Honeywell Shares Gain As Nomura Expects Recovery In Services, Exports To Lift Margins
Nomura expects Ebitda margin to normalise to 19% by FY24.
Shares of Honeywell Automation India Ltd. gained the most since Dec. 1 as Nomura expects a recovery in services and exports to lift margins in the second half of the current fiscal.
"Travel resumption should lead to increased commissioning activities and service exports, resulting in rising service revenues and helping maintain gross margins at 49–50%," the research house said in its Dec. 11 investor note.
This could lead to the Ebitda margin normalising to 19% by FY24, it said.
The research house also expects execution to improve, leading to a strong rebound in sales.
Nomura kept a 'buy' rating on the stock and raised the target price to Rs 50,642, implying an upside of about 22%. It largely maintained its earnings per share estimates for FY23–25 and said that valuations are reasonable as compared to peers.
The stock went up as much as 5.44% intraday to Rs 43,798.6 apiece—rising the most since Oct. 28, before closing at Rs 43,391.4, logging an increase of 4.46%. The total traded volume stood at 2.9 times the 30-day average.
The benchmark Nifty 50 ended flat at 18,497.15.
Of the nine analysts tracking the company, four maintain a 'buy,' three suggest 'hold,' and two recommend 'sell', according to Bloomberg data. The average 12-month consensus price target implies a potential downside of the stock is 5.8%.
Execution To Improve
Along with the margin uptick, Nomura expects execution to improve in the second half of fiscal 2023 and thereafter to accelerate over FY24.
A Covid-led shortage of semiconductor chips and travel restrictions had dragged Honeywell's execution back in fiscal 2021 and 2022, the research house said. However, with constraints on the supply chain easing, revenues will pick up in the fourth quarter of this fiscal, it said.
Chip lead times—the gap between when a chip is ordered and when it is delivered—peaked in April 2022, Nomura said, citing Bloomberg. A decline of three weeks was observed in October, it said.
Nomura expects chip lead times to normalise further in the second half of this fiscal and in FY24, which would aid deployment of services and drive revenue growth in the fourth quarter of this fiscal.
The resumption of travel would also aid execution, leading to higher commissioning activities or services, the research house said.
Introduction Of 5G A "Key Game Changer"
The deployment of fifth-generation technology could bring forth more long-term opportunities for the software solutions and automation provider, Nomura said.
Honeywell has offerings in "building technologies that address both edge data centres and hyperscale systems", it said.
Rolling out 5G for the industrial internet-of-things could be a "key game changer", the research house said. It expects 5G industrial IoT opportunities to increase, which may drive 15-20% order inflow growth for the company in the near term.