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Honeywell Automation India Ltd Management Discussions

34,227.45
(1.52%)
Apr 2, 2025|02:09:59 PM

Honeywell Automation India Ltd Share Price Management Discussions

Key Financial Indicators and Performance Highlights for FY 2023-24

For the year ended Variation
31st March 2024 31st March 2023
Revenue from Operations ( in millions) 40,582 34,476 Up 17.7%
Operating Income (%)* 18.0% 18.9% Down 90 bps
Net Income (%) 12.4% 12.8% Down 40 bps

INDUSTRY OUTLOOK AND OPPORTUNITIES

The Companys operating results are influenced by domestic and global macroeconomic developments which can have effect on trends such as industrial production, economic growth, capital spending, commercial and infrastructure construction, commodity prices and foreign exchange.

India Economic Overview

India continued its growth trajectory in fiscal year 202324 - full year real GDP growth rate is estimated to be 7.3% (Source: IHS). The economy has been resilient despite facing challenges of inflation (5.4%) and tight monetary policy (Source: RBI) The growth has been driven by governments capex investment push and a turnaround in the private investment cycle.

The interim budget announced for fiscal year 2024-25 in February envisions a total spending increase of 6.1% (to 4.8 million crore) and capital expenditure rising by 11% (to 1.1 million crore). This will keep up the economic expansion rate that was seen over the past few years. The government continues to focus on energy transition as a core policy initiative that is encouraging investments in solar, hydrogen, biofuels and electric mobility projects. The momentum in the private investment recovery is also expected to sustain improved capacity utilization rates and positive business sentiments.

India is also firmly on a digital transformation journey. With data consumption on the rise, cloud adoption accelerating and technology demand soaring higher than ever before, Indian corporations are investing in massive leaps forward to meet this demand. It is expected that India will see a six-fold increase in data centre capacity to 5,100-5,200 MW over next six years, involving investments of ~ 0.16 million crore. It will also drive enterprises to adopt digitally enabled innovative business models. (Source: ICRA)

While India is on a steady recovery path, global geopolitical developments, tightening of monetary policies in some countries may result in subdued global demand, impacting Indian exports. Broad supply chain disruptions can continue to cause cost inflationary pressure in future. Domestically, high interest rates and a return to rising consumer price inflation may exert pressure on household spending and corporate investments, leading to a moderation in the pace of overall GDP growth. However, the Company is confident of the strong fundamentals of the Indian economy to achieve growth in the longer term.

Industry Overview

The Company operates in multiple sectors i.e. infrastructure, manufacturing and energy that are directly linked to the sustainable, economic and industrial growth of the country.

• Infrastructure: The Indian construction sector is expected to remain steady in the years ahead, driven by buildout of airports, roads, ports, railways, metros, logistics parks, industrial corridors, data centers, cold storage and warehouses. Budget 2024 reinforces focus on infrastructure with capital expenditure raised by 11% to 1.1 million crore. Additionally, Indias growing population and rising household incomes will continue to propel the demand. Construction capex outlook estimates construction year-on-year growth in 2024 to be 10% - further broken down to 8.9% growth estimate for residential segment, 7.2% for office segment and 15.2% for infrastructure segment. (Source: S&P Globa))

• Manufacturing: The industrial production grew by 5.7% in 2023, supported by the governments manufacturing incentives and infrastructure investments. The manufacturing sector has emerged as one of the sectors with high growth potential in India. Governments Production Linked Incentive (PLI) scheme has been tremendously successful in boosting investments in the 14 key sectors that it covers, including automobile and auto components, electronics and IT hardware, telecom, pharmaceuticals, solar modules, metals and mining, textiles and apparel, white goods, drones and advanced chemistry cell batteries. The governments policies to support manufacturing intend to make India self-reliant under Aatma Nirbhar Bharat & Make in India programmes and also a global hub for manufacturing. Digitization of the manufacturing operations is also fast becoming one of the key priorities for manufacturers to reap the benefit of improved efficiencies at the same time protecting plants assets and data safety against physical or cybersecurity threats. Digitization of the Manufacturing operations is also becoming one of the key priorities to reap benefits of improved efficiencies, at the same time protecting plants assets and data safety against physical or cybersecurity threats. (Source: S&P Global)

• Energy: With increasing population, urbanization and industrialization, Indias energy requirement has already more than doubled since 2000 and is expected to increase in the coming years. In the coming three decades, India will see the largest energy demand growth of any country or region in the world. The demand for oil is estimated to go up from 5.2 million barrels per day (bpd) in 2022 to 6.8 million bpd in 2030 and 7.8 million bpd in 2050 (Source: IEA, World Energy Outlook2023). To meet this increased energy requirement, the government is adopting strategies to enhance domestic oil & gas production, shifting to gas based economy and technological upgradation to improve refinery processes. Indias refining capacity is expected to grow by 22% by 2028 vs. 2023 level (Source:MoPNG). The government has also taken up development of National Gas Grid and City Gas Distribution networks to provide clean and green fuel to the public.

Indias long term energy roadmap is marked by its net zero by 2070 ambition, increased regulatory sophistication, a focus on clean energy deployment, and the creation of domestic clean energy technology supply chains. Indias energy mix has been seeing a shift from more conventional energy sources to renewables, in line with the governments aim of achieving 500 GW installed capacity from non-fossil fuel-based capacity, and 5 mmtpa green H2 capacity by 2030. (Source: NITI Aayog)

OPERATiONS

The Company has only one segment as per Ind-AS namely “Automation and Control Systems” across various business operations, as stated below:

Honeywell Process Solutions

The Process Solutions business continues to deliver strong performance across all the key financial parameters. We saw a strong traction with many of our strategic customers and EPCs, with our products businesses delivering a robust performance. Our strong engagement in the Life Sciences vertical also helped with significant tailwinds which resulted in certain key wins. The Process Solutions business provides leading technologies from the plant floor to the boardroom as well as comprehensive lifecycle services to ensure more productive and stable operations. We also continued to leverage our wide portfolio of 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 & life sciences and metals. We continue to expand our reach in various underpenetrated geographies within India through channel partners and OEM engagements. These have helped the Process Solutions business of the Company to deliver a reasonable 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 drives make in India, sustainability goals, builds energy security & independence and encourages use of digital solutions. The Company is excited about the opportunities that these industries bring to the business. Apart from the core markets and solutions, the Company is uniquely positioned to drive growth in software solutions such as cyber security. The Company is also enhancing its reach and coverage to serve the renewable energy market with new and innovative solutions. As customers shift their focus to be carbon neutral and environmentally compliant operations, the Company would like to serve these new needs in the industry.

Honeywell Sensing Solutions (Formerly Safety Sensing Technologies)

The Honeywell Sensing Solutions (HSS) distribution business consists of various sensors and switches applied in on key industries like Transportation, Medical & Health Care, and Defense and Aerospace. HSS offers a wide portfolio, which includes pressure switches, airflow sensors, humidity and temperature sensors, oxygen and breath sensors. This helped the business win in healthcare and other industrial verticals. HSS added new product portfolio to leverage mega trend in Electric Vehicles, Green Hydrogen and other new sustainable ideas. With Make in India drive, the Company will continue to access the portfolio for localization opportunities to drive higher penetration of the products. HSS also leveraged its defense and military product portfolio to get into new military programs of government customers.

HSS business did a good job in marketing products for upcoming new verticals and on-time supply to customers by efficient operations management. This business rationalized its portfolio and gave priority to right technologies and future customer demand. To drive higher business growth, the Company took number of initiatives like establishing the application engineering support system in India, consolidation of the business accounts to concentrating on master distributors for improved 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. The local control and higher local content could further drive up the productivity further and help overcome the supply chain and quality issues.

Honeywell Building Solutions

The Building Solutions business caters to customer needs by providing system integration services that transform buildings into green, efficient, safe and smart using diverse automation and control technologies using its comprehensive suite of solutions. Notably, the unit leverages Honeywells Enterprise Building Integrator™ (EBI) to deliver these integrated solutions. Building Solutions provides state-of-the-art ground lighting, video analytics software (implemented in various airports across the country) and an extensive suite of after-sales services for various control systems. It also offers comprehensive maintenance plans to ensure optimal upkeep of key infrastructure for their customers.

Increased government funding allocated to the development of critical national infrastructure, including Ports, Railways, Airports, Metro systems, and Safe City initiatives, presents significant growth opportunities. A surge in private investments within large data centers, semiconductor factories, and similar establishments further strengthens this outlook. By capitalizing on our expertise in areas like analytics, energy optimization, software solutions for connected buildings and cybersecurity, Building Solutions business is well-positioned to capitalize on these emerging growth levers.

Building Management Systems

Building Management Systems (BMS) is a leading provider of building automation products and that seamlessly integrates with their specific building automation needs. BMS portfolio offers a comprehensive suite of controllers, field devices, and software solutions, empowering customers to tailor a system. It excels in facilitating the effortless monitoring and management of a buildings mechanical, electrical, and electromechanical elements. Our extensive portfolio encompasses solutions for Healthy Buildings and Heating, Ventilation and Air Conditioning (HVAC) applications, catering to a diverse range of verticals across India. These include large, mission-critical facilities in pharmaceutical, healthcare, and government infrastructure (airports, stadiums, metro stations), alongside IT parks, residential complexes, industrial spaces and hospitality sectors.

BMS unit has experienced consistent growth throughout the year and remains committed to its core strategies. This commitment manifests through a focus on commercial excellence levers such as optimized sales deployment, efficient onboarding processes, channel partner excellence, robust pipeline expansion and the introduction of innovative new product offerings. These initiatives ensure continued growth through the leverage of our existing product portfolio.

The business unit is actively targeting high-growth verticals like Healthcare, Data centers and Government infrastructure. We are fostering this expansion through exciting new initiatives such as Connected Buildings and upcoming product launches, coupled with a strategic enhancement of our market reach. These efforts solidify our position in a rapidly evolving market.

Exports

The exports business focuses on Engineering Services, Contract Manufacturing & Projects across Companys line of businesses for Honeywell affiliates.

Engineering Services business fosters engineering across verticals market in the Process Automation and Building Automation businesses by providing various engineering services. It provides basic and detailed engineering, application software development, project management services, solution consulting, site commissioning for Projects, Life Cycle Services, Connected Process and 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 Process Solutions, it serves in several core verticals like oil & gas, refinery & petrochemical, power, minerals, mining, & metals, etc. and new areas like life sciences, energy management and storage, etc. For Building Solutions, it provides services for airports, data centers, commercial and residential buildings, etc.

As a contract manufacturer, this business focuses on delivering high quality products and project solutions right and fast to India and the global market through Built-In Quality and Continuous Improvement processes under the Honeywell Accelerator framework. The Company continues to invest in new product initiatives, meaningful automation, capacity enhancement and localization to be cost competitive and improve deliveries. The Company maintains high HSE standards, robust control environment and continuous improvement culture. Under project solutions we deliver turn-key contract of automation and control solutions for industrial applications, primarily batch and continuous processes. Its competitiveness allows Process Solutions to grow globally, especially in highly competitive nations and large-scale programs in the EMEA and APAC regions. This division serves as a Center of Excellence for end-to-end project execution for global projects involving Process Solutions systems, safety and environmental controls, industrial security system, software application engineering, advanced software applications. Offerings from this business address the requirements of industries, such as oil & gas, refining, power production, water, and chemicals & life sciences.

Sustainability Portfolio

The Company has a number of products and solutions to support the ambitious goal of the country in energy transition and sustainability as follows:

(a) Battery Energy Storage Systems (BESS), which store electric energy using renewable sources (i.e. solar or wind) and functions as operating reserves that constantly work to manage frequency fluctuations on the grid, charging up during off-peak times and discharging when energy demand and electricity costs increase.

(b) The Company has innovative control technology for the automation of compressed biogas, compressor systems, distribution and special applications which offer odorization, station automation, smart metering and software visualization for pressure, quantity and measurements.

(c) Our process automation and controls portfolio also provides a complete package for hydrogen production as well as 1G/2G ethanol production. It offers innovative software applications that manage, monitor and control operations for maximum efficiency and minimum cost of production.

(d) Company also offers a suite of sensor offerings for enhanced safety in EV batteries and energy storage systems to offer the best combination of performance and reliability. Honeywells battery-current sensing devices provide high accuracy readings with low temperature drift to the Battery Management System for electrical management protection and state of charge monitoring.

(e) Honeywells automation and process safety solutions are used in in Gigafactories, helping the operators to run safe operations and also optimize use of energy and minimize waste, helping to increase battery production.

(f) Companys Intelligent Building Optimization helps building owners and operators meet two pressing yet often conflicting objectives: reduce the environmental impact of buildings to meet their carbon neutrality goals while optimizing indoor air quality to support occupant well-being.

Leadership and Talent

The 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. The Company leverages processes that have been the cornerstone of its growth. These include Honeywell Performance Development and Management Resource Review. 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, Individual Development Plan (IDP) and proactive succession planning for all key positions across the organization.

As part of our evolved Honeywell Behaviors (ACT WITH), talent development continues to be a strategic priority for us as we work to develop and retain our dedicated employees. Career advancement and development opportunities continue to fuel retention and engagement. We ask managers and employees prioritize career advancement and development conversations and these important conversations provide an avenue for employees and their managers to discuss IDPs, resulting in tangible action plans to accelerate readiness for future career progression. We have witnessed firsthand positive impact that a quality development plan can have on driving success in an employees current role and accelerating their readiness for future roles. Developing leadership capability in employees is a key expectation of every business leader and the 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.

As on 31st March 2024, the Companys employee strength was 3,096 as compared to 2,956 (full-time employees) as on 31st March 2023.

Employee Health & Safety

At Honeywell, the health and well-being of our employees are paramount priorities. A healthy workforce is productive, and we are committed to providing a safe and supportive work environment that promotes physical, mental and emotional well-being.

Throughout the past year, we have implemented various initiatives and programs to support our employees in maintaining and improving their health. The key highlights includes:

• Health and Wellness Programs: We offer a range of health and wellness programs, such as nutrition workshops and mental health awareness sessions. These programs are designed to empower employees to make positive lifestyle choices and take control of their health. Our company gym provides access to fitness equipment and exercise classes, ensuring employees have the resources to stay active and fit.

• Ergonomic Assessments and Support: We conduct ergonomic assessments to ensure employees have a proper workstation and equipment to support their physical well-being and prevent musculoskeletal injuries. We also provide personalised ergonomic training and help implement ergonomic solutions tailored to each employee.

We prioritize workplace safety and adhere to strict health and safety protocols to protect our employees from work-related hazards and risks. Regular safety training sessions and awareness campaigns ensure employees are well-informed and equipped to manage emergencies. By fostering a culture of care, support and safety, we are fulfilling our responsibility to our employees and driving sustainable business growth and success.

FiNANCiALS

Overall revenue from operations was 40,582 million registering a 17.7% growth as compared to the previous year. The domestic segment registered revenue of 24,178 million for the current year as compared to 20,054 million in the previous year, registering a 20.6% growth. Revenue from exports was 16,370 million as against 14,265 million in the previous year, registering a growth of 14.8%. The New Orders base increased by 10.8% YoY.

Overall profit after tax was 5,014 million. The Company delivered a return of 12.4% on sales for the year (previous year: 12.8%). Cost of goods sold was 57.0% of sales (previous year: 53.2%).

Net cash flow from operations was 4,387 million, as compared to 4,099 million in the previous year representing 87.5% of net profit (previous year: 93.6%). The Company will continue to focus on working capital performance and positive operating cash flows.

Related party transactions for the financial year ending 31st March 2024 are in accordance with the provisions of Section 188 of the Act and Regulation 23 of the SEBI Listing Regulations, 2015.

RiSKS AND CONCERNS

The Company generates a good percentage of its sales and profits from both direct customers and its business with Honeywell affiliates (including the ultimate holding company). The Companys ability to maintain or grow revenue & profits with both external customers and Honeywell affiliates depends upon performance factors like:

• Identify emerging trends and customer requirements and develop product & service offerings superior to those of its competitors.

• Meet or surpass the price, quality and delivery requirements of Honeywell affiliates and its end-customers in a cost- effective and competitive manner.

• Develop and retain employees and leaders with the necessary expertise.

• Honeywell-specific business considerations (independent of its shareholdings in the Company), including changes in Honeywells strategies regarding utilization of alternative opportunities to globally source products and services currently provided by the Company (including from alternative sources that Honeywell affiliates may acquire or develop), the level and/or mix of Honeywells business with the Company.

• An overall 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.

In addition, major macro and micro economic factors pose some risks to business despite Companys diversified products & services for varied industries as follows:

• Geopolitical risks: The ongoing Russia-Ukraine war and the tensions in the Middle East will continue to have an impact on the global economy and supply chains, leading to higher trading and logistics costs.

• High oil import bill: Indias net oil and gas imports in value terms for April-January of fiscal year 2023-24 declined by nearly a fifth on a year-on-year basis to $101.3 billion due to relatively lower prices of crude oil, natural gas and petroleum products in the international market. However, Indias strong dependence on crude oil imports subjects it to a range of international demand and supply factors that have an influence on the crude oil prices. (Source: MoPNG)

• Global economy: Owing to an elevated risk of capital outflows, Indias economy remains vulnerable to global financial tightening. Slowing global demand would weigh on growth via reduced exports and foreign capital inflows.

• Forex rate fluctuations: The Indian rupee has been stable over the past six months, in response to a combination of shifting expectations for the US Federal Reserves policy direction and interventions by the Reserve Bank of India. However, the rupee remains vulnerable to external factors such as financial market volatility and elevated sovereign bond yields in advanced economies and domestic factors such as current-account and fiscal deficits and high public debt. The company normally has a reasonable natural hedge position given a healthy mix of Export business.

• Global supply chain disruptions and energy price shocks: Supply chain disruptions can impact the industrial output. High energy costs may squeeze corporate profit margins and add to already high consumer price inflation, subsequently suppressing demand and delaying investments, resulting in slower than anticipated GDP growth.

• Competition: The Company is witnessing an overall increasingly competitive landscape and pricing pressures on sale of goods and services in both domestic and exports segments, which can impact the revenue and profits of the Company.

INTERNAL CONTROLS

The 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. The Company has continued its efforts to align all its processes and controls with global best practices. We believe that our system of internal controls provides reasonable assurance regarding the reliability of financial reporting and the effectiveness and efficiency of operations. We remain committed to continuously evaluating and enhancing our internal control framework to adapt to evolving risks and business requirements.

In addition to external audits, the financial and operating controls of the 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 the Company and reported to the Audit Committee.

The Audit Committee 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.

The Companys 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 interests review and reporting of concerns.

The Company also has a robust Integrity and Compliance program, in which all 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. The Company also has a formal process to receive and address incidents related to business conduct lodged by employees and other stakeholders.

SUMMARY

The Companys mix of exports revenue decreased as compared to the previous period. Overall revenue improved 17.7%. Net income was 12.4% of sales as compared to 12.8% in the previous year. Increased competitive environment in both domestic and exports segments, supply chain disruptions and inflation continue to be a challenge. The risks and concerns as mentioned above are being addressed through concerted efforts on operational excellence, driving productivity and cost rationalization. The Company is continuously driving new productivity initiatives to remain committed to the journey of profitable growth.

Details of various key ratios have been presented in the “Performance Highlights” section. Please note that the interest coverage ratio and debt equity ratio is not applicable to the Company as there is no debt.

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