-30% in FY2021-22 from a low base in FY2020-21 and is expected to grow at 10-12% in FY2022-23. Going forward, with concerted efforts from the Government to boost investments in infrastructure, the share of investment in construction for projects such as roads, metros, smart cities, data centers, warehouses, water supply, railways and airports is expected to rise in the coming years. The total budgetary allocation on capex in infrastructure for FY2022-23 saw a 10% rise over the revised estimates for FY2021-22 to Rs 5.87 lakh crore with roads and railways getting the largest share. Growth in building segment is likely to be 85-95% in FY2021-22 due to completion of deferred projects of FY2020-21 and increase in vaccination across the country. Capex spends across Industrial in FY2022-23 are seen rising 3-6% due to high base in FY2021-22, where the sector grew due to deferred investments from FY 2021-22 and capex investments into PLI schemes. The stronger than expected pickup in demand and gain share by larger companies from smaller companies has also led to revival of capex in FY2022-23. (Sources: CRISIL, IEA, IBEF)

Manufacturing: Capacity utilization in the sector recently recovered to 72.4% in Q3 ‘22, surpassing the pre-pandemic level of 69.9% in Q4 ‘20. While this is a significant milestone, growth in private consumption and fixed investment remains subdued, remaining 1.2% and 2.6% respectively above their pre-pandemic levels. Escalating global geopolitical tensions have been impacting exports from India. Therefore, the sector needs continued policy support from the Government for smoother and faster recovery to attain long-term growth. Further to announcing PLI schemes in 14 key sectors, the Government is also working on 24 sub-sectors keeping in mind their competitive edge and need for import substitution. The Government is also developing various industrial corridors as part of the National Industrial Corridor program, which is aimed at the development of futuristic industrial cities. (Sources:

CRISIL, IBEF)

Energy: With increasing population, urbanization and industrialization, India’s energy requirement has already more than doubled since 2000 and is expected to increase considerably in the coming years. Per IEA’s World Energy Outlook 2021, India’s current share in global primary energy consumption is 6.1% and is likely to increase to 9.8% by 2050. To meet this increased energy requirement, the Government is adopting strategies to enhance domestic oil and gas production, shifting to gas based economy and technological upgradation to improve refinery processes. It has also taken up development of National Gas Grid and city gas distribution networks to provide clean and green fuel to the public. India’s energy mix has been seeing a shift from more conventional energy sources to renewables, in line with the Government’s aim of achieving 500 GW installed capacity from non-fossil fuel-based capacity by

2030. (Source: Ministry of Power)

OPERATIONS:

The Company has only one segment namely "Automation and Control Systems" as per Indian Accounting Standard. The segment is across various business operations, as stated below:

Honeywell Process Solutions:

The Process Solutions business continued to witness the impact of COVID-19 at the start of the financial year. The first half of the year proved to be very challenging as we faced strong headwinds in business. However, the second half of the year helped bring back the business to reasonable level. We saw strong traction with many of our strategic customers and EPCs with enhanced focus on remote operations and monitoring which helped pivot the Process Solutions business to this new offering. This eventually brought about significant wins with customers. Our past engagement in the Life Sciences vertical also helped with significant tailwinds which resulted in certain key wins. All this was done using our approach to digital transformation with our leading industrial software applications. Our Process Solutions team was able to provide the required Digitization offerings as requested by customers and establish Honeywell as their preferred automation vendor. We also continued to leverage our wide portfolio of industrial automation products and solutions that help customers to operate safely, reliably, efficiently, sustainably, and achieve profitable operations. We have the expertise and breadth of resources to execute projects of every size and complexity in the oil and gas, refining, pulp and paper, industrial power generation, chemicals and petrochemicals, biofuels, pharma and life sciences, and metals, minerals, and mining industries. We have also expanded our reach in various underpenetrated geographies through channel partners and OEM engagements.

These have helped the Process Solutions business of your Company to deliver a reasonably performance in a challenging environment. The Process Solutions business will continue to stay focused on its core strategies and aggressively leverage the new growth levers of digitization, sustainability, and tailwinds across various industry segments like metals, life sciences, pharmaceuticals and gas etc. The entire business landscape is changing as the country expands its gas network, drives sustainability goals, builds energy security and encourages use of digital solutions. Your Company is excited about the opportunities that these industries bring to the business. Apart from the core markets and solutions, your Company is uniquely positioned to drive growth in areas such as pharmaceuticals, specialty chemicals, personal safety, and security and cyber security. Your Company is also enhancing its reach and coverage to serve the renewable energy market with new, innovative solutions. As many corporates shift their focus to be carbon neutral and environmentally compliant, your Company would like to serve these new needs in the industry. To enable our growth in all these areas, we will continue to focus on expanding our local engineering, product development, and manufacturing capabilities.

Honeywell Building Solutions

The Building Solutions business provides automation and control technologies that help make buildings green, safe, productive and smart in verticals like industrials, data centers, pharma and healthcare, energy, premium commercial, transport, infrastructure, etc. For these segments, the business provides state-of-the-art solutions like intelligent buildings suite comprising building management systems, fire detection and alarm systems, access control systems, video surveillance systems, integrated security systems, and integrated building management systems based on

Honeywell’s Enterprise Buildings Integrator . The business provides aftermarket services for various control systems as well as comprehensive utilities’ operations and maintenance services for mechanical and electrical systems in buildings. With a diversified portfolio and proven track record, the business continued to do well by securing large projects in segments like smart cities, metros and airport projects. The business had launched "Lockdown Support Software" last year during COVID-19 to monitor lockdowns effectively, wherein security cameras were installed. commissioned and integrated with common control rooms of smart cities. This continued to help in reporting areas with higher number of people/vehicles where respective Government stakeholders could focus and initiate patrolling.

This service was offered to some of the smart cities as our commitment towards society.

There has been continued Government funding on building core infrastructure such as airports, metros, railways, ports, safe cities and large-scale data centers. We see opportunities for value-added services like analytics, energy optimization, and healthcare in the critical operator segment. In addition, your Company is also positioned to drive growth in solutions like connected buildings and cybersecurity.

Building Management Systems

The Building Management Systems business is a global leader in the building automation space and maintains a leadership position in India. With a wide range of building automation offerings, including Healthy Buildings and

HVAC applications the business is already present across multiple verticals in India. These include large mission-critical facilities like pharma and healthcare and government infrastructure like airports, stadiums, metro stations, as well as IT, residential, industrial and hospitality. Building Management Systems has a diverse portfolio comprising building control solutions and global field devices.

The business will continue to stay focused on its core strategies through commercial excellence levers such as sales deployment, on-boarding, channel excellence, pipeline management, and new product offerings. This will enable your Company to grow via its existing product portfolio. Business will also be focusing on vertical which is growing like Pharma, Healthcare, Datacenter etc. Exciting new initiatives such as Connected Buildings and upcoming new product launches along with enhanced reach will help your Company grow in an evolving market. Meanwhile, your company has dealt with Inflation pressure with timely price action.

Advanced Sensing Technologies (Former SlOT)

The Advanced Sensing Technologies (AST) business has multiple diversified customer accounts from transportation, aerospace, healthcare, and industrial verticals. This business was focused on key account management, demand generation, and localization during FY2021-22. Our product portfolio, which includes pressure switches, airflow sensors, humidity and temperature sensors, oxygen and breath sensors, helped the business win in healthcare and other industrial verticals. This business also leveraged its defense and military product portfolio to get into new military programs of government customers.

AST business did a good job in on-time supply to customers by making correct forecasts and efficient operations management. This business rationalized its portfolio and gave priority to right technologies and future customer demand. AST business also built application engineering support system in India to help our customers develop their ideas faster. This has given a lead in getting into new customer programs faster. AST business continued its efforts in consolidating business accounts by concentrating on master distributors; this helped improved our sales productivity and enabled us to focus on strategic accounts. This business also launched multiple new products that address customer needs in water management, medical equipment, machine safety and healthcare. Our Pune factory is a business enabler for this business and played a significant role during the global supply crisis. The AST business could gain high customer satisfaction because of local manufacturing and better control on supply chain and quality.

Global Engineering Services

Global Engineering Services fosters engineering and innovation across verticals market in the Process Automation and Building Automation businesses by providing various engineering services. The Global Engineering Services business provides basic and detailed engineering, application software development, project management services, solution consulting, site commissioning for Projects, Life Cycle Services, Connected Process, Building Solutions of Honeywell. This division delivers projects efficiently by leveraging competence, economy of scale, etc., and improving the productivity and cost competitiveness for several Honeywell business units and regional affiliates. For Honeywell Process Solutions, it serves in many core verticals like oil and gas (O&G), refinery and petrochemical (R&P), Power, MMM, etc. and new areas like life sciences, energy management and storage, etc. For Honeywell

Building Solutions, it provides services for airports, commercial and residential buildings, data centers and mega projects like smart cities. Global Engineering Services strives for "First-Time-Right" quality, built on matured processes and a strong continuous improvement culture. It leverages its lean thinking, DevOps and automation to assure quality, and responsive customer-centric strategy to enhance customer experience.

This business continues to deliver good results consistently over the years. It has increased its footprint globally through new portfolios, offerings and geographic expansion, supporting Honeywell’s global growth agenda. Global Engineering Services is making investments in talent development and retention strategies in the conventional and new technology space for accelerated growth in various strategic business units.

Global Manufacturing

As a contract manufacturer this business focuses on delivering high quality products and project solutions right and fast to India and the global market. Your Company is focused on delivering quality products to customers through Built-In Quality and Continuous Improvement processes under the Honeywell Accelerator framework. Your Company continues to leverage local supply base to be cost competitive and faster delivery to market. COVID-19 pandemic caused global supply shortages for certain electronic components, impacting supply chain, delay in delivery schedules, and inflationary trends in cost of raw materials and freight.

Your Company maintains high standards in the area of Health, Safety and Environment (HSE), and implemented all mandated COVID-specific guidelines to continue manufacturing operations.

Your Company continues to leverage local talent, talent development and retention strategy for sustainable business growth.

LEADERSHIP AND TALENT:

Your Company believes in the immense potential of its human capital and continues to invest in technical and leadership capabilities as key enablers for business growth. Your Company leverages processes that have been the cornerstone of Honeywell’s global growth. These include Honeywell Performance Development (HPD) and Management Resource Review (MRR). These foundational processes enable careful and continual review of leadership talent within the organization, while promoting meritocracy, clarity in goals, providing structured feedback, development planning, and proactive succession planning for all key positions across the organization. Developing leadership capability in employees is a key expectation of every business leader, and your Company actively promotes internal movements for career growth. Development plans help focus on capability building and skills development to enable leaders to take up larger roles. The HPD process ensures that there is a consistent framework to assess our employees on goals and behaviors, creating opportunities for objective feedback and discussions on development plans.

Your Company continues to invest in a multi-tiered framework to build leadership capability. This includes the India Leadership Connect (ILC) focused on development of top talent for senior leadership roles, the Leadership Skill Workshop (LSW) to build frontline managerial capability, the Honeywell HGR Leadership Forum focused on building self-awareness and networking among senior leaders in Honeywell India, and the Senior Leadership Development Program (SLDP) to develop supervisory skills and capability. In addition, your Company invests in building sales capability of frontline sales employees through classroom and online learning modules. Your Company continues to work towards building systemic enablers through continuous training on inclusion and diversity to encourage diversity in the organization. Your Company has laid out plans to attract, retain and develop diversity talent. Regular monitoring through meetings helps strengthen and retain diversity numbers. The Company follows a robust process of Management Resource Review (MRR) across all levels and Feeder Role Reviews (FRR) for key and senior positions. Your Company is also well prepared to analyze, assess and implement the impact of recent regulatory changes (implementation of 4 Labour codes).

As on March 31, 2022, the Company’s employee strength was 2,950 as compared to 3,175 (full-time employees) as on March 31, 2021.

FINANCIALS:

Overall revenue from operations was INR 2,948 crore registering a 3.1% decline as compared to the previous year. The domestic segment registered revenue of INR 1,839 crore for the current year as compared to INR 1,663 crore in the previous year, registering a 10.6% growth. Revenue from exports was INR 1,109 crore as against INR 1,380 crore in the previous year, registering a decline of 19.6%. The New Orders from Non Honeywell Customer base increased by 31% YoY.

Overall profit after tax was INR 339 crore. Your Company delivered a return of 11.5% on sales for the year (previous year: 15.1%). Cost of goods sold was 52.4% of sales (previous year: 50.3%).

Net cash flow from operations was INR 264 crore, as compared to INR 364 crore in the previous year representing 77.9% of net profit (previous year: 79.1%). Your Company will continue to focus on working capital performance and positive operating cash flows.

Related party transactions for the financial year ending March 31, 2022 follow Section 188 of the Companies Act, 2013, and Regulation 23 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015.

RISKS AND CONCERNS:

Your Company generates a good percentage of its sales and profits from both direct customers and its business with Honeywell International Inc. and its affiliates. Your Company’s ability to maintain or grow direct business depends upon various macro-economic factors and its business with Honeywell International depends upon a number of performance factors, including its ability to:

(i) Identify emerging trends and customer requirements, and develop product and service offerings superior to those of its competitors

(ii) Meet or surpass the price, quality, and delivery requirements of Honeywell and its end-customers in a cost- effective and competitive manner

(iii) Develop and retain employees and leaders with the necessary expertise.

(iv) Honeywell-specific business considerations (independent of its shareholdings in the Company), including changes in Honeywell’s strategies regarding utilization of alternative opportunities to source products and services currently provided by your Company (including from alternative sources that Honeywell may acquire or develop within its own Group), may also reduce the level and/or mix of Honeywell’s business with the

Company.

An overall aggressive competitive landscape, pricing pressures on sale of goods and services to Honeywell, or a reduction in the volume or change in the mix of orders or sales to Honeywell can be expected to have a material adverse impact on the revenue and profits of your Company.

While your Company has diversified products and operates within varied industries, major macroeconomic developments pose some risks to growth which can have an impact on the performance. Diversification and strong industrial relations are helping manage these risks. Some of these risks are highlighted below:

• Prolonged spread of COVID-19: Mutations in COVID-19 virus are leading to multiple variants that cause varying intensity of infections across the world. Any significant wave in future can impact recovery, demand, consumer sentiment and delay in private investment. Increased public spending on public healthcare (during

COVID) may restrict the Government’s. ability to spend on infrastructure. (Sources: RBI, CRISIL)

• Geopolitical risks: The global recovery from the COVID-19 pandemic is turning out to be muted relative to earlier expectations. Downside risks to even this subdued recovery have jumped significantly from the escalation of geopolitical tensions. A more protracted conflict, extended sanctions, sustained further hardening of global commodity prices and prolonged supply bottlenecks could push global growth well below the baseline. (Sources: RBI, CRISIL)

• High oil import bill: International crude oil prices have risen sharply. This has impacted growth due to rise in inflation, depreciatory pressure on the rupee, reducing discretionary spends of households and lower profit margins.

• Forex rate fluctuations: The rupee has exhibited two-way movements over the past six months, reflecting both global and domestic factors. Looking ahead, the protracted geopolitical tensions, heightened volatility in global financial markets, elevated global sovereign bond yields on the back of more than currently anticipated monetary policy tightening in major advanced economies, and new COVID-19 mutations could lead to a broader risk aversion towards emerging market economies’ assets and net capital outflows. Such developments can put downward pressure on the rupee.

• Global supply chain disruption and inflation: Disruptions since 2020 owing to the pandemic and geopolitical conflicts have put immense stress on global supply chains leading to shortages of key intermediary goods and thereby a significant rise in commodity prices globally. This poses a two-fold risk for us in terms of meeting our delivery commitments, while maintaining and improving profitability.

INTERNAL CONTROL:

Your Company has established adequate internal control procedures commensurate with the nature of its business and size of its operations. The internal control process of the Company has been effective and provides reasonable assurance on reliability of financial information, compliances with laws and regulations in force and standard operating procedures. It ensures documentation and evaluation of entity-level controls through existing policies and procedures, primarily to identify significant gaps and define key actions for improvement. Your Company has continued its efforts to align all its processes and controls with global best practices. Even though we have not experienced any material impact to our internal control over financial reporting during the COVID-19 pandemic, we have enhanced our oversight and monitoring during the close and reporting process.

In addition to external audits, the financial and operating controls of your Company are reviewed regularly by the internal audit team as per the annual plan approved by the Audit Committee. Audit observations and follow-up actions thereon are tracked for resolution by your Company and reported to the Audit Committee.

The Audit Committee of the Board of Directors, comprising independent directors, regularly reviews the audit plans, significant audit findings, adequacy of internal controls, compliance with accounting standards as well as reasons for changes in accounting policies and practices, if any.

Your Company’s Code of Conduct sets out the fundamental standards to be followed by employees in all of the business dealings and day-to-day operations. The code provides guidance around financial reporting, ethical conduct, regulatory compliance, conflicts of interest’s review and reporting of concerns.

Your Company also has a robust Integrity and Compliance program, in which all company employees undergo communications and trainings on the Code of Conduct. It enables employees to become familiar with leadership expectations on behaviors and compliance, legal requirements, avoiding conflicts of interest, providing a healthy and safe workplace, safeguarding Company property and information, appropriate use of information technology resources, and understanding how to report any suspected unethical or illegal conduct, without fear of retaliation. Your Company also has a formal process to receive and address incidents related to business conduct lodged by employees and other stakeholders.

SUMMARY:

Your Company’s mix of exports revenue decreased as compared to the previous period. Overall revenue contracted 3.1%. Net income was 11.5% of sales as compared to 15.1% in the previous year. The Company’s financial performance was impacted due to COVID-19, while increased competitive environment in both domestic and exports segments, supply chain disruptions and inflation. These are being addressed through concerted efforts on operational excellence, driving productivity, and cost rationalization. Your Company is continuously driving new productivity initiatives to remain committed to the journey of profitable growth.

In accordance with SEBI (Amendment) Regulations, 2018, your Company is required to give details of significant changes (change of 25% or more as compared to the immediate previous financial year). The relevant applicable information is as below. Further, the interest coverage ratio and debt equity ratio is not applicable to the Company as there is no debt.