january 2021 sector report
TRANSCRIPT
January 2021
Amit Mahawar+91 22 4040 [email protected]
Edelweiss Securities Limited
Sector Report
Engineering & Capital Goods
INDUSTRIAL AUTOMATION:AN EFFICIENT SWITCH
fcus
Ashutosh Mehta+91 22 6141 [email protected]
Manish Agarwall+91 22 4063 [email protected]
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited
Engineering and capital goods
Contents
Executive Summary ........................................................................................ 2
Story in Charts ................................................................................................ 5
Global industrial automation landscape ........................................................ 7
Global markets fairly automated; High growth/intensity for Asia .....……8
Industry at inflexion point; shifting from ‘hardware to software’… ..... .14
A brief comparison between ABB, Siemens, Honeywell globally… ..... ..19
Performance of India business versus global for key players…… ..... …..22
Case for OPM expansion - Rising local value add, cost focus ................ 24
India: Dynamic market; structurally set for accelerated growth……………….28
India’s challenge in adopting high scale of automation ........................ 30
Exports: Dark horse that could spur manufacturing capex ................... 35
India’s challenge in adopting high scale of automation ........................ 30
Exports: Dark horse that could spur manufacturing capex ................... 35
Valuation: Structural shift favour leaders .................................................... 38
Edelweiss Portfolio Snapshot ....................................................................... 42
Appendix 1 .................................................................................................... 44
Companies
Honeywell .............................................................................................. 50
ABB India ................................................................................................ 70
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Executive Summary
Globally, rising urbanisation and industrialisation have been the key drivers for industrial capex in the past century. Over the past decade, rising disruptions, deteriorating profitability/productivity, skilled manpower availability and rising environmental compliance have led manufacturing around the world to become more environment compliant and automation-intensive. This drove extensive usage of robotics, energy efficient drives-motors, rising installations of DCS/SCADA/PLC by utilities/industries, etc. The industrial automation market is growing across segments by 4–6% (nearly double of global GDP) with its market size expected to exceed USD550bn by FY25–26E.
India, though a small part of the global automation market, has logged better growth than most markets: a double-digit 10-year CAGR, largely product led. Most global players are expanding their India-specific portfolios and market reach, with digitally-compatible product/ solutions range to tap into the automation market, which is getting broad-based and marks a shift in business model (now getting cash-return rewarding). Total industrial automation revenue/EBITDA pool for global players in India (including unlisted) stands at INR370/50bn-plus (FY20), implying a 10%/13%-plus revenue/EBITDA growth over the past one decade, which includes exports/service revenues. We expect the total industrial automation market revenue/EBITDA pool
to to exceed INR850bn/120bn by FY25E, implying a 15/17% CAGR.
Global trends: Automation-led by productivity-compliance focus
After a strong growth cycle across decades, last few years have seen rising
consolidation by global players via M&A, either to expand their total addressable
market (TAM) or sharpen their technology edge to address changing client needs for
higher compliance, productivity, and a quicker TAT to market, among others. Rising
needs for energy-efficient motors drives (motor consumes 50% of industrial power
globally), availability of variations of robotic solutions, SCADA, DCS systems, etc for
energy-process industries and smart infra have led the global markets exceed
USD400bn, implying a 4–6% CAGR in the past decade. Spend on technology/R&D to
cater to higher outsourcing needs of clients by global leaders is on the rise with focus
on digital solutions as a recurring revenue stream. This shift, we argue, will drive
better cash/returns, reducing cyclicality in business for ABB, Siemens, HAIL, etc.
Asia: Best case in global industrial automation, global growth engine
If one looks at the three key markets in Asia—China, South Korea and Japan—it is
evident that ‘global automation growth’ has largely taken place in these markets
over the past one–two decades. The key reasons for higher industrial automation in
these markets include: i) focus on globally-exposed manufacturing such as auto,
electronics, chemicals, and metals, which need high productivity/quality; ii)
availability of skilled manpower, a prerequisite for adoption of industrial
automation, including intensive use of robotic, thereby lifting Asia’s share of global
market to 70%-plus; and iii) urbanisation and installation of energy capacities, etc.
in Asia, which is driving growth for segments such as SCADA, DCS, and other digitally-
compatible systems and products.
The industrial automation market is growing
across segments by 4–6%, nearly double of
global GDP rate, with its market size
expected to exceed USD550bn by FY25–26E.
Total industrial automation revenue
/EBITDA pool for top global players in India
stands at INR370/50bn-plus (FY20), implying
10%/13%-plus revenue/EBITDA growth in
the past one decade, which includes exports/
service revenues. We expect the total
industrial automation market pool to exceed
INR850bn with an EBITDA pool of INR120bn-
plus by FY25, implying a 15/17% CAGR.
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India: A small fraction of global market, but growth revving up
A small fraction of global market (1–2%), India’s total industrial automation
products market stands at ~INR425bn-plus (revenue pool including exports),
compounding at 10%-plus (10-year). Larger segments include HT/LT Motors,
Drives (VFD etc), while SCADA/DCS/Robotics/service is relatively small vis-a-vis
global mix. With rising exports/service opportunity and growing need for a much
wider adoption of industrial automation across large-mid sized manufacturers
and high digital growth, we expect the total revenue/EBITDA pie, including
exports, to exceed INR850bn/120bn by FY25E, a healthy 15/17% five-year CAGR.
What’s driving industrial automation in India: i) Rising manufacturing
disruptions (compliance, cost, demand), which has led to profitability/
productivity fatigue over the past decade. This is driving demand for energy-
efficient products (low voltage motors, drives, generators). ii) Increased spend
on infrastructure, including smart infra products, driving demand for
product/systems such as SCADA, DCS, and remote monitoring solutions. iii)
Capital-intensive sectors (metal, auto, chemicals and other process industries)
and consumer-facing sectors (FMCG, consume durables, etc) deploying higher
automation, either as part of their manufacturing rejig (reducing manpower
base) or for supply-chain/warehousing automation etc. iv) Lastly, quicker
technology adoption in emerging segments like electric vehicles, electronic
manufacturing and process plants, faster TAT becoming a norm for healthcare,
FMCG, e-commerce, high demand for warehouse-logistics-rail automation, etc;
these trends will, in our view, accelerate the pace of industrial automation.
India manufacturing: How current scenario compares with past
If one compares the past two decades of India’s manufacturing, it can be divided
into two phases: i) Period of massive capacity build-up (FY00–12): Across metals,
cement, auto, chemical, Infrastructure (roads, power, rail, etc), there was an
aggressive capacity ramp-up (both greenfield-brownfield) fuelled by a global exports
rally. This took India’s manufacturing/exports as a % of total GPD to ~20/22%. ii)
Capacity addition in the past eight years (FY12–20) has clearly slowed led by low
domestic demand, limited exports momentum (which has especially been weaker in
recent years), and lastly, corporates shifting focus to cash flows.
However, in our view, with improved corporate balance sheet, better positioning of
capital-intensive, globally-linked sectors and initiatives such as PLI and Atma Nirbhar
Bharat, the pickup in manufacturing can surprise on the upside. Add to this the rising
industrial-automation intensity and export-sensitive manufacturing landscape,
which, in our view, could spur India’s manufacturing to GDP share to new highs.
Markets preference for scale players; valuation premiums to sustain
Industrial automation leaders, such as ABB and HAIL in our coverage, are
expected to grow at a 10–15%-plus CAGR (three years) with potential for even
higher EBITDA growth, in our view, given the changing business model (service,
exports, software expanding better).
We are initiating coverage on HAIL with a ‘BUY/SO’, introducing it in our
‘BANYAN TREE’ series of high-quality names with a TP of INR50,000 (assigning
peak valuation of 62x June-2020E EPS), given high growth/scalable business
model. We are upgrading ABB to ‘BUY/SO’ (from ‘HOLD/SP’) with a revised TP
of INR1,650 (versus INR900) as we believe both growth pickup/OPM scale-up
potential remains high (due to rising India portfolio/exports). While we are
bullish on the whole industrial automation space, given a bigger and structural
trend, our order of stock preference is ABB, HAIL and SIEM.
Capital-intensive sectors (metal, auto,
chemicals and other process industries) and
consumer-facing sectors (FMCG, consume
durables, etc) deploying higher automation,
either as part of their manufacturing rejig
(reducing manpower base) or for supply-
chain/warehousing automation etc. Quicker
technology adoption in emerging segments
like electric vehicles, electronic
manufacturing and process plants, faster
TAT becoming a norm for healthcare, FMCG,
e-commerce, high demand for warehouse-
logistics-rail automation etc., these trends
will in our view accelerate the pace of
industrial automation.
In our view, with improved corporate balance
sheet, better positioning of capital-intensive,
globally-linked sectors and initiatives such as
PLI and Atma Nirbhar Bharat, the pickup in
manufacturing can surprise on the upside. Add
to this the rising industrial-automation
intensity and globally-positioned
manufacturing landscape, which, in our view,
could spur India’s manufacturing to GDP share
to new highs.
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What could go wrong; key risk to our thesis
Global exports pickup is an important variable in our hypothesis, wherein, we
believe, India this time is placed favourably to participate in the exports rally
over the next few years given better balance sheets and reasonable
productivity-led automation, especially in capital-intensive globally-exposed
sectors. Thus, our manufacturing/automation spend pickup argument builds in
delta from global exports, which could have a significant bearing on industrial
automation spends.
Infrastructure & core sector spend in India, particularly in smart infrastructure
across transportation (rail, metro), transmission and power capex (renewables-
led), spend on water infrastructure, metal-cement plant automation, etc. These
sectors have driven adoption of new technology over the past many years. Any
significant slowdown in these verticals could impact the pace of industrial
automation, impacting domestic growth across MNC leaders.
Rising exports mandate/service revenues: Global players have sharpened their
focus on the Indian market, including local entities. This is evident from both
their expansive India-dedicated offerings and rising exports mandates. Any
major policy shift globally could impact growth for Indian automation players.
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Story in charts
Global automation companies’ CAGRs
Market coverage/revenue share for global players
MNCs India revenue pool clocking 10% CAGR
Market coverage/revenue share for MNCs in India
Rising wages share has kept margins low
Source: Capitaline, CMIE, Company, Bloomberg, Edelweiss Research
Automation need of the hour
0.0
4.2
8.4
12.6
16.8
21.0
0
20
40
60
80
100
Ho
ney
wel
l
Sch
nei
de
r
Siem
en
s
AB
B
Emer
son
Ku
ka
Fan
uc
Yask
awa
Ro
ckw
ell
Rev
enu
e m
arke
t sh
are
(%)
Ind
ust
ry c
ove
rage
(%
)Revenue market share Industry coverage (LHS)
Honeywell
Schneider
Siemens
ABB
Fanuc Rockwell0.0
8.0
16.0
24.0
32.0
40.0
5.0 8.0 11.0 14.0 17.0 20.0
Rev
enu
e m
arke
t sh
are
%
FY11-20 revenue CAGR
0.0
8.0
16.0
24.0
32.0
40.0
0.0
20.0
40.0
60.0
80.0
100.0
Ho
ney
wel
l
Sch
nei
de
r
Siem
en
s
AB
B
Emer
son
Fan
uc
Yask
awa
Ro
ckw
ell
Rev
enu
e m
arke
t sh
are
(%)
Ind
ust
ry c
ove
rage
(%
)
Revenue market share Industry coverage (LHS)
0.0
5.0
10.0
15.0
20.0
25.0
0.0
5.0
10.0
15.0
20.0
25.0
FY0
0
FY0
5
FY1
0
FY1
1
FY1
5
FY1
6
FY1
7
FY1
8
FY1
9
FY2
0
(%)
(IN
R t
n)
Manufacturing GVA (LHS)
Manufacturing W&S (% of manuf. GVA)
BSE500 (ex BFSI/IT) PAT margin
0
1,200
2,400
3,600
4,800
6,000
0
5
10
15
20
25
FY7
7
FY8
5
FY9
5
FY0
5
FY1
5
FY1
6
FY1
7
FY1
8
FY1
9
FY2
0
(IN
R)
(IN
R t
n)
Manufacturing GVA (LHS) Revenue per manday
Global giants CAGR, 5.6
Asian peers CAGR, 7.2
Global giants Asia CAGR,
7.80.0
60.0
120.0
180.0
240.0
300.0
0.0 2.0 4.0 6.0 8.0 10.0
USD
bn
CY10-19 CAGR %
Fanuc Yaskawa Omron Mitsubishi
Electric Yokogawa
Honeywell Inc Schneider
Electric ABB Siemens AG Emerson Rockwell
Automation Kuka
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Increasing R&D spend by large global players
Rising mandate for Indian MNC companies
Driving higher growth for Indian players
Premium valuation to sustain
Ten-year price performance
Source: Company, Bloomberg, Edelweiss research
Edelweiss model portfolio weighting
4.3
4.7
5.2
1.0
2.0
3.0
4.0
5.0
6.0
0
2
5
7
10
12
CY10 CY15 CY19%
USD
bn
R&D R&D as a % of revenue
15.2
19.2 20.4
19.2
24.4
10.0
14.0
18.0
22.0
26.0
30.0
0
12
24
36
48
60
FY16 FY17 FY18 FY19 FY20
%
INR
Bn
Exports Exports as a % of sales
ABB IndiaSiemens
IndiaHAIL
Cummins IndiaABB
Siemens
Honeywell
Cummins
Fanuc
Yaskawa
KUKA
0.0
6.0
12.0
18.0
24.0
30.0
0.0 3.0 6.0 9.0 12.0 15.0
CY1
0-1
9 E
BIT
DA
CA
GR
CY10-19 Revenue CAGR
ABB India
Siemens India
HAIL
Cummins India
ABBSiemens
Honeywell
Cummins
0.0
15.0
30.0
45.0
60.0
75.0
0.0 8.0 16.0 24.0 32.0 40.0
1 y
ear
forw
ard
PE
(x)
CY19 ROE (%)
0.0
7.0
14.0
21.0
28.0
35.0
Ho
ney
wel
lIn
cH
on
eyw
ell
Ind
ia AB
BG
lob
alA
BB
Ind
ia
Siem
ens
AG
Siem
ens
Ind
ia
Cu
mm
ins
Inc
Cu
mm
ins
Ind
ia
(%)
10 year performance
L&T50%
ABB 15%
Honeywell12%
Siemens10%
BEL5%
KEC5%
BHFC3%
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Global industrial automation landscape
Source: Company, Edelweiss research
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Global markets fairly automated; High growth/intensity for Asia
Currently at USD400bn-plus, the global industrial automation industry, which
includes electrification, industrial automation, motion, robotics, and discrete
automation, is poised to cross USD550bn by FY25, implying a mid-single-digit
growth. Asia has been growing at a much higher rate led by rising urbanisation/infra
spend and global-scale manufacturing in segments such as auto, electronic
manufacturing, materials, etc.
Ex-electrification, core industrial automation segments such as robotics & discrete
automation, motion, process/industrial automation will each exceed USD100bn in
size by FY25, implying high double-digit growth for robotics and mid-single-digit
growth for other segments driven by global spend on productivity, rising
environmental compliance, issue of skilled manpower and changing shop-floor
landscape across manufacturing, energy and process plants.
As the market moves to USD550bn by FY25E…
Source: ABB, Industry, Edelweiss Research
…electrification is likely to gain more importance
Source: ABB, Industry, Edelweiss Research
Global automation companies’ CAGRs
Source: Edelweiss Research
160
90
80
80
Current market size, USD 410bn
Electrification
Industrialautomation
Motion
Robotics &discreteautomation
254
111
98
107
Market size by FY25E, USD 570bn
Electrification
Industrialautomation
Motion
Robotics &discreteautomation
Global giants CAGR, 5.6
Asian peers CAGR, 7.2
Global giants Asia CAGR, 7.8
0.0
60.0
120.0
180.0
240.0
300.0
0.0 2.0 4.0 6.0 8.0 10.0
USD
Bn
CY10-19 CAGR %
Fanuc Yaskawa Omron Mitsubishi Electric Yokogawa
Honeywell Inc Schneider Electric ABB Siemens AG Emerson Rockwell Automation Kuka
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Asia dominates focus segments (30–70% share across segments)
Source: Industry, Edelweiss Research
Growth drivers and key players in larger segments
Source: Edelweiss Research Legend: M&G – Motors & Generators
30.2 5.9 3.9 7.0 7.5
17.8
13.17.3
13.7 17.5
18-20%
4-6%5-7% 5-7%
3-5%
-10.0
-4.0
2.0
8.0
14.0
20.0
0.0
10.0
20.0
30.0
40.0
50.0
Robotics DCS SCADA VFDs Motors &Generators
(%)
(¦{5
bn
)
Asia Rest of World 5 Yr CAGR (RHS)
Robotics
•Rising cost of labor in key manufacturing markets.
•Model variety increase with drop in Robot costs, limited availability of skilled manpower.
•Players: ABB, Fanuc, Yaskawa, Omron, KUKA, EPSON, Kawasaki
DCS
•Rising investments in oil n gas, core infra in Asia-Pacific. ME region
•Process control in new refineries, power plants, proces industries.
•Players: ABB, Honeywell, Siemens, Schneider, GE, Rockwell
SCADA
•Expanding energy, utilities, remote monitoring in mining, cement etc.
•Players: ABB, Siemens, Yogokawa
VFDs
•Better innovaton and energy-efficienty norms driving VFD demand.
•Wider usage across motion-intensive process industries.
•Players: ABB, Danfoss, Siemens, Schneider, Rockwell, Delta.
Motors/
Generators
•Markets growting between 4-6% globally led by infra, urbaisation
•Rising trend/regulations driving demand for high efficiency/energy efficiency motors across applications.
•Players: ABB, WEG, Siemens, TECO, Regal Beloite, Leroy-Somer
High intensity of automation across auto
electronic manufacturing, steel, process
industries apart from higher share of global
infra and utilities capacity addition in Asia is
leading to higher growth vs global.
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Highlight of global automation markets remain China, Japan and South Korea, which
together drive the bulk of Asia-Pacific market given their high level of automation,
reflecting in intensive usage of robotics and other automation segments. More than
70% of the global robot usage is driven by five countries: China, Japan, South Korea,
Germany and the US. More than 75% of total robots deployed by these countries
are mobilised across three key sectors: automotive, steel and electronics
manufacturing. India is still at a very early stage of robots usage and, therefore, has
strong potential to grow given its expanding user industry base.
China leads the world in industrial robot installations; India far behind
Source: IFR, Edelweiss Research
Auto and Electronics industries drive this adoption in key markets
Source: IFR, Edelweiss Research
141
5033 28
2111 7 6 5 4 4 4 3 3 3
0
30
60
90
120
150
Ch
ina
Jap
an US
Rep
. of
Ko
rea
Ge
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y
Ital
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Fran
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Ch
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Spai
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Can
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Po
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('0
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Annual installation of industrial robots (2019)
106
8844
19
11
30
78
Annual installation of industrial robots (CY19; '000 units)
Automotive
Electrical/ElectronicsMetal and machinery
Plastic and chemicalproductsFood
Others
Unspecified
More than 70% of the global robot usage is
driven by five countries: China, Japan, South
Korea, Germany and the US
More than 75% of total robots deployed by
these countries are mobilised across three
key sectors: automotive, steel and
electronics manufacturing
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Robotic costs have halved, whereas wages have gone up globally
Source: Economist Intelligence Unit, IMB, IRF, US Social Security data, McKinsey
Global automation TAM at USD410bn plus; EBIT pool at USD29bn
We dissected global players’ addressable market size of the core automation
segments depending on their market presence. Wider offerings from global giants
such as Siemens, ABB, Honeywell and Schneider put them in high TAM and revenue
market share. Asian peers such as Fanuc, KUKA, and Yaskawa have a specific
presence, implying a much lower TAM; however, their competition positioning in
target segments is fairly dominant. Global addressable market for industrial
automation (including electrification, smart infra etc.) is pegged at USD400bn-plus
(of which core industrial automation products stands at ~USD250bn), while EBIT pool
globally is pegged at USD28bn.
India automation TAM at INR425bn; EBITDA pool at INR55bn
India’s total addressable market opportunity for industrial automation stands at
INR400bn-plus, with total EBITDA pool translating to INR 55 bn. Growth for large
global players in India in core automation segments has been 10% for the past 10
years. With a wider adoption of industrial automation across current and emerging
segments, we expect the addressable revenue/EBITDA pool including exports to
exceed INR 850/ 120bn by FY25E (five year CAGR of 15/17%), with exports, services
and digital revenue expected to lead the growth.
Market coverage and revenue share for global players
Source: Company, Edelweiss Research
0.0
4.2
8.4
12.6
16.8
21.0
0
20
40
60
80
100
Ho
ney
wel
l
Sch
nei
de
r
Siem
en
s
AB
B
Emer
son
Ku
ka
Fan
uc
Yask
awa
Ro
ckw
ell
Rev
enu
e m
arke
t sh
are
(%)
Ind
ust
ry c
ove
rage
(%
)
Revenue market share Industry coverage (LHS)
Wider portfolio, M&A for TAM
expansion/technology platforms driving
higher addressable market and revenue
share for global conglomerates such as
Siemens, ABB, Schneider, Honeywell, and
Asian peers like Fanuc, Yaskawa, etc. have
focused on the product portfolio.
Schneider has a larger presence in energy
management, power automation etc., while
core industrial automation products are less
than a third of revenues.
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Market coverage and revenue share for MNC’s in India
Source: Company, Edelweiss Research
India revenue pool for global players at INR370bn (10% CAGR)
Source: Company, Edelweiss Research
Industry EBITDA clocking higher 13% CAGR, pegged at INR50bn+
Source: Company, Edelweiss Research
0.0
8.0
16.0
24.0
32.0
40.0
0.0
20.0
40.0
60.0
80.0
100.0
Ho
ney
wel
l
Sch
nei
de
r
Siem
en
s
AB
B
Emer
son
Fan
uc
Yask
awa
Ro
ckw
ell
Rev
enu
e m
arke
t sh
are
(%)
Ind
ust
ry c
ove
rage
(%
)
Revenue market share Industry coverage (LHS)
Honeywell
Schneider
Siemens
ABB
Fanuc Rockwell0.0
8.0
16.0
24.0
32.0
40.0
5.0 8.0 11.0 14.0 17.0 20.0
Rev
enu
e M
arke
t sh
are
%
FY11-20 revenue CAGR
Honeywell
Schneider
Siemens
ABB
FanucRockwell
0.0
10.0
20.0
30.0
40.0
50.0
-5.0 1.0 7.0 13.0 19.0 25.0
FY2
0 E
BIT
DA
sh
are
%
FY11-20 EBITDA CAGR %
Global players like Siemens, ABB and
Honeywell account for a lion’s share of
India’s core industrial automation market
pie, while others like Emerson, Rockwell,
KUKA, Fanuc, Yaskawa have smaller
presence.
EBITDA has compounded at a higher rate vs
revenue historically for large MNCs present
in India as their exports/service revenue has
grown much faster driving better OPMs.
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Brief snapshot of global versus India segments for large MNCs
Company Segment Global size
(USD bn)
India size
(USD mn) Remarks
ABB
Electrification 12.7 425.0 India portfolio largely Utilities and smart infra focused. Recent India launches: TrueOne ATS,
Compact MCB, UMC Relays, Terra, EV Chargers, Relion Relays, Wavepro Busways. Digital
capabilities: MyRemoteCare and EDCS.
Motion 6.5 368.6 LV/IEV motors doing well on exports. Pace of localisation is picking up given rising global
mandate/local demand. 900 smart sensors and 600 plus remotely monitored drives
supplied in Indian market till date. Extended ABB Ability to motors/drives portfolio. Rail
portfolio (traction products) doing well.
Industrial automation 6.3 220.0 City gas, water compensating for slow refinery, thermal capex. For FGD capex in power, ABB
introduced India made Digisampler 2.0 (real time monitoring). Digital orders picking up well.
New range for India: ABB Ability™ Expert Optimizer, ABB Ability Tekomar XPERT.
Robotics & discrete
automation
3.3 38.3 India witnessing greater demand from food and beverage, consumer electronics,
warehousing automation due to productivity reasons. India has limited range due to low
scale of industry vs ABBs global range.
Siemens
Digital industries 17.2 370.1 Largely led by manufacturing and process industries. Range getting highly compatible with
Mindsphere.
Smart infrastructure 16.1 502.5 Large segment in India servicing oil n gas, power, water utilities.
Mobility 9.9 157.5 Largely led by rail/metro portfolio. E-locos, EMUs etc.
Portfolio companies 5.6 169.4 Mechanical and other drives etc.
Honeywell
Aerospace sales 14.1 463.1
Largest business for HAIL is export to multiple global entities of the parent especially in
building technologies, safety, design engineering services etc. India portfolio in listed entity
is largely process industries and building portfolio (domestic market), while aerospace is very
limited in India.
Honeywell building
technologies sales
5.7
Performance Materials
and Technology sales
10.8
Safety & Productivity
Solutions Sales
6.1
Schneider
Energy Management 23.3 194.9 SEIL (India) is largely smart infra focused around power system products/automation.
Unlisted entity captures bulk of global portfolio in industrial and energy mgt
Industrial Automation 7.1
Emerson
Automation solutions 12.2 127.8 India has limited scale/presence, largely a service centre for the parent. Most of the sales
happen via distribution channel.
Commercial &
residential solutions
6.2
Fanuc
Factory automation
systems
1.9 96.3
Leading player in robotics in India, however limited size vs parent given smaller industry size
of less than 300 mn USD. 50% of India manpower in servicing.
Robot 2.0
Robomachine 1.1
Service 0.8
Yaskawa Motion control 1.1 47.0
Drives plant in Bangalore, leveraging on high global share in AC servo drives and industrial
robots. Robotics 1.4
System engineering 0.5
Rockwell
Discrete 1.6 117.9
India entity (unlisted) markets global brands (like Allen Bradley) for the parent. Limited
scale/offerings in India via local manufacturing. Hybrid 2.5
Process 2.5
Total 180 3,300
Source: Company, Edelweiss Research
Engineering and capital goods
Edelweiss Securities Limited
14 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
Industry at inflexion point; edge shifting from ‘hardware to software’
In a total global revenue pool of USD250bn for core industrial automation
product portfolio, digital/service revenue across top eight–nine players stands
at a whopping USD50bn-plus, with potential to lead the overall revenue growth
basis: installed base and ongoing expansion of digitally-compatible products/
solutions, IIOT, etc. In comparison with past decades of assembly-line/copper-
steel based product profile with upfront cost based edge, the industry is clearly
transforming into solutions/life-cycle based customer preference which will
decide the competitive edge, future growth.
Extending product leadership into digitally-compatible offerings: While ABB
and Siemens have the widest presence across key verticals, translating into a
much higher share of revenue pie, there are players with niche areas around
automation verticals. Please refer (Appendix 1) for some key global product
platforms and offerings by top global players.
Competitive landscape shifting globally; Who are winners-losers: There are 3
sets of players: Regional players with select product focus, global product
focused companies with some exposure to service/digital based on strategic tie
up/customised arrangements and thirdly, there are these global giants like ABB,
Siemens, Honeywell who have strong in house digital infrastructure with most
products highly-compatible to digital platforms which is helping generate high
share of service/digital revenue stream with higher than market growth. In our
view, strong balance sheet muscle and domain expertise will drive technology/
R&D innovations for large global players like ABB, Siemens, Honeywell etc. This
coupled with dominant market positioning and a widening digital/automation
adoption by mid-sized players would impart a strong and sustainable
competitive advantage driving better scale/returns for automation leaders with
rising TAM/revenue share. Those with select product focus and limited
capability to augment digital capabilities in our view will lose their existing edge
at a fast pace.
Service revenue as % of total revenue (global players)
Source: Company, Edelweiss Research
5.0
10.0
15.0
20.0
25.0
30.0
2015 2016 2017 2018 2019
%
Honeywell ABB Rockwell
In our view, strong balance sheet muscle and domain
expertise will drive technology/R&D innovations for
large global players like ABB, Siemens, Honeywell etc.
This coupled with dominant market positioning and a
widening digital/automation adoption by mid-sized
players (clients) would impart a strong and
sustainable competitive advantage driving better
scale/returns for automation leaders with rising
TAM/revenue share.
Edelweiss Securities Limited
Engineering and capital goods
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 15
R&D spend as a % of revenues rising for large global players
Source: Company, Edelweiss Research
Local demand/outsourcing mandate driving a change in India model: If
one tracks what ABB, Siemens, Honeywell, Schneider etc. are strategizing
in India, there seem to be growing evidence of digitally-compatible and
India-specific portfolio to address changing customer needs. Also, focus on
tier ii markets to expand overall TAM is clearly reflecting in recent
actions(like ABBs e-mobility, Tier II focus, Leveraging on Mindsphere to
launch new product/solutions, HAIL aggressively expanding sales force with
robust product/solutions launch pipeline to tap tier II markets etc.).
Additionally, with global demand for IIOT/digital, role of Indian subsidiaries
will clearly go up in our view, given design engineering and software
capabilities, expanding addressable market. Directionally, we see large
MNCs in India with robust digital platforms, global leadership to take share
from regional-product focused players leading to an overall market
consolidation.
Mandate for Indian entities consistently growing higher
Source: Company, Edelweiss Research
4.3
4.7
5.2
1.0
2.0
3.0
4.0
5.0
6.0
0
2
5
7
10
12
CY10 CY15 CY19
%
USD
Bn
R&D R&D as a % of revenue
15.2
19.2 20.4
19.2
24.4
10.0
14.0
18.0
22.0
26.0
30.0
0
12
24
36
48
60
FY16 FY17 FY18 FY19 FY20
%
INR
Bn
Exports Exports as a % of sales
Directionally, we see large MNCs in India
with robust digital platforms, global
leadership to take share from regional-
product focused players driving faster
market consolidation. Sharpening focus on
Tier II/III markets by ABB, Siemens and HAIL,
more active digital platforms for
product/marketing etc are some early
indications of upcoming consolidation.
Engineering and capital goods
Edelweiss Securities Limited
16 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
USD 10bn plus of USD 25bn global M&A by global players in last 5 years happened in digital/IIOT based space
Source: Company, Edelweiss Research
> 40% of Global M&ADigital automation/IIOT
• Siemens -• Mentor Graphics - Leading Electronic design automation company
• Mendis - Addition to its comprehensive Digital Enterprise and MindSphere IoT portfolio
• ABB -• B&R - Product- and software-based, open-architecture solutions for factory automation.
• Honeywell• Transnorm - Global leader in high performance conveyor and warehouse automation
• Intelligrated - Supply chain and warehouse automation technologies
• Xtralis - Leading global provider of smoke detection and perimeter security technologies
• COM DEV - Leading satellite and space components provider
• Rockwell • ASEM, S.p.A - Industrial IoT gateway system, Industrial PC, HMI etc.
• Kalypso, LP - consulting, digital innovation, enterprise technology and process mgt service.
• Avnet Data Security - Cyber security solutions range.
• MESTECH Services - Leader in manufacturing operation/execution system
• PTC - IoT, Augmented realty
• Odos Imaging Limited - 3-D time-of-flight sensor technology for industrial applications
> USD 16bn in valueProduct/region
• Schneider -• L&T E&A - Leadership in India/Asia switchgears market
• Siemens -• C&S Electric - Siemens to leverage C&S switchgears, busbar, protection device etc globally
• Dresser-Rand - To create a world-class provider for growing oil and gas market
• Healthcare - Siemens AG's global strategy of managing healthcare separately
• ABB • GEIS - Strengthening ABBs global position in electrification and expands in US markets
• Honeywell• Transportation (spin off) - focus on six high growth segments that are aligned to global trends and to
maximise shareholder value in spun off business by sharper focus in turbocharger leadership.
• Homes and Global Distribution (spin off) - To sharpen focus in HVAC controls and security markets, and drive leadership status in global distributor of security and fire protection products.
• Elster Group - Acquisition will provide access to high-growth product areas and geographical locations
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ABB AbilityTM - Leading with innovation
Source: Company
ABB Ability™ solutions combine ABB’s deep domain
expertise with connectivity and software innovation to
empower real-time, data-driven decisions for safer,
smarter operations that maximize resource efficiency
and contribute to a low-carbon future
180 ABB Ability™ solutions in the new ABB| 45% of new
orders from digitally enabled offerings
Honeywell Forge – Next step in performance
Source: Company
Honeywell Forge is Enterprise Performance
Management Software-as-a-Service, purpose-built on a
native edge-to-cloud, data-driven architecture to
accelerate digital transformation.
Featuring connected software and hardware solutions,
Honeywell Forge measures, optimizes and automates
operations, as an open, extensible, cyber secure offering
designed to work across any enterprise.
20-40% productivity gains, 20-30% yield optimization,
90+% remote operations and 25% reduction in net
carbon by 2030
Siemens Mindsphere – industrial IoT as a service
Source: Company
MindSphere® by Siemens, is the leading industrial IoT as
a service solution. Using advanced analytics and AI,
MindSphere powers IoT solutions from the edge to the
cloud with data from connected products, plants and
systems to optimize operations, create better quality
products and deploy new business models.
Built on the Mendix application platform, MindSphere
empowers customers, partners and the Siemens
organization to quickly build and integrate personalized
IoT applications.
Key partners include Amazon web services, HCL,
Microsoft, TCS, Tech Mahindra, etc.
Engineering and capital goods
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Schneider – IoT enabled architecture & platform
Source: Company
EcoStruxure is Schneider Electric's innovative IoT-
enabled, plug-and-play, open, interoperable
architecture and platform, which can be employed all
across Homes, Buildings, Data Centres, Infrastructure
and Industries.
Helps to optimise up to 80% engineering cost and time,
up to 75% maintenance cost and up to 50% carbon
footprint.
20,000+ developers, 6,50,000+ service providers and
partners, 4,80,000 sites deployed
Plantweb – Digital ecosystem by Emerson
Source: Company
A scalable portfolio of technologies, software and
services, Plantweb by Emerson, enables measurable
performance improvement in the areas of production,
reliability, safety and energy management by
empowering personnel with new insights and
actionable information.
From small, targeted applications to enterprise-wide
solutions, Plantweb drives true performance gains and
accelerates the journey to Top Quartile performance.
FANUC Intelligent Edge Link & Drive system
Source: Company
FIELD system (FANUC Intelligent Edge Link & Drive
system) is an open platform for the manufacturing
industry which targets improvements in productivity
and efficiency.
Third party developers can freely develop and sell
applications and converters for devices. As various
devices on the shop floor can be connected without
barriers related to generation or manufacturer,
centralized management of equipment and data, as well
as the sharing of data are enhanced.
Key partnership with Preferred Network Inc.
Edelweiss Securities Limited
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A brief comparison between ABB, Siemens, Honeywell globally
Beyond just growth, profitability, market positioning etc. a lot of which are reflected
in obvious numbers, below are a few relevant strategically important aspects that
investors need to consider while comparing the three industry leaders for a better
long term insight for Indian listed entities, given high linkages directionally. We tried
to put our thoughts together on some relevant aspects:
Acquisitions by large automation players over past five years
Source: Company, Edelweiss Research
Our thoughts on competitive edge and growth strategy
Source: Company, Edelweiss Research
ABB
(USD 5bn)
•Key acquisitions - GEIS, B&R
•Advantage: ABB consolidated its leadershp in electrification and industrial automation. B&R contributes to ABBs premium, futuristic platforms across products.
Siemens
(Euro 11-12bn)
•Key acquisitions - Mendix, Mentor Graphics, Dresser-Rand Group
•Advantage: Dresser-Rand consolidates Siemens' oil and gas dominance, while other buyouts enhanced Mindsphere's dominance in IIoT/digital platform across domains.
Honeywell
(USD 8bn)
•Key acquisitions - Transnorm, Xtralis, Intelligrated, Elster Group, COM DEV International
•Advantage: These not only expanded TAM for Honeywell significanlty, but dellivered better growth leveraging on Honeywell's integration trackrecord, diverse customer base.
ABB
•Pro active growth strategy: B&R (highly compatible with ABB portfolio) and Powergrid decision mark a techtonic shift in ABBs future growth strategy to emerging high growth areas.
•Leadership across most large segments: Innovation culture and customer-centricity helped ABB retain No 1-3 rank in most large segments (Motors, drives, DCS, Robotics, process automation etc).
•Believe in orgnic growth: Unlike most peers, ABBs growth path has largely been organic, barring a few acquisions. ABBs strong innovation-led culture helps in large portfolio of cutting-edge product ranges.
Siemens
•Robust digital platform; Mindsphere: Wider digital offerings; amongst top 10 IT companies globally; more than Euro 10bn invested in 10Y in digital companies; 40K employees in digital.
•Largest TAM across peers: TAM exceeds USD 365bn; dominant present in most sizable segments like energy, smart infra, manufacturing automation etc.
•High autonomy to businesses: Higher automony give to all key regions as per Vision 2020; will enable quicker decision making in some high growth markets including India.
Honeywell
•Excellent M&A trackr ecord in high growth segments: Honeywell is able to deliver better post M&A integration, reflecting in solid improved growth in Xtralis/Intelligrated buyouts, both delivering 20% sales CAGR post buyouts.
•Honeywell Forge, adds USD 100bn: Completing Honeywell's high growth acquisitions; Adds 100 bn (IIoT) TAM
•Empowering local management: Local for local and local for global strategy firing well|, parent's delibrate stategy of empowering local managements has been quite successful.
Engineering and capital goods
Edelweiss Securities Limited
20 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
What’s the sales-EBIT CAGR and stock returns pecking order: Honeywell has clearly
outperformed both globally and in India versus large peers. This we believe is driven
by significant scale up in profitability led by successful M&A integration and higher
reliance on HGR (high growth regions) to drive competence. Siemens and ABB on
the other hand, had seen consolidation in business portfolio, which to an extent
drove lower returns both in India and globally.
EBITDA CAGR versus stock return performance
Source: Company, Edelweiss Research
Honeywell
Siemens
ABB
HAIL
Siemens India
ABB India
0.0
6.0
12.0
18.0
24.0
30.0
0.0 4.0 8.0 12.0 16.0 20.0
CY1
0-1
9 S
tock
ret
urn
CA
GR
%
CY10-19 EBITDA CAGR %
Edelweiss Securities Limited
Engineering and capital goods
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 21
ABB Global & India MD/CEO track-record CY10–19
Source: Company, Bloomberg, Edelweiss Research
ABB in India has been more stable vs parent across
CEOs in the past decade both in term of growth and
stock return.
Siemens AG & India MD/CEO record Sept10–19
Source: Company, Bloomberg, Edelweiss Research
Greater autonomy for India management in recent
years with better execution has clearly made a
difference for Siemens both in growth, reflecting in
better returns for shareholders.
Honeywell Inc. & India MD/CEO record CY10–19
Source: Company, Bloomberg, Edelweiss Research
Honeywell Inc. has outperformed many peers
consistently led by strong internal culture which has
made new acquisitions sync and grow well, this has
played out across CEOs.
While in India, which is a key part of HGR (high growth
region for the parent), the mandate for higher value
addition to parent (via higher design engineering
mandate) seem to be rising as a trend, reflecting in
consistent OPM scale up.
0.0
8.0
16.0
24.0
32.0
40.0
Joe
Ho
gan
(10
-13
)
Ulr
ich
Spie
ssh
ofe
r(1
3-1
8)
Pet
er
Vo
ser
(18
-19
)
Baz
mi R
Hu
sain
(10
-15
)
San
jeev
Shar
ma
(15
-19
)
(%)
Revenue CAGR Stock CAGR
-20.0
-10.0
0.0
10.0
20.0
30.0
Pet
er
Lösc
her
(10
-13
)
Joe
Kae
ser
(13
-19
)
Dr.
Arm
inB
ruck
(10
-13
)
Sun
ilM
ath
ur
(13
-19
)
(%)
Revenue CAGR Stock CAGR
0.0
13.0
26.0
39.0
52.0
65.0
Dav
id M
.C
ote
(10
-16
)
Dar
ius
Ad
amcz
yk(1
6-1
9)
An
ant
Mah
esh
war
i(1
0-1
2)
Vik
asC
had
ha
(12
-14
)
Ash
ish
Gai
kwad
(15
-20
)
(%)
Revenue CAGR Stock CAGR
Engineering and capital goods
Edelweiss Securities Limited
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Performance of India business versus global for key players
Across players, while Asia has clearly done better as a region, India has particularly
grown much better for most players. While a few players such as Honeywell etc.
have done much better in India, both for listed and unlisted, suggesting much better
growth in exports market with higher value addition over the years. For global
automation leaders such as Siemens and ABB, in our view, the scope for both growth
and profitability scale-up in India remain high given improving growth(both
domestic and exports) and changing industry landscape with higher potential from
services/technology-led revenue model, which coupled with changing cost
structure, could drive a much higher returns structure.
Honeywell parent revenue
Source: Company, Edelweiss Research
Honeywell India listed versus unlisted entity
Source: Company, Edelweiss Research
ABB parent revenue
Source: Company, Edelweiss Research
ABB India revenue
Source: Company, Edelweiss Research
15.4
16.8
18.2
19.6
21.0
22.4
34,000
36,000
38,000
40,000
42,000
44,000
CY15 CY16 CY17 CY18 CY19
%
USD
Mn
Honeywell parent revenue EBITDA margin
0.0
7.0
14.0
21.0
28.0
35.0
0
8,000
16,000
24,000
32,000
40,000
FY16 FY17 FY18 FY19 FY20
%
INR
Mn
Honeywell India listed entity revenue
Honeywell India unlisted entities revenue
EBITDA margin
Unlisted entity EBITDA margin
9.0
10.0
11.0
12.0
13.0
14.0
22,100
23,400
24,700
26,000
27,300
28,600
CY15 CY16 CY17 CY18 CY19
%
USD
Mn
ABB parent revenue (ex power grid) EBITDA margin
5.0
6.0
7.0
8.0
9.0
10.0
0
18,000
36,000
54,000
72,000
90,000
FY16 FY17 FY18 FY19 FY20
%
INR
Mn
Indian listed entity revenue EBITDA margin
Edelweiss Securities Limited
Engineering and capital goods
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 23
Schneider parent revenue
Source: Company, Edelweiss Research
Schneider India listed versus unlisted entity
Source: Company, Edelweiss Research
Siemens parent revenue
Source: Company, Edelweiss Research
Siemens India listed versus unlisted entity
Source: Company, Edelweiss Research * Unlisted includes 4 large entities in India
Emerson parent revenue
Source: Company, Edelweiss Research
Emerson India revenue
Source: Company, Edelweiss Research
10.0
11.0
12.0
13.0
14.0
15.0
23,000
24,000
25,000
26,000
27,000
28,000
CY15 CY16 CY17 CY18 CY19
%
EUR
O m
n
Schneider parent revenue EBITDA margin
-12.0
-6.0
0.0
6.0
12.0
18.0
0
18,000
36,000
54,000
72,000
90,000
1,08,000
FY16 FY17 FY18 FY19 FY20
%
INR
Mn
Schneider Indian listed entity revenueSchneider Indian unlisted entities revenueEBITDA marginUnlisted entity EBITDA margin
6.5
7.1
7.7
8.3
8.9
9.5
68,000
72,000
76,000
80,000
84,000
88,000
CY15 CY16 CY17 CY18 CY19
%
EUR
O M
n
Siemens parent revenue EBITDA margin
7.0
8.6
10.2
11.8
13.4
15.0
0
30,000
60,000
90,000
1,20,000
1,50,000
FY16 FY17 FY18 FY19 FY20
%
INR
Mn
Indian listed entity revenue
India unlisted entities revenue
EBITDA margin
Unlisted entity EBITDA margin
-
5.0
10.0
15.0
20.0
25.0
-
4,000
8,000
12,000
16,000
20,000
CY15 CY16 CY17 CY18 CY19
%
USD
Mn
Revenue EBITDA margin
15.0
18.0
21.0
24.0
27.0
30.0
0
2,000
4,000
6,000
8,000
10,000
FY16 FY17 FY18 FY19 FY20
%
INR
Mn
Revenue EBITDA margin
Engineering and capital goods
Edelweiss Securities Limited
24 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
Case for OPM expansion – Rising local value add/service, cost focus
Global players are making significant inroads when it comes to localisation
product/systems from their global portfolio as reflecting in ABB/Siemens ramp
up in recent years across business segments. The same though has had some
positive impact on overall margins, however, we believe, there lies a much
greater scope for margin expansion, as local value addition goes up with
growing scale of business. Despite recent pick up in localisation, the extent of
support from parent’s portfolio, reflecting in high traded goods has gone up, to
address industry needs-across transportation, control and automation, low
voltage range, digital know-how etc. Rising industry volumes will make the case
for local manufacturing/designing and engineering etc. stronger which will add
significantly to medium-long term OPMs.
What’s more comforting is a gradual pick up in service/software based revenue
pool for these large global names, which generates steady and profitable
revenue driving higher visibility for margin structure. There seem to be a gradual
but structural change in industrial business model as global players have
realised bigger money is not just in selling products, but packaged solutions and
service offerings on a life cycle basis.
Significant scope for margin expansion for ABB…
Source: Company, Edelweiss Research
…the same is true for Siemens as well
Source: Company, Edelweiss Research
0.0
3.0
6.0
9.0
12.0
15.0
CY1
2
CY1
3
CY1
4
CY1
5
CY1
6
CY1
7
CY1
8
CY1
9
(%)
ABB India
Traded goods as % of RM EBITDA margin (%)
0.0
2.8
5.6
8.4
11.2
14.0
30.0
35.0
40.0
45.0
50.0
55.0
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8
FY1
9
FY2
0
(%)
(%)
Siemens India
Traded goods as % of RM EBITDA margin (%)
Faster localisation has had some positive
impact on overall margins in recent year,
however, we believe, there lies a much
greater scope for margin expansion, as local
value addition goes up with growing scale of
business both led by domestic/exports
demand and rising digital/service portfolio.
Edelweiss Securities Limited
Engineering and capital goods
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 25
ABB product localisation track record for India
Localisation done Year Product Application/sector
Composite converter
(CC1500_M500_AC_M) 2019
Propulsion
converter
Application: Diesel electric trains (DMU), rail applications
Benefits: Converts DG power into propulsion power for the traction motors/auxiliary power (AC,
DC and battery), energy-efficient, easy maintenance.
Underslung Auxiliary
converter 2019
Propulsion
converter
ABB has 20% plus share of traction converters used in 3 phase Electric-Locos in India.
Application: Electric Loco/rail segment.
Benefits: Lower life cycle cost, better design and energy efficient.
AC Metro (Bordline
M80_AC_U) 2019
static converter
system
Usage: Metro and railway application.
Benefits: Comes in a broad range of voltage, highly customised and compatible with ABB Ability.
Multi-feeder protection
system (SSC600)
product
2018 Power
automation
Advantage: It allows centralised monitoring/control and control for key assets.
Application: SMART Infrastructure, Substation automation.
Inverter modules for
solar inverters and
industrial drives
2017 Solar
inverter/drives
Advantage: Micro, string, central for residential, commercial and utility range.
Application; Solar power plants. Benefit: Compact design, energy-efficient, low on life cycle cost.
Slip ring motors in 400
to 500 frames 2017 Motor
Advantage: Can deliver high starting torque while low starting current and continues to supply
high torque over entire speed range, adds to the drive life span.
Application: For Conveyer mills, crushers and fans in Cement/process plants.
New generation of LV
ACS 880 Drives 2016 LV Drives
Advantage: compatible with virtually all processes, automation systems, highly energy-efficient.
Application: across wide range of motion-intensive process plants, marine, power etc.
OTDC Local assembly 2016 Power breaker Advantage: ensure reliable breaking power for all current levels, efficient and simple
Application: Smart Infra/T&D
Tmax XT MCCB 2016 Circuit breaker Advantage: Compact, simple to install with better safety and lower energy cost
Application: Smart Meters, Building technologies, Motor and Generator protection.
NXR motor technology 2015 HV Motors Advantage: Rib cooled design drive better energy efficiency, build in serviceability.
Application: Plants with continuous duty applications, used with pumps, blowers, conveyers etc.
Active Harmonics filter 2015 LV drive-based
product
Advantage: Increase the operating life of equipment, prevent expensive downtimes
Application: Mining, Oil and Gas, Marine, Rail, Data-Centre etc. Drives compatible product.
DC Capacitors 2015 Voltage
conversion
Advantage: Compact design, better equipment protection
Application: HVDC, Converter application for motor, drives, traction etc.
New global general
purpose LV drive 2015 LV drive
Application: F&B, Material handling, mining, oil and gas, auto, chemicals, rubber and plastic.
Advantage: Low down time, customised, can communicate with all major automation network.
Source: Company, Edelweiss Research
Engineering and capital goods
Edelweiss Securities Limited
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Siemens product localisation track record for India
Localisation done Year Product Application/sector
3D Vision system 2020 Industrial image
processor
Based on Siemens' SIMATIC IPC platform.
Application: Process plants, food and beverages, sophisticated manufacturing.
Advantage: Product quality tracking, high volume manufacturing, compatible with robotics.
Hardware and Software for
Transient network analyser 2019
Digital industrial
automation
PSS®SINCAL based, simulator for the planning, modelling, and analysis
Application: T&D, industrial, rail, and renewables / distributed energy systems
Real Time Digital Simulator
upgrade 2019
Power
automation
Power systems protection/management, control across industries, utilities etc. Compatible
with Siemens Mindsphere platform.
Know how(Control
Software for Locomotives 2019 E-mobility
Advantage of Locomotive control system: Dynamic braking, effective wheel slip and slide
control and reduced lifecycle cost etc. Overload protection.
Existing products for India includes: Propulsion System including Traction Converter and
Traction Motor, auxiliary power supply and all other Electrics for ACAC EMUs etc.
Integrated Traction
Converter for E-Loco 2019 E-mobility
Application: Freight and passenger electric locos
Advantage: Increase in haulage capacity/average speed and utilisation of rolling stock assets.
Axle counters for Rail
Automation - ACM200 2019 E-mobility
Application: Railways track automation and control system
Advantage: Smart track vacancy detection system for cost-effective operations.
Inline 8 spindle Tappling
automation 2019
CNC-Machine
automation
Application: Used for high volume, precision production across machine tools, process etc.
Advantage: Compatible with digital platforms, low life cycle and energy efficient.
Merging Unit, Process Bus
based Technology for SAS 2018
power
automation
Application: Power digital automation for process, industries and smart infrastructure.
Advantage: Central protection & control, based on SIEMENS SIPROTEC MU platform.
Microgrid solutions like
Microgrid Controller 2019 Digital grid
Advantage: Low life cycle cost, managing renewable energy or reducing emissions.
Applications: Greater usage across business, institutions with falling battery storage prices.
Mechanical test bench 2018 Machine
automation
Advantage: Compact, Control of the rollers to the last millimetre, digital-compatibility.
Utility: Machine tools, automotive, process etc.
Other range: Roller test stand, Linear motor test stand, E-mobility test stand.
IE2 and IE3 Motors 2017 LT/HT Motors Application: process plants, chemicals, cement, steel, power, auto etc.
Advantage: High energy efficiency, low life cycle cost, compatible with Siemens digital.
Servo press for AC/DC
Magnet production line 2017 Servo Press
Advantage: Based on FIDO Press/SIMOTION control system by Siemens, energy management
Application: Range till 3200 tons for auto, machinery tools, Mindsphere compatible.
Linear Taktomat (servo
controlled conveyor) 2017
Conveyor
technology
Application: Intralogistics, automotive, food and beverage or airport, conveyor technology
Advantage: Optimised material flow, high precision accuracy and digital compatibility
RFID & Vision inspection
system (sensor humming) 2017
Industrial
automation
Advantage: Material flow control, customise processes with precision.
Application: material flow, control mobile robots, for low volume high mix production, AGVs.
Motor:1400/2800/3000 kw 2016 Motors Usage: Pump, compressors, blowers, conveyers etc. across oil n gas, water, marine, cement.
Advantage: compact, digital ready, energy efficient.
Source: Company, Edelweiss Research
Risks/concerns led by higher industrial automation
Risk of rising unemployment: A popular belief is that higher automation will lead to
higher unemployment as the shop floor worker is replaced by more-efficient
machines. If one takes a deeper look into the US market, there has been a strong
positive rub-off in the long run of rising automation/robotic deployment on
employment rates in the US, as seen in the data below. In fact, at a time when
robotics usage got intensified, rate of unemployment in the US dropped sharply. The
same is true in case of Japan, China and South Korea.
Greater disruption for SME segment in India: Automation is largely adopted by large
corporates/MNCs in India given scale, balance sheet heft and focus on productivity-
efficiency and quality to meet global standards. At a time when most
organised/large players are consolidating market shares by a wide margin versus
small/unorganised set, pickup in industrial automation might further accelerate this
trend going ahead.
Data at least does not support the
conventional belief that higher automation
drives higher unemployment as seen in case
of a few larger manufacturing markets such
as the US, Japan, China and South Korea
Edelweiss Securities Limited
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Steady drop in unemployment despite rising automation
Source: IFR, Bloomberg, Edelweiss research
0.0
2.4
4.8
7.2
9.6
12.0
0
100
200
300
400
500
CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19
Un
emp
loym
ent
rate
(%
)
('0
00
un
its)
wƻōƻǘƛŎ installations China US Japan Germany
Engineering and capital goods
Edelweiss Securities Limited
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India: Dynamic market; structurally set
for accelerated growth
Compliance, manufacturing disruptions, globally-exposed sectors: Key drivers
For top global OEMs and technology players, India revenues make up a marginal 2–
4% of global size (across ABB, SIEM, Honeywell, etc.), suggesting the bulk of the core
markets are elsewhere currently. That said, if one looks at recent trend and the
growth rate, the focus on India seems to be catching up. Besides, there seems to be
a rising role of the Indian establishment, reflecting in higher growth in
outsourcing/exports to parent in recent years. This suggests an expanding base of
Indian operations including that for R&D/digital etc.
Export mix on the rise – Mandate for global MNCs increasing
Source: Company, Edelweiss Research
Profitability/productivity fatigue in manufacturing
If one takes a closer look at larger manufacturing companies in India, the past decade
has seen a significant deterioration in profitability led by multiple challenges,
including rising cost structure, especially wages. Most of the capital-intensive sectors
with globally-exposed revenue streams are looking to shift shop-floor structure to
change cost dynamics, incurring productivity-efficiency-led spending to stay
competitive. This, in our view, post-covid-19, will accelerate and broad base across
a much wider industry players (including MSMEs) driving better growth across
industrial automation segments. Stricter environmental compliance puts an
additional burden on cost, which is our view will only rise going ahead.
0.0
10.0
20.0
30.0
40.0
50.0
Siemens ABB Honeywell Schneider
(%)
Exports (% of revenue)
FY15 FY18 FY20
For top global OEMs and technology players,
India revenues make up a marginal 3–5% of
global size, suggesting the bulk of the core
markets are elsewhere
Large manufacturing companies in India
have seen a strong deterioration in
profitability in the past decade, which is both
cost- (fixed cost etc.) and demand-led, with
pricing power in limited pockets
Edelweiss Securities Limited
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Consistent rise in wages has impacted profitability in manufacturing
Source: CMIE, Capitaline, Edelweiss Research; Legend: Wages & Salary
Labour productivity has stagnated – Automation is need of the hour
Source: CMIE, Capitaline, Edelweiss Research
Readiness index for Industrial automation
Source: ABB, Edelweiss Research
0.0
5.0
10.0
15.0
20.0
25.0
0.0
5.0
10.0
15.0
20.0
25.0
FY00 FY05 FY10 FY11 FY15 FY16 FY17 FY18 FY19 FY20
(%)
(IN
R t
n)
Manufacturing GVA (LHS)
Manufacturing W&S (% of manuf. GVA)
BSE500 (ex BFSI/IT) PAT margin
0
1,200
2,400
3,600
4,800
6,000
0
5
10
15
20
25
FY77 FY85 FY95 FY05 FY15 FY16 FY17 FY18 FY19 FY20
(IN
R)
(IN
R t
n)
Manufacturing GVA (LHS) Revenue per manday
Productivity for manufacturing in India
seems to have fatigued, warranting stronger
initiatives on productivity, be it automation,
change in factory landscape, higher
outsourcing etc.
Engineering and capital goods
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India’s challenge in adopting high scale of automation
One prime reason why China, Japan and South Korea saw robust
automation/technology investments is their rising role in global sectors such as
auto, metals and electronics manufacturing. Due to high-scale/volumes, it was
imperative to go for higher automation/technology investment for want of
productivity/efficiency. This is one prime reason why these also became global
markets for robotics overtaking US/Europe.
India, on the other hand, is far more labour-intensive and agriculture-focused,
which has its own set of challenges when it comes to quicker adoption to
automation/technology. A large number of MSME-based manufacturing (>50%
share) makes it tougher to adopt technology/automation, given low financial
muscle and limited scale of operations. We have seen automation intensity
rising in bits and pieces, and covid-19, no doubt, could add some speed/urgency
to the same. MSMEs have largely adopted automation/new technology for
energy efficiency products/environmental compliance etc. in the past, but
larger focus by MNCs to tap tier II/III markets, wider digital offerings in our view,
will encourage a better participation by MSMEs for value reasons.
Share of organised sector in manufacturing low; SMEs form the bulk
Source: CMIE, AceEquity, Edelweiss Research
Areas where industrial automation spend is happening
Some areas where Indian companies have seen rising focus on industrial automation
spends, either due to rising environmental compliance, technology-shift, or energy
efficiency norms, productivity issues, etc. include below-mentioned areas. Beyond
the conventional sectors mentioned below, covid-19 has seen some new sectors
such as cement, steel, mining, etc. witnessing higher spends in automation in areas
such as remote monitoring, low voltage capex, etc., apart from intensified spends in
sectors such as FMCG, warehouse automation, healthcare and pharma.
0.0
7.0
14.0
21.0
28.0
35.0
0.0
5.0
10.0
15.0
20.0
25.0
FY02 FY05 FY10 FY15 FY16 FY17 FY18 FY19 FY20
(%)
(IN
R t
n)
India Manufacturing GVA (LHS) BSE500 (ex BFSI/IT/OnG) EBITDA (% of manuf. GVA)
MSMEs have largely adopted
automation/new technology for energy
efficiency products/environmental
compliance etc. in the past, but larger focus
by MNCs to tap tier II/III markets, wider
digital offerings in our view, will encourage
a wider participation by MSMEs for value
reasons.
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User industry spend on automation in India
Sector Areas of automation/technology spend
Automotive Reduced capex owing to low demand & rationalisation of inventory/capacity
BS VI compliance
E-Mobility
Food and beverage Modernisation of capacity and productivity, supply chain/automated warehouses
Consumer electronics Spent by brands on robotics for productivity gains/quality
Electrification AIS/GIS substations for metro rail
LV Switchgears
Datacenters for retail and cloud computing companies
Motion- Motors n drives Energy efficient LV/MV motors
VFDs
Propulsion systems and composite converters for railways
Industrial automation-Process BS VI advanced blending applications
Gas distribution solutions for Metros
Breakthrough data center operations for mining and oil n gas
Robotics/discrete automation investment by global consumer brands in India
Investment by Japanese/other Asian auto OEMs in India
Source: Edelweiss Research
Emerging areas for new demand in industrial automation
If one looks at the changing landscape of manufacturing globally and in India, a few
elements come to our minds that will drive a tectonic shift in the manufacturing
landscape. A few areas where we believe there will be significant change in the
medium to long term include:
Emergence of Electric Vehicles/autonomous vehicle: The number of parts in an
EV is significant lower than an ICE-based automobile; this phenomenon
warrants a significant shift in the manufacturing landscape for the auto sector.
While one may argue it will take more than a decade to materialize, while doing
so, we are underappreciating the technology progression, which could surprise
on the upside, leader to a faster disruption cycle. Key products: EV chargers and
super chargers, sensors, battery storage etc.
Though small today, global shift towards EVs could be much faster
Source: Edelweiss research
Engineering and capital goods
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Manufacturing and supply-chain automation by FMCG players: Though, today,
driven by global giants such as Nestles and Unilevers of the world, higher
automation in not only the manufacturing process, but also logistics and
warehouse automation is getting intensified. This will eventually become the
industry norm, with other players joining the league. Some benefits of
automation highlighted by FMCG players include: Better stock accuracy,
Reduced truak load time, Enhances customer service etc. Key products: process
automation, robotic systems, automated conveyers and sensors.
FMCG players spending towards process, distribution automation
Source: Edelweiss research
Real-time data generation/monitoring: Conventionally, oil & gas, power, etc.
had an intense use of SCADA and DCS systems, which is a complete set of
equipment/machines and computers to control, monitor and supervise the
entire process, control systems, etc. Recently, many global players such as ABB
and Siemens highlighted the trend for real-time remote monitoring in sectors
like mining, cement and even metals, which clearly shows how automation is
spreading all over. Key products: SCADA/DCS/sensors etc.
Conventionally energy-led, SCADA/DCS picking up for metals-mining
Source: Edelweiss research
Connected devices and connected machines: Work from home (WFH) has
forced a large working population to adopt to work from anywhere. This had
Some benefits of supply-chain and warehouse
automation highlighted by FMCG players
include: Better stock accuracy, Reduced truck
load time, enhances customer service etc
Edelweiss Securities Limited
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led most corporates across manufacturing/services etc. to augment/overhaul
IT/technology spends given a large number of connected devices (mobiles,
laptops, machines, etc.) on a real-time basis. For organizations that are unable
to move in tandem with rising technology adoption and scale, it is a clear loss of
market edge in many data-sensitive industries.
Predictive maintenance: Across power plants, large manufacturing units
deploying motors, drives, turbines, generators, etc. with revenue-critical
manufacturing operations or utility like power plants, refineries, etc., predictive
analytics is becoming a bare minimum standard. Data availability/intensity has
gone higher, offering opportunity to leaders to take quicker corrective actions,
strategic decisions like responding to changing customer needs etc.
Responding to these emerging trends, global giants like Rockwell, ABB, Siemens,
and Honeywell etc. are offering innovative/new solutions to clients-both large
and mid-sized corporates to drive greater asset availability, decrease
maintenance cost, improve revenue visibility etc.
Rising preference for predictive maintenance for critical assets
Source: Edelweiss research
Pressure to reduce time to market, TAT across industries: Several industries in
healthcare, FMCG, E-commerce and personal protective equipment to name a
few, had to respond to urgent industry needs with a quicker TAT versus
conventionally, be it surgical masks, critical medicines, ventilators, etc. And
there was a solid unprecedented response to an unprecedented global-scale
problem. Thus, world is moving towards a much quicker TAT across a variety of
industries like automobile launches, healthcare and pharma stages etc. All this
is not possible purely by human efforts; a step-up in automation is definitely
needed. Key products/offerings: Mindsphere from Siemens, Honeywell forge
from Honeywell, ABB Ability from ABB etc. are digital platforms that are getting
highly compatible offering plug and play mode to meet client needs.
Engineering and capital goods
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Time to market could come down significantly across multiple sectors
Source: Edelweiss research
Edelweiss Securities Limited
Engineering and capital goods
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 35
Exports: Dark horse that could add to automation intensity
If one compares the past two decades of India manufacturing, it can be divided
into two phases: i) Period of massive capacity build-up (FY00–12): Across
metals, cement, auto, chemical, Infrastructure, there was aggressive capacity
ramp-up (both greenfield-brownfield) fuelled by a global exports rally driving
India’s manufacturing as a % of total GPD to ~20/22%. ii) Capacity addition over
FY12–20 has clearly slowed led by low domestic demand, limited exports (which
has especially been weaker in recent years), and lastly, corporate shifting focus
to cash flows. However, in our view, with improved corporate balance sheet,
globally-linked sectors and initiatives such as PLI and Atma Nirbhar Bharat, the
pickup in manufacturing could surprise on the upside. Add to this the rising
industrial-automation intensity and export-sensitive manufacturing landscape,
could spur India’s manufacturing to GDP share to new highs.
Unlike post-GFC, capital-intensive exports faring better: The GFC was followed
by a strong recovery, both in labour- and capital-intensive exports, which led to
a broad-based exports normalization. However, the divergence in present times
implies a much weaker scenario for informal sector, share of MSME is fairly low
in industrial automation, which is largely driven by large players across sectors.
Manufacturing capex getting slower, rising cash focus
Source: Ace Equity, Edelweiss Research
Capital-intensive exports doing much better
Source: CMIE, Bloomberg, Edelweiss Research
India & world exports: Strong positive correlation
Source: CMIE, Bloomberg, Edelweiss Research
(40)
(20)
0
20
40
60
Sep 02 Sep 05 Sep 08 Sep 11 Sep 14 Sep 17 Sep 20
(%, Y
oY)
World Export growth India's export growth
In our view, with improved corporate balance
sheet, better positioning of capital-intensive,
globally-linked sectors and initiatives such as PLI
and Atma Nirbhar Bharat, the pickup in
manufacturing could surprise on the upside. Add
to this the rising industrial-automation intensity
and export-sensitive manufacturing landscape,
which, in our view, could spur India’s
manufacturing to GDP share to new highs.
90
120
150
180
210
240
Oct 08 Oct 12 Oct 16 Oct 20
(12
m s
um
, re-
bas
ed t
o 1
00
)
Capital intensive exports Labour intensive exports
Synchronous
recovery
0.0
0.7
1.4
2.1
2.8
3.5
0.0
6.0
12.0
18.0
24.0
30.0
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
(IN
R t
n)
(IN
R t
n)
Gross Block (LHS) Capex OCF
FY12-20
GB CAGR: 7% OCF CAGR: 16%
FY00-12:
GB CAGR: 31% OCF CAGR: 12%
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Manufacturing capex driven by global trade...
Source: Bloomberg, Edelweiss Research
…as well as global manufacturing prices
Source: Bloomberg, Edelweiss Research
Manufacturing mix improved sharply in FY00–10…
Source: CMIE, Edelweiss Research
…with global exports cycle playing a major role
Source: CMIE, Edelweiss Research
India stacks well against western countries...
Source: Bloomberg, Edelweiss Research
…but lags w.r.t closest peers
Source: Bloomberg, Edelweiss Research
(5)
2
9
16
23
30
(5)
(1)
3
7
11
15
Mar-03 Mar-07 Mar-11 Mar-15 Mar-19
(%, Y
oY)
(12
mm
a, %
Yo
Y)
World trade volume (12mma, % YoY)
India's manufacturing capex (%, YoY) - RHS
(5)
2
9
16
23
30
(20)
(8)
4
16
28
40
Mar-03 Mar-07 Mar-11 Mar-15 Mar-19
(%, Y
oY)
(12
mm
a, %
Yo
Y)
Global mfg prices (12mma, % YoY) - INR terms
India's manufacturing capex (%, YoY) - RHS
10.0
12.0
14.0
16.0
18.0
20.0
0.0
28.0
56.0
84.0
112.0
140.0
FY6
1
FY7
0
FY8
0
FY9
0
FY0
0
FY1
0
FY1
5
FY2
0
(%)
(IN
R t
n)
Total GDP Manufacturing % of GDP (RHS)
2.0
3.5
5.0
6.5
8.0
9.5
10
14
18
22
26
30
FY00 FY04 FY08 FY12 FY16 FY20
(% o
f G
DP
)
(% o
f G
DP
)
India's exports Manuf. capex (RHS)
10.0
13.0
16.0
19.0
22.0
25.0
19
97
19
99
20
01
20
03
20
05
20
07
20
09
20
11
20
13
20
15
20
17
20
19
(%)
Manufacturing % of GDP (versus DM/World)
World US Euro area Japan India
10.0
15.0
20.0
25.0
30.0
35.0
19
97
19
99
20
01
20
03
20
05
20
07
20
09
20
11
20
13
20
15
20
17
20
19
(%)
Manufacturing % of GDP (EM)
China Malaysia Indonesia India
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PLI could drive capex into select globally exposed sectors
The recent PLI scheme by the GOI targets capital-intensive sectors that: i) have
large global markets; and ii) strong local demand. This, we believe, has come at
a time when India has seen a decade of weak manufacturing capex, and now
looks set to ride a global exports pickup, like the cycle of FY00–10 period.
More importantly, these sectors are those that have globally seen a strong
automation/high technology-intensive production, especially by some large
Asian exporters such as China, Japan, Korea, etc.
PLI incentive of ~INR2tn over five years…
Source: Edelweiss Research
…could drive additional investment of ~INR3.5tn on a best case basis
Source: Edelweiss Research
0
500
1,000
1,500
2,000
2,500
Au
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Valuation: Structural shift favour leaders
Multiple drivers leading to high growth in industrial automation: The past
decade has seen multiple disruptions in manufacturing- reflecting in both rising
Environment compliance standard (clean air, clean water technologies, etc.),
factory wage bill and flattening productivity levels. This is driving demand for
energy-efficient and high productivity solutions/systems across industries
(especially energy intensive). Last but not the least, digital-adoption and fast
changing industry landscape is driving large scale automation in warehouse-
logistics, FMCG, EV market, need for a quicker TAT in healthcare-pharma,
adoption of new technology-know how in transportation, energy etc.
India at an inflexion point; Global leaders to consolidate: Software based
digital/IIOT platforms are gaining momentum globally driving higher capital
allocations by industry leaders to gain technology heft-both via organic and
inorganic route. This, we believe, will accelerate growth rates for Indian
subsidiaries, who have been making significant changes to their business
models (higher R&D/tech platform spends, India-dedicated product launches,
tier II market focus, higher parent mandate etc.). Thus, multiple demand levers
with high growth in service/digital with leaner cost structure makes a strong
case for a higher share of revenue/EBITDA pool for dominant players like ABB,
HAIL, Siemens in India.
That makes premium valuation case much more stronger: We see a few
sustainable advantages emerging for large automation players: a) Industry
transformation with manufacturers leading towards life cycle based and
digitally-compatible products/solutions make a strong case for better market
share in the expanding opportunity pie for MNC associates, b) Rising parent
mandates and high growth in scalable service/digital revenues will drive a much
better scale/returns in medium to long run. Hence, we believe, premium
valuations for market leaders given better growth/cash/return structure and
high entry barriers will well sustain over the medium-long term. We are
initiating coverage on Honeywell Automation (HAIL) with a ‘BUY/SO’ and TP
of INR50,000 (25% upside, assigning a 62x PE, peak-cycle multiple), and
upgrading ABB to ‘BUY/SO’ (from ‘HOLD/SP)’ with a revised TP of INR1,650
(up from INR900, assigning a peak cycle PE of 70x).
Risk to our call; what could go wrong: Our industrial coverage, particularly
automation names, derive a significant part of growth from global markets
(parent etc.). If those markets get in the grip of a major slowdown, our growth
forecasts would be at risk. ii) The domestic market has seen a material step-up
in productivity-, efficiency- and compliance-led automation spends; should such
spends slow down, MNCs will face challenges (growth/returns) given tight
competition among them.
How do valuations stack up vis-a-vis parent entities? Indian entities trade at a
significant premium versus parent, which in our view is a function of: a) High
scale and growth opportunities with better scope for market consolidation
domestically, b) significant headroom for OPM expansion vs parent given better
scale and higher localisation potential. C) With higher capital allocation by
parent’s for digital capabilities (which is more than a third of total M&As in 4-
5Y), global mandates for Indian entities including that for digital etc. could see
a significant step up over coming years, which is not captured in earnings.
Multiple demand levers with high growth in
service/digital with leaner cost structure
makes a strong case for a higher share of
revenue/EBITDA pool for dominant players
like ABB, HAIL, Siemens.
Players like ABB, HAIL could well surprise on
growth/OPM expansion given rising parent
mandate for a greater role-both locally/
globally, in our view. An accelerated shift to
digital platforms in high growth areas led by
aggressive global capital allocation, could
well add to India growth rates materially,
given incumbent design engineering edge.
This, in our view, is clearly not captured in
current earnings.
Edelweiss Securities Limited
Engineering and capital goods
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MNC valuation snapshot Revenue EBITDA margin (%) EPS
FY20 FY21E FY22E FY23E FY20 FY21E FY22E FY23E FY20 FY21E FY22E FY23E
Indian entities
ABB 73,151 62,221 73,682 82,731 7.3 5.9 8.0 8.5 18 13 21 26
Siemens 98,694 1,30,561 1,51,066 1,65,759 10.0 11.0 11.6 11.3 21.3 31.3 38.1 40.7
HAIL 32,900 33,806 40,497 47,347 19.3 19.7 21.3 21.7 556.0 572.1 762.3 925.1
Cummins 51,577 48,596 53,844 59,091 11.4 11.6 12.9 13.8 23.4 19.6 23.6 26.5
Parent entities
ABB 27,978 25,791 27,549 28,844 11.1 11.8 15.4 16.6 0.7 0.8 1.2 1.5
Siemens 57,454 57,455 57,616 60,439 14 14 15.2 16.9 5.6 5.6 6.0 7.0
Honeywell 36,709 33,994 36,307 38,549 22 24.2 24.8 24.8 8.4 7.9 8.9 10.0
Cummins 23,571 21,488 23,303 24,128 15 15.6 16.3 16.8 14.5 13.7 16.2 17.4
Schneider 27,158 26,642 27,803 29,329 13 18.5 19.3 20.2 4.3 5.1 5.8 6.5
Source: Company, Bloomberg, Edelweiss Research
MNC valuation snapshot P/E (x) P/B EV/EBITDA
FY20 FY21E FY22E FY23E FY20 FY21E FY22E FY23E FY20 FY21E FY22E FY23E
Indian entities
ABB 78.7 109.2 64.6 53.5 8.7 8.1 7.5 6.7 52.1 74.9 45.7 37.6
Siemens 77.7 52.7 43.4 40.5 6.2 5.7 5.2 4.8 53.8 37.1 29.9 27.7
HAIL 73.1 71.0 53.3 43.9 16.5 13.7 11.2 9.1 54.1 51.0 38.8 31.8
Cummins 26.3 31.4 26.1 23.2 4.1 4.0 3.9 3.7 27.8 28.6 23.0 19.6
Parent entities
ABB 11.4 24.3 19.9 16.7 3.8 4.6 4.3 3.7 21.9 16.3 14.3 16.7
Siemens 24.6 20.4 17.2 15.1 2.8 2.3 2.2 2.1 18.1 15.1 12.6 11.2
Honeywell 29.5 26.4 23.3 20.9 7.9 7.7 7.4 8.0 19.9 18.6 17.0 16.3
Cummins 23.4 17.6 14.9 13.8 4.8 4.4 3.8 3.3 12.7 11.0 9.5 8.7
Schneider 31.9 24.3 21.3 19.1 3.4 3.1 2.9 2.6 17.8 15.4 13.9 12.2
Source: Company, Bloomberg, Edelweiss Research
Change in valuation and Target price
Multiple (x) Rating TP (INR) Upside (%)
Company Previous New Previous New Previous New
Honeywell NA 62 NA Buy NA 50,000 29.6
ABB 40 70 Hold Buy 900 1,650 18.9
Siemens 50 55 Buy Buy 1748 2000 24.1
Source: Edelweiss Research
Engineering and capital goods
Edelweiss Securities Limited
40 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
Global & Indian companies Revenue and EBITDA CAGR (CY10-19)
Source: Company, Edelweiss Research
Global & Indian companies OCF-EBITDA & FCF-PAT (CY17-19)
Source: Company, Edelweiss Research
Global & Indian companies ROE and 1 year forward PE
Source: Company, Edelweiss Research
ABB India
Siemens India HAIL
Cummins IndiaABB
Siemens
Honeywell
Cummins
Fanuc
Yaskawa
KUKA
0.0
6.0
12.0
18.0
24.0
30.0
0.0 3.0 6.0 9.0 12.0 15.0
CY1
0-1
9 E
BIT
DA
CA
GR
CY10-19 Revenue CAGR
ABB India
Siemens India
HAIL
Cummins IndiaABB
Siemens
Honeywell Cummins
Fanuc
Yaskawa
KUKA
-3.3
-2.0
-0.8
0.5
1.8
3.0
0.5 0.8 1.1 1.4 1.7 2.0
CY1
7-1
9 F
CF
to P
AT
CY17-19 OCF to EBITDA
ABB India
Siemens India
HAIL
Cummins India
ABBSiemens
Honeywell
Cummins
0.0
15.0
30.0
45.0
60.0
75.0
0.0 8.0 16.0 24.0 32.0 40.0
1 y
ear
forw
ard
PE
(x)
CY19 ROE (%)
Edelweiss Securities Limited
Engineering and capital goods
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 41
Industrial automation leaders translating better cash/growth
Source: Company, Edelweiss Research
Significant scope for revenue/margin scale up for ABB, SIEM
Source: Company, Edelweiss Research
Valuation snapshot – Coverage universe
Source: Edelweiss Research
L&T
HAIL
SIEM
BEL
BHFC
KPP
ENGR
KKC
TMX
ABB
KEC
GRV
-0.2
0.2
0.6
1.0
1.4
1.8
0.0 3.6 7.2 10.8 14.4 18.0
FCF
to P
AT
(x)
5 year rvenue CAGR (%)
L&T
HAIL
SIEM
BEL
BHFC
KPP
ENGRKKC
BHEL
TMX ABB
KEC
GRV
0.0
5.0
10.0
15.0
20.0
25.0
0.0 6.4 12.8 19.2 25.6 32.0
Avg
FY1
9-2
0 E
BIT
DA
mar
gin
(%
)
Avg FY19-20 FA turns (x)
Engineering and capital goods
Edelweiss Securities Limited
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Edelweiss Portfolio Snapshot
Introducing Honeywell and raising ABB India weight in Edelweiss model portfolio
Company Mkt cap
(USD mn)
Mkt cap by
weighting (%) Weighting (%) CMP (INR) TP (INR) % upside Reco
Larsen & Toubro 26,210 43.6 50.0 1,359 1,575 15.9 Buy
Siemens 8,119 13.5 10.0 1,612 2,000 24.1 Buy
Honeywell Automation 4,834 8.0 12.5 38,588 50,000 29.6 Buy
Bharat Electronics 4,419 7.3 5.0 133 140 5.3 Buy
Bharat Forge 4,016 6.7 2.5 594 580 -2.3 Buy
ABB India 4,001 6.7 15.0 1,388 1,650 18.9 Buy
Cummins India 2,339 3.9 5.0 623 530 -8.5 Buy
BHEL 1,796 3.0 - 36 23 -36.1 Reduce
Thermax 1,563 2.6 - 965 675 -30.1 Reduce
KEC International 1,259 2.1 - 357 400 11.9 Buy
Kalpataru Power 641 1.1 - 319 315 -1.3 Hold
Engineers India 636 1.1 - 74 60 -18.4 Reduce
Greaves Cotton 294 0.5 - 88 95 7.9 Buy
Sector 60,130 100 100
Source: Edelweiss Research
Edelweiss model portfolio weighting
Source: Edelweiss Research
L&T50%
ABB 15%
Honeywell12%
Siemens10%
BEL5%
KEC5%
BHFC3%
Edelweiss Securities Limited
Engineering and capital goods
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Edelweiss portfolio performance versus benchmark
Source: Bloomberg, Edelweiss Research
Portfolio performance versus benchmark
Period Performance (%) Performance versus
benchmark (bps)
Edel
portfolio Nifty
BSE
Capgoods Nifty
BSE
capgoods
1M 7.3 6.0 8.8 130 -150
3M 42.7 22.9 46.9 1,980 -420
6M 48.5 33.0 57.7 1,560 -910
12M 6.5 20.7 19.0 -1,420 -1,250
Inception (Apr-19) 14.0 28.5 13.7 -1,450 30
Source: Bloomberg, Edelweiss Research
50
68
86
104
122
140
Ap
r-1
9
May
-19
Jun
-19
Jul-
19
Au
g-1
9
Sep
-19
Oct
-19
No
v-1
9
Dec
-19
Jan
-20
Feb
-20
Mar
-20
Ap
r-2
0
May
-20
Jun
-20
Jul-
20
Au
g-2
0
Sep
-20
Oct
-20
No
v-2
0
Dec
-20
Jan
-21
(reb
ase
to 1
00
)
Edel portfolio Nifty BSE Capgoods index
Engineering and capital goods
Edelweiss Securities Limited
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Appendix 1
ABB AbilityTM System 800xA
Source: Company
ABB DCS880 industrial DC drives
Source: Company
ABB – High performance circuit breaker
Source: Company
ABB – Solar string combiner boxes
Source: Company
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Engineering and capital goods
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ABB – IRB1100 robot
Source: Company
ABB – OmnicoreTM robot controller
Source: Company
ABB – programmable logic controllers
Source: Company
ABB – Aquamaster 4 electromagnetic flowmeter
Source: Company
SIMATIC TDC & FM 458-1DP by Siemens
Source: Company
SINAMICS PCS by Siemens
Source: Company
Engineering and capital goods
Edelweiss Securities Limited
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SIMOTICS HV air-cooled motor by Siemens
Source: Company
SIM0GEAR - geared motors by Siemens
Source: Company
SIMATIC HMI mobile panels by Siemens
Source: Company
Desigo fire safety 50 point panel system
Source: Company
Honeywell variable frequency drive
Source: Company
Honeywell airflow sensors
Source: Company
Edelweiss Securities Limited
Engineering and capital goods
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SCADAPack 47x by Schneider
Source: Company
SpaceLynk logic controller by Schneider
Source: Company
Laser welding robot by KUKA
Source: Company
KR QUANTEC by KUKA, a versatile robot
Source: Company
AVENTICSTM series AF2 sensor by Emerson
Source: Company
SOLAHDTM performance power supplies, Emerson
Source: Company
Engineering and capital goods
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Yaskawa MPX2600 painting robot
Source: Company
Yaskawa servo motor
Source: Company
Robodrill by FANUC
Source: Company
Motion control systems by FANUC
Source: Company
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COMPANIES
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited
KEY DATA
Rating BUY Sector relative Outperformer Price (INR) 38,588 12 month price target (INR) 50,000 Market cap (INR bn/USD bn) 347/4.8 Free float/Foreign ownership (%) 25.0/1.0
INVESTMENT METRICS
Global play with local flavour
An expanding local-global presence along with higher value driven by local sourcing puts Honeywell Automation (HAIL) on a high growth-returns trajectory over mid-long term. Its expanding India-dedicated portfolio and rising role in parent’s high-growth region offer strong growth upside in years to come.
We envisage HAIL’s focus on expanding local engineering, product development and manufacturing capabilities across process-building solutions to drive a sustained return-cash accretive growth. Initiate with ‘BUY’ and add HAIL to our industrials top picks given its solid growth-returns trajectory with multiple levers in place.
FINANCIALS (INR mn)
Year to March FY20A FY21E FY22E FY23E
Revenue 32,900 33,806 40,497 47,347
EBITDA 6,363 6,665 8,608 10,297
Adjusted profit 4,915 5,057 6,739 8,178
Diluted EPS (INR) 556.0 572.1 762.3 925.1
EPS growth (%) 36.9 2.9 33.3 21.4
RoAE (%) 25.0 21.1 23.2 22.9
P/E (x) 69.4 69.7 52.3 43.1
EV/EBITDA (x) 51.2 50.0 38.1 31.1
Dividend yield (%) 0.2 0.2 0.2 0.3
PRICE PERFORMANCE
Solid leverage on parent’s diverse portfolio; rising role for HAIL
HAIL’s business segments in India are focused on process industries/building
technologies, apart from being a large exporter of product/services to parent. While
the company’s local/ global (exports) growth clocked a robust 10%/11% CAGR over
the past ten years, rising localisation of products/solutions and increasing local
design/engineering scope, in our view, triggered a strong 880bps EBITDA margin
expansion. Parent’s expansive installed base across a wide range of industries drive
connected software and service revenue stream and products for HAIL leading to a
sustainable TAM expansion, giving a clear edge over competition.
Rising trend of automation, efficiency capex: Growth catalyst
Across key sectors catered to by HAIL, there has been a rising trend of spending on
higher automation and productivity given multiple disruptions affecting sector
profitability. Spurt in compliance standards and technology upgrade spends across
sectors are boosting HAIL’s overall growth story. Across process/building solutions,
sensors, etc., the company remains consistent in India-dedicated product launches,
apart from robust sales/marketing efforts to tap into emerging opportunities.
Despite near-term headwinds from covid, globally aligned and scalable sectors like
chemicals, electronics, metals & mining and industrials offer strong growth potential.
Explore:
Outlook and valuation: Multiple levers at play; initiate with ‘BUY’
HAIL’s growth story has multiple levers. Its East for East and East for Rest model
offers local as well as global growth upsides with a clear advantage on competitive
India-centric delivery model. Globally expanding parent TAM and compatible
platforms offer new growth avenues and sustainable service revenue base.
Beyond organic growth, HAIL’s growth also is linked to how parent integrates
businesses expanding its target offerings, which in our view remains a key upside
potential in the long run. We initiate coverage with ‘BUY/SO’ and TP of INR50,000,
assigning a premium industrial PE of 62x building in double-digit growth/returns
trajectory with robust FCF profile given asset-light business. Key risks: 1) High
dependence on parent’s growth and ability to identify emerging trends. 2) Sharp
volatility in energy markets given HAIL’s/parent’s high dependence on them.
-5
10
25
40
55
70
Sales Growth(%)
EPS Growth(%)
RoE(%)
PE(x)
Engineering and capital goods HWA IN EQUITY
25,000
30,000
35,000
40,000
45,000
50,000
20,075
24,210
28,345
32,480
36,615
40,750
Jan-20 Apr-20 Jul-20 Oct-20
HWA IN EQUITY Sensex
India Equity Research Engineering and capital goods January 28, 2021
HONEYWELL AUTOMATION INITIATING COVERAGE
Amit Mahawar Ashutosh Virendra Mehta Manish Agarwall +91 (22) 4040 7451 +91 (22) 6141 2748 +91 (22) 4063 5497 [email protected] [email protected] [email protected]
Corporate access
Financial model Podcast
Video
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HONEYWELL AUTOMATION
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Executive Summary
Automation an emerging trend for India; HAIL at centre stage
While growth outlook on process industries has improved significantly, they
incrementally face greater challenges on the cost-returns front, warranting higher
spends on automation/productivity-led capex/opex. Across energy, pharma
chemicals, industrials, auto & transportation, etc., spending on higher compliance is
only mounting these challenges. Global automation majors like HAIL have been at
the forefront to help customers counter these by expanding their solutions/product
offerings to cater to changing customer needs and delivering on price/quality
expectations.
Moving up the ladder as parent’s high-growth contributory
Expansion in its total addressable market riding successful track record of integrating
new businesses/platforms speaks volumes about parent Honeywell Inc.’s leadership
and strong growth DNA. The India management too has delivered on growth/return
expectations over the past 5-10 years despite having a diverse business model across
product/service offerings. HAIL’s share in parent’s growth, which reflects in HGR
(high growth regions), stands at 50%. One key reason for the same has been a locally
empowered management, which in our view has helped the company tap into
adjacent growth avenues, reflecting in growth of subsidiaries.
Highly cash-return accretive model; scalable opportunities
HAIL’s business model generates high cash flow (10Y FCF/PAT at 1.3x) while
generating solid returns (10Y ROCE at 25%; FY20 exit at 35%), which is both a
function of high service-based revenue base as well as rising local scope of design-
engineering. The company’s twin exposure, locally and globally with parent,
enhances revenue scale potential, portending generation of sustainably higher
returns-cash given high compatibility with parent’s system/technology.
Outlook and valuation: Multiple levers at play; initiate with ‘BUY’
Industrial capex over the past few years is inclined towards higher spends on
productivity-efficiency versus pure capacity. This is leading to higher growth for
industrial automation verticals like DCS/SCADA, process automation, building
automation, among others, which are HAIL’s forte. The 13%/17% revenue/EBITDA
CAGR over FY20-23E yielding a strong 30%-plus ROCE and 1.1x FCF/PAT led by asset-
light yet scalable business model warrants a premium valuation of 62x(peak band)
for HAIL’s high entry barrier-technology-intensive business model. A large part of
value is derived from parent’s global presence in high growth segments, which
encompasses a wide range of industries where HAIL has high degree of compatibility
with Honeywell Inc.’s technology platforms. We initiate coverage with ‘BUY/SO’ and
TP of INR50,000 (30% upside), which discounts FY22E/23E profit at 66/53x.
Key risks
The company’s business is highly linked to global business cycles, especially for
energy and process industries. Any major slowdown in global GDP poses a downside
risk to HAIL’s growth. Major part of its exports comes from parent, which implies a
greater reliance on Honeywell Inc.’s growth, which remains a key downside risk.
HONEYWELL AUTOMATION
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The Story in Charts
Expanding TAM for parent
Driving higher mandate for HAIL
With strong domestic growth
Aiding margin expansion
Premium valuations to sustain
Source: Capitaline, Company, Bloomberg, Edelweiss Research
Quantumsoln,
$50bn
UAS/UAM,
$120bn
Gridenergystorage,
$4bn
ElectricPropulsion,
$11bn
Adv Plasticrecycling,
$2bn
Smartcities, $13bn
Processcontrol, $10bn
Renewablefuels, $1bn
Healthybuildings,
$2bn
PharmaPacking,
$5bn
HoneywellForge,
$100bn
Tech
no
logy
mat
uri
ty
Market readiness
25.0
28.0
31.0
34.0
37.0
40.0
0
2,800
5,600
8,400
11,200
14,000
CY1
0
CY1
1
CY1
2
CY1
3
FY1
5
FY1
6
FY1
7
FY1
8
FY1
9
FY2
0
(%)
(IN
R m
n)
Sale to related parties % of revenues
0.0
3.0
6.0
9.0
12.0
15.0
5 year CAGR 10 year CAGR
(%)
HAIL revenue Oil & Gas
Infrastructure Power
Cement Automotive
Steel, metals & mining
0.0
5.0
10.0
15.0
20.0
25.0
0
10,000
20,000
30,000
40,000
50,000
CY1
0
CY1
1
CY1
2
CY1
3
FY1
5
FY1
6
FY1
7
FY1
8
FY1
9
FY2
0
FY2
1E
FY2
2E
FY2
3E
(%)
(IN
R m
n)
Domestic revenues Exports revenues
EBITDA margin (%)
0.0
15.0
30.0
45.0
60.0
75.0
Jan
-11
Jan
-12
Jan
-13
Jan
-14
Jan
-15
Jan
-16
Jan
-17
Jan
-18
Jan
-19
Jan
-20
Jan
-21
(x)
1 year forward PE Average
+1 Std dev -1 Std dev
Edelweiss Securities Limited
HONEYWELL AUTOMATION
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Financial Statements
Income Statement (INR mn) Year to March FY20A FY21E FY22E FY23E
Total operating income 32,900 33,806 40,497 47,347
Gross profit 16,471 16,903 20,249 23,579
Employee costs 5,548 5,437 5,768 6,417
Other expenses 4,559 4,800 5,872 6,865
EBITDA 6,363 6,665 8,608 10,297
Depreciation 406 464 492 531
Less: Interest expense 69 72 76 80
Add: Other income 977 676 1,004 1,291
Profit before tax 6,865 6,806 9,045 10,977
Prov for tax 1,951 1,749 2,307 2,799
Less: Other adj 0 0 0 0
Reported profit 4,915 5,057 6,739 8,178
Less: Excp.item (net) 0 0 0 0
Adjusted profit 4,915 5,057 6,739 8,178
Diluted shares o/s 9 9 9 9
Adjusted diluted EPS 556.0 572.1 762.3 925.1
DPS (INR) 75.0 80.0 90.0 100.0
Tax rate (%) 28.4 25.7 25.5 25.5
Important Ratios (%) Year to March FY20A FY21E FY22E FY23E
COGS (% of rev) 49.9 50.0 50.0 50.2
Employee cost (% of rev) 16.9 16.1 14.2 13.6
Other exp (% of rev) 13.9 14.2 14.5 14.5
EBITDA margin (%) 19.3 19.7 21.3 21.7
Net profit margin (%) 14.9 15.0 16.6 17.3
Revenue growth (% YoY) 3.6 2.8 19.8 16.9
EBITDA growth (% YoY) 26.3 4.7 29.1 19.6
Adj. profit growth (%) 36.9 2.9 33.3 21.4
Assumptions (%) Year to March FY20A FY21E FY22E FY23E
GDP (YoY %) 4.8 (6.0) 7.0 6.0
Repo rate (%) 4.4 3.5 3.5 4.0
USD/INR (average) 70.7 75.0 73.0 72.0
5ƻƳŜǎǘƛŎ NJŜǾΦ ƎǿǘƘ ό҈ ) 7.8 1.0 18.0 16.0
9ȄLJƻNJǘ NJevΦ growth (%) (1.2) 5.0 22.0 18.0
Gross margin (%) 50.1 50.0 50.0 49.8
EBITDA margin (%) 19.3 19.7 21.3 21.7
Tax rate (%) 28.4 25.7 25.5 25.5
Capex (INR mn) 591.0 250.0 250.0 250.0
Valuation Metrics Year to March FY20A FY21E FY22E FY23E
Diluted P/E (x) 69.4 69.7 52.3 43.1
Price/BV (x) 15.7 13.5 11.0 9.0
EV/EBITDA (x) 51.2 50.0 38.1 31.1
Dividend yield (%) 0.2 0.2 0.2 0.3
Source: Company and Edelweiss estimates
Balance Sheet (INR mn) Year to March FY20A FY21E FY22E FY23E
Share capital 88 88 88 88
Reserves 21,694 26,044 31,987 39,281
Shareholders funds 21,783 26,132 32,075 39,369
Minority interest 0 0 0 0
Borrowings 0 0 0 0
Trade payables 8,514 8,660 10,263 11,917
Other liabs & prov 2,644 2,805 2,973 3,151
Total liabilities 34,006 38,662 46,377 55,501
Net block 1,933 1,720 1,478 1,197
Intangible assets 0 0 0 0
Capital WIP 139 139 139 139
Total fixed assets 2,072 1,859 1,617 1,336
Non current inv 0 0 0 0
Cash/cash equivalent 15,139 19,325 25,106 32,265
Sundry debtors 7,320 7,410 8,876 10,377
Loans & advances 4,937 5,183 5,442 5,715
Other assets 2,255 2,488 2,817 3,164
Total assets 34,006 38,662 46,377 55,501
Free Cash Flow (INR mn) Year to March FY20A FY21E FY22E FY23E
Reported profit 4,915 5,057 6,739 8,178
Add: Depreciation 406 464 492 531
Interest (net of tax) 49 54 56 59
Others 909 1,091 1,322 1,529
Less: Changes in WC (961) (377) (404) (415)
Operating cash flow 5,318 6,288 8,205 9,881
Less: Capex 591 250 250 250
Free cash flow 4,727 6,038 7,955 9,631
Key Ratios Year to March FY20A FY21E FY22E FY23E
RoE (%) 25.0 21.1 23.2 22.9
RoCE (%) 35.3 28.7 31.3 31.0
Inventory days 25 28 28 28
Receivable days 76 80 73 74
Payable days 187 185 171 170
Working cap (% sales) 8.5 9.0 8.2 7.6
Gross debt/equity (x) 0 0 0 0
Net debt/equity (x) (0.7) (0.7) (0.8) (0.8)
Interest coverage (x) 86.7 86.0 107.2 122.8
Valuation Drivers Year to March FY20A FY21E FY22E FY23E
EPS growth (%) 36.9 2.9 33.3 21.4
RoE (%) 25.0 21.1 23.2 22.9
EBITDA growth (%) 26.3 4.7 29.1 19.6
Payout ratio (%) 13.5 14.0 11.8 10.8
HONEYWELL AUTOMATION
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54 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
Investment Rationale
Consistent rise in global mandate driving higher global share
HAIL’s growth in the past decade (11%/13% revenue/EBITDA CAGR) reflects a rising
trend of greater reliance by parent on the Indian associate along with mandate for
greater value addition, well reflecting in the company’s overall sales/exports and
EBITDA. Rising mandates and an empowered Indian management reflect well in
robust performance of HAIL over the past decade. It now accounts for 1.2% of
Honeywell Inc’s sales versus 0.8% five years ago.
Consistent growth
Source: Company, Edelweiss Research
Rise share of HAIL revenues in Honeywell Inc.
Source: Company, Edelweiss Research
* Spin off Homes & Global distribution business and Transportation system
Expanding TAM/scalable technology for parent: Key growth lever
Parent’s total TAM is in excess of USD300bn, of which a major portion comes from
Honeywell Forge, quantum solutions and unmanned aerial systems/urban air
mobility. Over the years, Honeywell Inc. has been able to expand its TAM in high
growth emerging segments led by organic and inorganic initiatives. This, we believe,
has helped HAIL track a robust growth in exports (product/services), especially in the
recent years (5 year CAGR for exports at 18%).
0.0
5.0
10.0
15.0
20.0
25.0
0
10,000
20,000
30,000
40,000
50,000
CY1
0
CY1
1
CY1
2
CY1
3
FY1
5
FY1
6
FY1
7
FY1
8
FY1
9
FY2
0
FY2
1E
FY2
2E
FY2
3E
(%)
(IN
R m
n)
Domestic revenues Exports revenues EBITDA margin (%)
0.5
0.7
0.9
1.1
1.3
1.5
0
9,000
18,000
27,000
36,000
45,000
CY10 CY11 CY12 CY13 CY14 CY15 CY16 CY17 CY18 CY19*
(%)
(USD
mn
)
Honeywell INC (USD mn) HAIL revenue as % of INC revenue
Edelweiss Securities Limited
HONEYWELL AUTOMATION
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 55
Market potential in excess of USD300bn
Source: Company, Edelweiss Research
Honeywell Inc: Focus on existing base Solutions Value Traction
Building * Digitized maintenance
** Energy optimisation
* Uptime / reliability
** 20-30% energy saving
* Honeywell Forge for Building installed base increased by 4x
in 2020
** Large enterprise deals, 25+ active pilots
Industrial * Asset performance management
** On-premise software and services
* Reduce unplanned downtime by upto
90%
** Process simulation and optimisation
* Diversifying outside of O&G: chemicals / mining / pharms
** Notable deals won with PTTEP, Aramco, ADNOC
Cyber * Managing security services
** Consulting
* Remote work enablement
** Penetration Testing
* Growing HPS penetration to project (upsell)
** Diversifying outside of O&G with enterprise pipeline
Worker * Inspection rounds
** Worker assist
* 60% time saving versus manual
** Every worker an expert
* COVID-related demand
** Notable deals won (Aramco) with pipeline of large deals
Partners * Co-sell Honeywell solutions
** Real estate operations (SAP)
* Greater reach and diversifying
channels
** Co-Innovations
* Built organisation in 2020, already delivering opportunities
** Signed 4 strategic partners; robust pipeline of more
partners
Source: Company, Edelweiss Research
India business segments on a structural growth highway
HAIL’s business segments are fairly diversified and cover a wide range of clients
including process solutions (for process industries), building solutions (automation
and control technologies), building management systems (connected buildings
solutions), sensing & IOT (electronic sensing portfolio) and global manufacturing
/services (global focus). With India at an early stage of automation, digitalisation and
moving into a compliance-intensive industrial environment, we believe HAIL is at an
early stage of a long-term structural growth path. We estimate the company to
sustain 13%/17% sales/EBITDA CAGR (FY20-23E) led by better translation of
expanding opportunity pie and greater value addition trend.
Quantumsoln,
$50bn
UAS/UAM,
$120bn
Gridenergystorage,
$4bn
ElectricPropulsion,
$11bn
Adv Plasticrecycling,
$2bn
Smartcities, $13bn
Processcontrol, $10bn
Renewablefuels, $1bn
Healthybuildings,
$2bn
PharmaPacking,
$5bn
HoneywellForge,
$100bn
Tech
no
logy
mat
uri
ty
Market readiness
HONEYWELL AUTOMATION
Edelweiss Securities Limited
56 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
Growth levers by key segment for HAIL
India business verticals What is it about Customer set includes Key growth levers / focus areas
Process solutions
Driving safe reliable sustainable
and more profitable operations
across a wide variety of process
industries
Oil and gas, refining, pulp and
paper, industrial power generation,
chemical and petchem, pharma,
metals/mining
# Focus on expanding local engineering, product
development and manufacturing capabilities.
# Enhancing reach to serve large and growing mass
mid-market in India.
Building solutions
Provides automation and control
technologies for intelligent
building suites including fire
detection, alarm, access control
etc based on Honeywell
Enterprise building integration.
IT, Pharma, Industrial/commercial,
airports, metro and railways, smart
cities.
# HAIL exploring opportunities to create India-specific
integrated products for different sectors.
Building management
system
Global leader in the connected
buildings space and maintains a
leadership position in India.
Airports, stadiums, metro, IT,
residential, industrial, hospitality
and healthcare
# Focus on new launches: recently introduced
mechanical PICV, Variable Frequency drives, Piston type
PRVs.
# Focus on sales deployment, on boarding, channel
excellence and pipeline management.
Sending and IOT Electronic sensing portfolio
Diverse customer base including
transportation, aerospace, medical,
industrial.
# FY19 focus was on market demand and new segment
identification.
# Putting extra efforts in rail/stationary power to
generate long term business for packaged sensors.
# Focus on consolidation of small business a/c to masters
distributors, which is helping HAILs direct sales team
focus on key a/c management with a wider portfolio.
# Localisation of child parts for transportation segment
like stalk controls, pressure switches is planned to roll
out from Pune. This will improve supply chain, quality
control and customer satisfaction.
Global services
Provides project engineering
services, product customisation
and software development
driving productivity and cost
competitiveness for Honeywell
global entities.
Largely various global entities for
Honeywell.
# Increased global footprint via new portfolio and
geographical expansion supporting Honeywell global
growth agenda.
Global manufacturing
business
Largely focused on global
products market
Largely various global entities for
Honeywell.
# New face mask facility commissioned at Fulgaon.
# Investing in new product introductions, acquiring new
customers and adding capacity through automation and
digitalisation to support growth.
Source: Company, Edelweiss Research
HAIL--Domestic correlation to BSE200 growth
Source: Capitaline, Company, Edelweiss Research
BSE 200 segment-wise revenue CAGR
Source: Capitaline, Company, Edelweiss Research
(8.0)
0.0
8.0
16.0
24.0
32.0
CY1
0
CY1
1
CY1
2
CY1
3
FY1
5
FY1
6
FY1
7
FY1
8
FY1
9
FY2
0
(%)
HAIL domestic rev growth
BSE 200 (ex IT/BFSI) rev growth
0.0
3.0
6.0
9.0
12.0
15.0
5 year CAGR 10 year CAGR
(%)
HAIL revenue Oil & Gas
Infrastructure Power
Cement Automotive
Steel, metals & mining
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Recent launches to expand domestic market presence
BMS portfolio:
Honeywell Inc., is a global leader in the connected building space and maintains
leadership in India as well. Key clients here include airports, stadiums, metros,
IT, residential/industrials.
HAIL’s target here has been higher sales deployment/on-boarding/channel
excellence and pipeline management.
Variable frequency drive
Source: Company
PICV
Source: Company
Sensing & IOT portfolio:
HAIL launched several India-dedicated products to tap customers in
transportation, aerospace, medical and industrial segment, which helped it win
many new deals, especially in medical/EVs.
The company sharpened sales focus putting teams for rail/stationary power to
generate long-term business for packaged sensors portfolio.
Airflow sensors
Source: Company
Temperature sensors
Source: Company
HONEYWELL AUTOMATION
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Pressure sensors
Source: Company
Motion and position sensors
Source: Company
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HONEYWELL AUTOMATION
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Valuation: High scale/return model
Superior growth/returns trajectory: HAIL’s past decade growth/return
trajectory has seen a strong track-record aided by rising domestic penetration
and higher global mandates. To add to that, its offerings have consistently
increased, reflecting in regular product/solutions portfolio expansion. In our
view, parent’s robust global presence coupled with HAIL’s rising local capabilities
will ensure a sustained phase of high growth, and given low capex intensity, will
drive robust cash/return profile. We model in 13%/17% revenue/EBITDA CAGR
over FY20-23, implying a strong 100%-plus OCF/EBITDA.
India dedicated portfolio; exposure to parent’s HGR poses key upside risk to
earnings: HAIL’s superior growth track record over the past 5/10 years is driven
by expanding local portfolio and rising mandate for global HGRs (high growth
regions), which could lead to a higher growth/returns trajectory over the next
three-five years given favourable industry trends. This leads us to initiate
coverage with a 12 month TP of INR50,000, assigning a premium valuation of
62x (peak cycle multiples for MNC industrial names). Parent’s rising capital
allocation into emerging high scale opportunities will enhance HAILs global role
driving consistent high growth/return.
One-year forward PE chart
Source: Bloomberg, Edelweiss Research
0.0
15.0
30.0
45.0
60.0
75.0
Jan
-11
Jul-
11
Jan
-12
Jul-
12
Jan
-13
Jul-
13
Jan
-14
Jul-
14
Jan
-15
Jul-
15
Jan
-16
Jul-
16
Jan
-17
Jul-
17
Jan
-18
Jul-
18
Jan
-19
Jul-
19
Jan
-20
Jul-
20
Jan
-21
(x)
1 year forward PE Average +1 Std dev -1 Std dev
Parent’s expanding TAM and capital
allocation into high growth segments,
augurs well for HAILs long term growth
adding long term growth visibility. This
coupled with improving domestic growth
could help HAIL generate much better
growth/returns vs the past decade, which
we believe justifies premium valuations. We
argue, HAILs business is getting highly
scalable with scope for greater OPM
expansion.
HONEYWELL AUTOMATION
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One-year forward P/B
Source: Bloomberg, Edelweiss Research
DCF assumptions
Particulars %
Cost of equity (Beta @0.91) 11.5
Debt/Equity 0.0
WACC 11.5
Tax rate 25.5
Terminal growth rate 9.4
Source: Bloomberg, Edelweiss Research
0.0
2.8
5.6
8.4
11.2
14.0
Jan
-11
Jul-
11
Jan
-12
Jul-
12
Jan
-13
Jul-
13
Jan
-14
Jul-
14
Jan
-15
Jul-
15
Jan
-16
Jul-
16
Jan
-17
Jul-
17
Jan
-18
Jul-
18
Jan
-19
Jul-
19
Jan
-20
Jul-
20
Jan
-21
(x)
1 year fwd PB Average +1 Std dev -1 Std dev
Edelweiss Securities Limited
HONEYWELL AUTOMATION
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 61
Alternative DCF valuation
INR mn FY21E FY22E FY23E FY24E FY25E FY26E FY27E FY28E FY29E FY30E Terminal
Domestic revenues 18,655 22,013 25,535 28,599 31,459 34,604 38,065 41,871 46,058 50,664
YoY growth (%) 1.0 18.0 16.0 12.0 10.0 10.0 10.0 10.0 10.0 10.0
Export revenues 15,152 18,485 21,812 25,302 28,591 32,308 36,508 41,254 46,617 52,678
YoY growth (%) 5.0 22.0 18.0 16.0 13.0 13.0 13.0 13.0 13.0 13.0
Revenues 33,806 40,497 47,347 53,901 60,050 66,913 74,573 83,126 92,676 1,03,342
YoY growth (%) 2.8 19.8 16.9 13.8 11.4 11.4 11.4 11.5 11.5 11.5
EBITDA 6,665 8,608 10,297 12,033 13,632 15,370 17,071 19,050 21,264 23,741
EBTIDA margin (%) 19.7 21.3 21.7 22.3 22.7 23.0 22.9 22.9 22.9 23.0
EBIT 6,202 8,117 9,766 11,463 13,022 14,720 16,382 18,321 20,495 22,933
EBIT margin (%) 18.3 20.0 20.6 21.3 21.7 22.0 22.0 22.0 22.1 22.2
Tax 1,749 2,307 2,799 3,273 3,759 4,242 4,768 5,377 6,061 6,829
Tax rate (%) 25.7 25.5 25.5 25.5 25.5 25.5 25.5 25.5 25.5 25.5
Depreciation 464 492 531 571 610 650 689 729 768 808
WC changes -377 -404 -415 491 -100 -257 -61 -250 -256 -260
Capex -250 -250 -250 -250 -250 -250 -250 -250 -250 -250
Free cashflow 4,289 5,648 6,832 9,002 9,523 10,621 11,992 13,173 14,697 16,401
Discounted cashflow 6,130 7,246 6,877 6,882 6,971 6,870 6,877 6,885 7,703
DCF FY23-30E 54,738
Terminal Value 3,72,123
Total value 4,26,862
Add: Net Cash 15,139
Value of equity 4,42,001
No of shares 8.8
Value per share 50,000
Source: Edelweiss Research
HONEYWELL AUTOMATION
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62 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
Financial Outlook
Exports to drive growth
Source: Company, Edelweiss Research
Recurring services share moving up…
Source: Company, Edelweiss Research
…with rising mandates for Indian entity
Source: Company, Edelweiss Research
Margin expansion to sustain
Source: Company, Edelweiss Research
Cash flow translation to remain healthy
Source: Company, Edelweiss Research
0
10,000
20,000
30,000
40,000
50,000
CY1
0
CY1
1
CY1
2
CY1
3
FY15
FY16
FY17
FY18
FY19
FY20
FY21
E
FY22
E
FY23
E
(IN
R m
n)
Domestic revenues Exports revenues
11% CAGR
13% CAGR
25.0
27.0
29.0
31.0
33.0
35.0
0
2,400
4,800
7,200
9,600
12,000
CY1
0
CY1
1
CY1
2
CY1
3
FY1
5
FY1
6
FY1
7
FY1
8
FY1
9
FY2
0
(%)
(IN
R m
n)
Service revenues Mix of service (%)
25.0
28.0
31.0
34.0
37.0
40.0
0
2,800
5,600
8,400
11,200
14,000C
Y10
CY1
1
CY1
2
CY1
3
FY1
5
FY1
6
FY1
7
FY1
8
FY1
9
FY2
0
(%)
(IN
R m
n)
Sale to related parties % of revenues
0.0
5.0
10.0
15.0
20.0
25.0
0
2,500
5,000
7,500
10,000
12,500
CY1
0
CY1
1
CY1
2
CY1
3
FY1
5
FY1
6
FY1
7
FY1
8
FY1
9
FY2
0
FY2
1E
FY2
2E
FY2
3E
(%)
(IN
R m
n)
EBITDA EBITDA margin
0
90
180
270
360
450
CY1
0
CY1
1
CY1
2
CY1
3
FY1
5
FY1
6
FY1
7
FY1
8
FY1
9
FY2
0
FY2
1E
FY2
2E
FY2
3E
(%)
OCF to EBITDA (%) FCF to PAT (%)
HAILs local value addition, design
engineering etc. for parent has gone up to
support parents global solutions/product
delivery reflecting in better exports
consistently over the past decade.
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Key Risks
Large part of business concentrated in parent and its affiliates
HAIL derived ~38% of its FY20 revenue from Honeywell Inc. and its affiliates. Major
part of exports come from parent, which implies a greater reliance on Honeywell
Inc.’s growth--a key downside risk to our thesis.
Steep decline in global oil demand
Rising geopolitical uncertainties could result in steep decline in global oil demand,
impacting capital investment plans of upstream and downstream companies.
Slowdown in global GDP
HAIL’s business is highly linked to global business cycles, especially for energy and
process industries. Any major slowdown in global GDP poses downside risk to the
company’s growth.
HONEYWELL AUTOMATION
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Company Description
Honeywell’s presence in India
Honeywell Inc. is a global technology company that helps aircraft, buildings,
manufacturing plants, supply chains and workers become more connected to make
the world smarter, safer and more sustainable.
All of Honeywell Inc.’s global businesses have a strong legacy in India, built over the
past eight decades. Its India business has three state-of-the-art manufacturing
facilities and five global centers of excellence for technology development and
innovation. It employs close to 15,000 people across 50 locations, including
Bangaluru, Chennai, Delhi, Gurgaon, Hyderabad, Madurai, Pune and Vadodara.
Honeywell Automation India (HAIL)
HAIL is a leader in providing integrated automation and software solutions, including
process solutions and building solutions. It has a wide product portfolio in
environmental and combustion controls, sensing and control, and also provides
engineering services in the field of automation and control to global clients. A
Fortune India 500 company, HAIL has more than 3,300 employees based in nine
offices across India–Pune, Baroda, Bengaluru, Hyderabad, Mumbai, Chennai,
Gurgaon, Kolkata and Jamshedpur.
Evolution over the years
Source: Company
Product profile
Over the years, HAIL has continued to build on its product and service portfolio, with
focus on expanding it addressable market both domestically and internationally.
1987•Started as a JV between Honeywell and Tata
1989•Listed on the stock exchange as Tata Honeywell Limited.
Honeywell and Tata shareholding at 39.54% each
2004
•Honeywell Asia Pacific Inc. (wholly owned subsidiary of Honeywell International Inc.) bought Tata stake
•Company renamed Honeywell Automation India Limited
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Product profile
Source: Company
Various businesses catering to variety of segments
Process solution
Source: Company, Edelweiss Research
Building solution
Source: Company, Edelweiss Research
Environment control
Source: Company, Edelweiss Research
Sensing & control
Source: Company, Edelweiss Research
Process Solution
•Automation and control systems for process industries
•Lifecycle services
•Advanced solutions -Simulation, optimisation
•Field instrumentation and solutions
Building Solution
•Integrated Building Management Systems including HVAC, life safety and security
•Large, complex, integrated projects
•Energy saving performance contracts
Building Management
System
•Building automation technologies
•Mechanical PICVs, Variable Frequency drives and Piston type PRVs
Sensing and Internet of Things
(IOT)
•Sensors
•Safety and limit switches
•Mission critical applications
Global Services
•Project engineering services, product customisation, and software development for several global Honeywell entities
Global Manufacturing
Business
•High quality products and project solutions for Indian and Global markets
Process solution
E&P
Refining
Petrochemical
Chemicals
Power
Metals &
mining
Pharma
Pulp & paper
Building solution
Infrastructure
Government
Education
Airport
Commercial
Transportatio
n
Telecom
Residential
Environment
control
Residential
Infrastructure
Government
Education
Airport
Commercial
Transportatio
n
Industrial
Sensing & Control
Transport
Aerospace
Defence
Medical
Industrial
Test & measure
ment
HONEYWELL AUTOMATION
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Sector-wise outlook for HAIL remains buoyant for domestic market
HAIL’s offerings are fairly diversified across oil and gas, chemicals, process plants and
infrastructure. However, its core offerings like DCS, QCS and ESD are largely focused
around the energy sector. With most incremental capacity additions across oil and
gas, power generation, T&D, transportation, process plants etc., are getting more
and more sophisticated, the growth potential for HAIL appears to be healthy.
Normalisation of manufacturing capex to aid HAILs growth
Source: Capitaline, Edelweiss Research
National Infrastructure Pipeline over FY21-25 – Total opportunity ~INR100tn
Source: Government documents, Edelweiss Research
0
1,200
2,400
3,600
4,800
6,000
FY0
5
FY0
6
FY0
7
FY0
8
FY0
9
FY1
0
FY1
1
FY1
2
FY1
3
FY1
4
FY1
5
FY1
6
FY1
7
FY1
8
FY1
9
FY2
0
(IN
R b
n)
BSE 500 (ex- IT & finance) capex
-
3,600
7,200
10,800
14,400
18,000
Ro
ad
s
Sma
rt C
itie
s, M
RT
S,A
ffo
rda
ble
Ho
usi
ng
Po
we
r
Ra
ilwa
ys
Re
ne
wa
ble
En
erg
y
Irri
ga
tio
n
Wa
ter
&sa
nit
ati
on
Ru
ral
infr
ast
ruct
ure
Ind
ust
rie
s &
inte
rna
l tra
de
Dig
ita
lco
mm
un
ica
tio
n
Pe
tro
leu
m &
na
tura
l ga
s
Ag
ricu
ltu
rein
fra
stru
ctu
re
Hig
he
re
du
cati
on
Ato
mic
en
erg
y
Air
po
rts
He
alt
h &
fam
ily w
elf
are
Po
rts
Oth
ers
(IN
R b
n)
Manufacturing sector in India, especially
process industries remain one of the prime
domestic revenue stream for HAIL.
Edelweiss Securities Limited
HONEYWELL AUTOMATION
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Management Overview
Mr. Ashish Gaikwad, Managing Director
Mr. Ashish Gaikwad was appointed Managing Director, HAIL, in 2016. He brings close
to 30 years of experience in automation, control and advanced software applications
in the process industry to drive growth for HAIL that serves Indian and global
customers for Honeywell's Process Solutions, Building Solutions, Building
Management Systems, and Sensing and Internet of Things businesses. Mr. Gaikwad
began his career as a software engineer with Honeywell Process Solutions in Pune,
India. Over the years, he has served HAIL’s customers in multiple roles of increasing
responsibility in several geographies including India, Southeast Asia, Asia Pacific and
US.
Mr. Akshay Bellare, Director
Mr. Akshay Bellare was appointed President, HAIL, in October 2019. He is
responsible for the continued growth of India operations across the company’s four
strategic business groups: Aerospace, Honeywell Building Technologies (HBT),
Performance Materials and Technologies (PMT), and Safety and Productivity
Solutions (SPS). Mr. Bellare moved to India in 2016 as Vice President and General
Manager of Honeywell Technology Solutions (HTS) India, the engineering and
technology development arm of HAIL. He spearheaded the transformation of HTS
India into a market-focused and customer-centric organisation that enables
innovation and business growth with speed and agility.
Mr. Ashish Modi, Director
Mr. Ashish Modi is VPGM Honeywell Building Technologies (HBT) India. In this role,
he leads the strategy and operations for HBT in India to drive focus and attention on
accelerating growth in one of the fastest growing economies in the world. Prior to
joining HAIL, Mr. Modi was working with OYO where he served as Vice President and
Region Head. He has also worked with McKinsey in Houston and MTI Microfuel Cells
Inc.’s New York office. Earlier in his career, he has spent seven years at Honeywell in
various leadership roles including Vice President and Chief Operating Officer for
Honeywell Connected Plant in Houston; Global Vice President and General Manager
for Advanced Solutions business; and LSS business Leader for both APAC and India.
Mr. Atul Pai, Director
Mr. Atul Pai is VP, Enterprise Controller Operations for Honeywell Corporation and
is based out of Bangalore India. He has been with Honeywell in various finance and
business roles for the past 19 years. Most recently he was the Global CFO for
Honeywell Building Solutions based out of Minneapolis USA. Mr. Pai was the CFO for
Honeywell Automation India Limited from 2004 to 2011 after which he took on
multiple regional and global roles. Mr. Pai is Chartered Accountant from ICAI, B.Com
from Mumbai University and is a certified Six Sigma Green Belt.
Mr. Amit Tantia, Chief Financial Officer
Mr. Amit Tantia was appointed as CFO of HAIL in May 2018. He has held multiple
finance leadership roles over the past 12 years within the company, spreading his
experience across controllership, corporate governance, business partnering,
finance general management and taxation. Mr. Tantia is a qualified Chartered
Accountant from Institute of Chartered Accountants of India and has earned
Bachelor’s degree in Science (Maths stream) from Ajmer University.
HONEYWELL AUTOMATION
Edelweiss Securities Limited
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Industry Outlook
Early signs of rising automation/digital spend in manufacturing/infra
What some of the developed nations witnessed during past two decades was
intensive-deployment of automation/ compliance standards for various reasons like
productivity, cost effectiveness, quality, monitoring etc., is what India has started to
already witness. In our view, India is at an early stage of industrial/infra automation
and digitalisation. Whether it is clean air, clean water, remote monitoring, smart
infrastructure and buildings, there has been a gradual but sustained pick up in spend
by process industries, energy utilities, aviation, commercial/residential, airports,
hospitality etc., towards better compliance/monitoring and control infrastructure.
Rising digital spend across sectors for operational productivity
Sector Spend directed towards / benefits derived from automation
Automotive
manufacturers Reduced their capital expenditure owing to reduced consumer demand and rationalization of capacity/ inventory.
Cement Reduce power consumption by 8% while increasing mill feed by 20 tonnes per hour
Consumer electronics Customers investing in robotic automation for productivity gains.
Food and beverage and
consumer segments Continued their investments during this period modernization of capacities for productivity and efficiency.
Pharma Improving batch quality while reducing batch cycle time by 15%
Power substation Connection to cloud resulted in reduced footprint, lower maintenance cost and flexibility of expansion
Utilities Remote Diagnostic Services (RDS) covering 29 gas turbines across multiple locations in India for real time data analysis helping
customer increase availability, reduce forced outages and enable proactive, predictive maintenance
Source: Company, Edelweiss Research
Changing industry landscape
Key changing landscape Disruptions caused Innovations/actions
Rising emission levels Rising Sox/NoX levels in air.
Industrial water pollution at alarming levels
Thermal plants- FGD, SoX and Nox plants. BS VI/VII emission norms for
auto sector. CPCB II/III for DG sets.
Rising competition/low
demand across
industries
Declining profitability/mounting losses
Adoption of energy saving measures reflecting in demand for
efficiency products- LT Motors, variable drives, smart
products/digitalisation etc
Project cost/time
overruns
Significant increase in working capital levels, sharp drop
in OPMs
Exit from non-core;
Asset light business models with judicious project selection and focus
on fewer segments
Shift to renewables -
limited thermal projects
Excess capacity across manufacturing/industrial players.
Increased spend towards setting up renewable capacity Companies tapping new opportunities in green energy, smart grid, etc
Source: Company, Edelweiss Research
TAM expansion to emerging areas driving industry consolidation
Across global technology players like ABB, Honeywell, Siemens and Schneider, there
has been a greater pace of M&A to exit non-core and to expand into newer high
potential market segments (refer to table below). Significant capital allocation is
moving towards adding new capabilities/ scope to address long-term growth/ return
needs.
Edelweiss Securities Limited
HONEYWELL AUTOMATION
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Honeywell Inc’s global M&A focus has been in high growth segments
Entry / Exit Year Division Rationale
Acquisition 2018 Transnorm Global leader in high performance conveyor and warehouse solutions
Spin off 2018 Transportation business
To focus on six high growth segments that are aligned to global trends and to
maximise shareholder value in spun off business by sharper focus in turbocharger
leadership.
Spin off 2018 Homes and Global Distribution
business
To sharpen focus in HVAC controls and security markets, and drive leadership status
in global distributor of security and fire protection products
Acquisition 2016 Intelligrated Intelligrated is leading provider of supply chain and warehouse automation
technologies
Acquisition 2016 Xtralis International Holdings Limited Xtralis is a leading global provider of aspiration smoke detection and perimeter
security technologies.
Acquisition 2016 COM DEV International COM DEV International is a leading satellite and space components provider
Acquisition 2016 Elster Group Acquisition will provide access to high-growth product areas and geographical
locations
Source: Company, Edelweiss Research
Industry moving towards short cyclical/ recurring revenue base
Versus conventional approach of pure product based business approach, which was
highly exposed to cyclical volatilities across sectors, more and more global players
seem to be moving towards non-cyclical revenue base adding significant share of
services/software revenues. While this is making businesses less cyclical, it has
helped global players optimise returns/cash flows as visible in below exhibit over the
years.
Service as % of revenue
Source: Company, Edelweiss Research
0.0
7.0
14.0
21.0
28.0
35.0
Siemens ABB India Honeywell Cummins
(%)
Service revenue as % of total revenue
FY10 FY12 FY15 FY18 FY20
HAILs service component in revenues is
much higher vs peers given significant
mandate from parent, rising digitalisation
etc. HAIL multiple delivery centres in India
adds to parent’s competitiveness globally.
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KEY DATA
Rating BUY Sector relative Outperformer Price (INR) 1,355 12 month price target (INR) 1,650 Market cap (INR bn/USD bn) 287/3.9 Free float/Foreign ownership (%) 25.0/3.5
What’s Changed Target Price
Rating/Risk Rating
INVESTMENT METRICS
Robust transformation underway
ABB India’s growth opportunities are clearly getting broad-based with rising digital and automation demand in global leadership segments for ABB, including process plants, cement, FMCG and smart infra. ABB’s localisation and marketing initiatives are getting far more robust, making a case for better growth and OPM scale-up potential.
Investor concerns centre on its higher cost structure than peers and the small base of automation revenue (India). Expanding India TAM with new product/solutions offerings, better OPM scale up visibility with exports/service growth and robust marketing approach lead us to upgrade ABB to ‘BUY’ and add it to our industrial top picks.
FINANCIALS (INR mn)
Year to December CY19A CY20E CY21E CY22E
Revenue 73,151 62,221 73,682 82,731
EBITDA 5,312 3,671 5,901 7,047
Adjusted profit 3,719 2,679 4,531 5,471
Diluted EPS (INR) 17.5 12.6 21.4 25.8
EPS growth (%) 46.3 (28.0) 69.1 20.8
RoAE (%) 11.7 5.8 11.6 12.8
P/E (x) 78.5 109.0 64.5 53.4
EV/EBITDA (x) 31.3 44.8 27.0 22.0
Dividend yield (%) 0.4 0.4 0.4 0.4
PRICE PERFORMANCE
What’s changing for ABB India—internally and externally
Digital and industrial automation adoption in domestic market is clearly getting
broad-based with several emerging opportunities such as FMCG, warehouse
automation, demand for newer technologies in infra (transportation, water, energy
etc.) and cement, mining and marine automation, etc. These are segments where
parent has global leadership, which augurs well for the Indian entity. We see a rising
trend by ABB to localise several global products ahead of demand to better tap
opportunities, which in our view will further intensify. This coupled with rising cost
focus makes a stronger case for a significant margin ramp-up over three–five years
for ABB India, which has been a key area of concern for investors, in our view.
Greater scope for exports/service ramp-up; global dynamics at play
Rising mix of digital/service revenue in global automation pool led by robust IIOT/AI
adoption has worked well for Indian entities of many MNCs led by rising mandates
as they leverage India’s design engineering/software capabilities. ABB’s exports have
grown better than domestic revenues in the past three years at a 16-18% CAGR,
which we believe, could improve as parent further expands India mandate to address
growing digital demand. Parent seems to be expanding digital offerings/service ramp
up to tap emerging demand for Indian markets in energy, smart infra and process.
Explore:
Outlook and valuation: Automation at play; upgrade to ‘BUY’
In our view, ABB India’s rising focus on tapping into opportunities leveraging a more
focused parent portfolio augurs well for three–five year growth/returns trajectory.
We see significant OPM scale-up for ABB with better growth in export/service
mandates, which will drive a much higher EBITDA CAGR over three–five years. We
see a rising localisation intensity drive by ABB India, which coupled with robust
marketing platform will drive TAM much higher. This leads us to raise ABB to
‘BUY/SO’ from ‘HOLD/SP’ with a revised TP of INR1,650 (versus INR900) as we assign
an upcycle 70x PE to ABB—recognising robust business transformation driving better
growth/cash flows as it consolidates its leadership amid emerging opportunities. Key
risks: i) global industrial slowdown; and ii) domestic demand slowdown, especially in
process industries.
-30
0
30
60
90
Sales Growth(%)
EPS Growth(%)
RoE(%)
PE(x)
Engineering and capital goods ABB IN Equity
25,000
30,000
35,000
40,000
45,000
50,000
700
840
980
1,120
1,260
1,400
Jan-20 Apr-20 Jul-20 Oct-20
ABB IN Equity Sensex
India Equity Research Engineering and capital goods January 28, 2021
ABB INDIA COMPANY UPDATE
Amit Mahawar Ashutosh Virendra Mehta Manish Agarwall +91 (22) 4040 7451 +91 (22) 6141 2748 +91 (22) 4063 5497 [email protected] [email protected] [email protected]
Corporate access
Financial model Podcast
Video
Edelweiss Securities Limited
ABB INDIA
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Financial Statements
Income Statement (INR mn) Year to December CY19A CY20E CY21E CY22E
Total operating income 73,151 62,221 73,682 82,731
Gross profit 24,539 20,906 25,125 27,715
Employee costs 5,796 5,537 5,814 6,107
Other expenses 13,432 11,698 13,410 14,561
EBITDA 5,312 3,671 5,901 7,047
Depreciation 904 1,002 1,034 1,102
Less: Interest expense 214 131 134 141
Add: Other income 943 1,240 1,323 1,508
Profit before tax 5,834 3,190 6,055 7,312
Prov for tax 1,418 1,099 1,524 1,840
Less: Other adj 0 0 0 0
Reported profit 4,416 2,091 4,531 5,471
Less: Excp.item (net) (697) 588 0 0
Adjusted profit 3,719 2,679 4,531 5,471
Diluted shares o/s 212 212 212 212
Adjusted diluted EPS 17.5 12.6 21.4 25.8
DPS (INR) 4.8 5.0 5.5 6.0
Tax rate (%) 24.3 34.4 25.2 25.2
Important Ratios (%) Year to December CY19A CY20E CY21E CY22E
COGS (% of rev) 66.5 66.4 65.9 66.5
Employee cost (% of rev) 7.9 8.9 7.9 7.4
Other exp (% of rev) 18.4 18.8 18.2 17.6
EBITDA margin (%) 7.3 5.9 8.0 8.5
Net profit margin (%) 5.1 4.3 6.1 6.6
Revenue growth (% YoY) 9.3 (13.9) 18.4 12.3
EBITDA growth (% YoY) 16.0 (30.9) 60.7 19.4
Adj. profit growth (%) 46.3 (28.0) 69.1 20.8
Assumptions (%) Year to December CY19A CY20E CY21E CY22E
GDP (YoY %) 4.8 (6.0) 7.0 6.0
Repo rate (%) 4.4 3.5 3.5 4.0
USD/INR (average) 70.7 75.0 73.0 72.0
Order inflow (% YoY) 3.6 (9.8) 17.4 14.3
Rev growth (% YoY) 9.3 (14.9) 18.4 12.3
EBITDA margin (%) 7.3 5.9 8.0 8.5
Depreciation (% of FA) 8.6 8.8 8.3 8.1
Tax rate (%) 31.9 25.2 25.2 25.2
Capex (INR mn) 1,214.7 1,200.0 1,300.0 1,300.0
Valuation Metrics Year to December CY19A CY20E CY21E CY22E
Diluted P/E (x) 78.5 109.0 64.5 53.4
Price/BV (x) 8.2 7.8 7.2 6.5
EV/EBITDA (x) 31.3 44.8 27.0 22.0
Dividend yield (%) 0.4 0.4 0.4 0.4
Source: Company and Edelweiss estimates
Balance Sheet (INR mn) Year to December CY19A CY20E CY21E CY22E
Share capital 424 424 424 424
Reserves 34,777 36,984 40,349 44,549
Shareholders funds 35,201 37,408 40,773 44,973
Minority interest 0 0 0 0
Borrowings 71 71 71 71
Trade payables 36,120 30,562 37,249 42,204
Other liabs & prov 1,312 1,432 1,559 1,692
Total liabilities 73,189 69,958 80,137 89,425
Net block 7,344 7,468 7,648 7,752
Intangible assets 73 46 32 26
Capital WIP 595 695 795 895
Total fixed assets 8,012 8,209 8,475 8,673
Non current inv 1 1 1 1
Cash/cash equivalent 15,976 17,713 22,807 27,415
Sundry debtors 19,475 16,195 19,177 21,533
Loans & advances 3,770 3,846 4,230 4,442
Other assets 25,956 23,996 25,448 27,363
Total assets 73,189 69,958 80,137 89,425
Free Cash Flow (INR mn) Year to December CY19A CY20E CY21E CY22E
Reported profit 4,416 2,091 4,531 5,471
Add: Depreciation 904 1,002 1,034 1,102
Interest (net of tax) 147 98 101 106
Others (1,644) (31) 34 36
Less: Changes in WC 2,846 (272) 1,995 607
Operating cash flow 6,669 2,888 7,694 7,321
Less: Capex (1,215) (1,200) (1,300) (1,300)
Free cash flow 5,454 1,688 6,394 6,021
Key Ratios Year to December CY19A CY20E CY21E CY22E
RoE (%) 11.7 5.8 11.6 12.8
RoCE (%) 14.2 10.7 15.8 17.4
Inventory days 67 73 62 61
Receivable days 91 105 88 90
Payable days 236 295 255 264
Working cap (% sales) 14.8 17.6 12.1 10.1
Gross debt/equity (x) 0 0 0 0
Net debt/equity (x) (0.5) (0.5) (0.6) (0.6)
Interest coverage (x) 20.6 20.4 36.2 42.0
Valuation Drivers Year to December CY19A CY20E CY21E CY22E
EPS growth (%) 46.3 (28.0) 69.1 20.8
RoE (%) 11.7 5.8 11.6 12.8
EBITDA growth (%) 16.0 (30.9) 60.7 19.4
Payout ratio (%) 23.0 50.7 25.7 23.2
ABB INDIA
Edelweiss Securities Limited
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What’s changing for ABB India—in industry and internally
Scope for significant margin step-up with rising value addition: ABB India’s focus
on localisation is clearly visible in product/solutions launch for India dedicated
demand. While this has helped margins see some ramp up in recent years, the scope
for OPM expansion to us seem significant as we believe:
a) Value addition from India will keep rising as individual segments gain size,
justifying the case for local manufacturing. With rising volume of newly
introduced range, we see a significant scale up potential for OPMs.
b) Focus by parent on driving cost efficiency, especially post-covid-19, has gone up,
making a case for all key geographies—including India—for better OPMs.
c) Ramp-up and focus on exports, digital and software service revenues could be
much faster in our view, given changing industry landscape (higher
outsourcing), rising preference for India locations/mandates by global
technology players. This will enrich revenue mix driving scale/returns/cash for
ABB over three–five years significantly.
Rising service revenues driving cash flows
Source: Company, Edelweiss Research
Higher exports driving margins
Source: Company, Edelweiss Research
4.0
5.0
6.0
7.0
8.0
9.0
0.0
50.0
100.0
150.0
200.0
250.0
CY11 CY13 CY15 CY17 CY19
(%)
(%)
OCF to EDITDA (%) - LHS Service revenue as % of revenues - RHS
10.0
12.0
14.0
16.0
18.0
20.0
4.0
5.0
6.0
7.0
8.0
9.0
CY11 CY13 CY15 CY17 CY19
(%)
(%)
EBITDA margins Exports as % of revenues
ABB India’s value addition over recent years have
clearly gone up with many global products localised.
Segments like Cement, Paper Pulp, food and
beverage, smart infra and process plants where ABB
has global leadership are emerging as key drivers of
automation/digitalisation, which will further
intensify localisation by parent.
Edelweiss Securities Limited
ABB INDIA
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Key products localised by ABB India over past few years
Source: Company, Edelweiss research
ABB adopting robust approach to tap into emerging opportunities: ABB in past 1-2
years have seen a rising intensity of automation across many emerging segments
which conventionally in India have not been large segments. New technology
adoption in infra projects, FMCG automation, warehouse and logistics automation,
mining and cement plant automation, transportation etc. is clearly on the rise. These
are also leading segments for ABB globally, which adds to India’s competitive
advantage. Below are some key product segments witnessing increased demand:
Water segment, lift irrigation, etc.: mega motors, advanced drives and relays.
DCS/SCADA: Smart power distribution technology to monitor water supply
network and gas transportation for metros.
Advanced traction solutions: railways
Modular power distribution equipment: Metro rail
First of its kind orders for digitalisation/remote monitoring: Cement, mining,
marine and data storage.
Wider adoption of new automation technology across larger manufacturing
companies and infra projects in our view will accelerate growth for digitally-
compatible product/solutions range, which will drive parent to sharpen and fast
track its India localisation strategy and roadmap ahead of actual demand to better
tap the opportunity. Additionally, ABBs recent initiative to launch digital platform to
expand customer reach for 6,000 of its products suggests a far more robust
approach to tap into mass and mid-tier market, which adds to its overall TAM.
2019
Composite converter
(CC1500_M500_AC_M)
Underslung Auxiliary converter
AC Metro (Bordline
M80_AC_U)
2018
Multi-feeder protection system (SSC600) product
OTDC Local assembly
Tmax XT MCCB
2017
Inverter modules for solar inverters
and industrial drives
Slip ring motors in 400 to 500 frames
2016
New generation of LV ACS 880
Drives
2015
NXR motor technology
Active Harmonics filter
DC Capacitors
We take note of expanding ABB footprint in
India, both products and customer to better
tap emerging opportunities including in tier
II markets. Additionally, parent seem to be
expanding India’s mandate reflecting in
better exports, which we believe will remain
a key growth driver.
ABB INDIA
Edelweiss Securities Limited
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ABB’s leadership products – Distributed Control System…
Source: Company
…ABB Ability™ System 800xA
Source: Company
…ABB Ability™ Symphony Plus
Source: Company
DCS880 industrial DC drives
Source: Company
ACQ580 packaged drive
Source: Company
Edelweiss Securities Limited
ABB INDIA
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A much wider presence for ABB Global; India opportunity size widening
Segment Market size
(USD bn) Segment Rank
Revenue
(USD bn)
Share
(%) Key competitors
Electrification 170 12.7 7.5
- Distribution solution 55 Medium voltage # 1 4.25 - 4.75 8.2 Schneider, Siemens, Eaton
- Smart Power 40 Low voltage # 2 2.75 - 3.25 7.5 Schneider, Siemens, Eaton
- Smart Building 45 Globally # 3 2.25 - 2.75 5.6 Schneider, Legrand, Eaton
- Installation products 25 Globally # 2 1.25 - 1.75 6.0 Eaton, Hubbell, Aatkore
- Power conversion 5 DC Power Solutions # 4 0.25 - 0.75 10.0 Vertiv, Delta, Enersys
Industrial automation 110 6.3 5.7
- Energy Industries 70 Conventional Power # 1 1.75 - 2.25 2.9 Siemens, Emerson, Honeywell, Schneider, Yokogawa
- Process Industries 20 Mining, Pulp &
Paper # 2 1.25 - 1.75 7.5 Siemens, SMS, FLSmidth, Rockwell, Schneider, GE
- Marine & Ports 5 Globally # 1 0.75 - 1.25 20.0 Siemens, SEOHO, Kongsberg, TMEIC, Wartsila, GE
- Turbo charging < 2.5 Globally # 1 0.75 - 1.25 40.0 Garrett, Mitsubishi, Wabtec, Cummins
- Measurement & Analytics 15 Analytics # 1 0.75 - 1.25 6.7 Emerson, Thermofisher, Siemens, E-H, Krohne,
Yokogawa
Motion 75 6.5 8.7
- Motors & Generators 25 Globally # 1 2.25 - 2.75 10.0 Weg, Siemens, Wolong
- Drive Products 10 Globally # 1 1.25 - 1.75 15.0 Siemens, Rockwell, Danfoss, Schneider
- System Drives 10 Globally # 1 0.75 - 1.25 10.0 Siemens, GE, Danfoss
- Service 5 Globally # 1 0.75 - 1.25 20.0
- Traction 10 Globally # 2 < 1.0 10.0 Ingeteam, medcom, Mitsubishi, Medha
- Mechanical Power
transmission 15 Globally # 5 0.25 - 0.75 3.3 SKF, SEW, Rexnord
Robotics & Discrete
automation 75 3.3 4.4
- Robotics 55 Globally # 2 2.25 - 2.75 4.5 FANUC, KUKA, Yaskawa, Teradyne
- Machine automation 20 Globally # 5 0.75 - 1.25 5.0 Siemens, Rockwell, Beckhoff, Mitsubishi
Source: Company, Edelweiss Research
Electrification – ABBS global segment mix
Source: Company, Edelweiss Research
32
2015
10
8
74 3
Buildings
Other Industry
Distribution, Conv gen
Other T&I
O&G, Chemicals
Data Center
Renewables
F&B
ABB is expanding its product portfolio to
address growing demand across data
centres, water, oil & gas, power automation,
(DCS etc.), and building portfolio. India’s
smart infra and rising digitalisation create
additional opportunities for electrification
business.
ABB INDIA
Edelweiss Securities Limited
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Industrial automation – ABBS global segment mix
Source: Company, Edelweiss Research
Motion – ABBs global segment mix
Source: Company, Edelweiss Research
Robotics and Discrete automation
Source: Company, Edelweiss Research
24
23
16
16
10
8 2
Mining, metals, pulp &paper
Marine & Ports
Conv generation
O&G
Chemicals & refinery
Other industry
Other
27
15
13
13
11
8
55 3
Other industry
Mining & metals
O&G, Chemicals
Buildings
F&B, Pharma
Rail
Conv generation
Other T&I
Renewables
28
25
22
13
75
Auto OEM
Machine automation
General Industry
Auto Tier I
Consumer segments
Electronics
Digital is clearly gaining momentum in
segments such as mining, cement, metals,
etc. apart from the utilities segment for
remote monitoring/control. Digital
platforms with rising O&M outsourcing are
expanding the overall revenue pie for ABB.
ABB’s growth in this segment is led by
stricter adoption of energy efficiency LT
motors, drives including VFD. Large projects
will drive demand for HT motors, the while
transportation segment is led by rail/metro
expansion/upgrade driving demand for
traction converters, energy storage, etc.
Auto, food and beverage, electronics,
automated warehousing, logistics, etc. are
driving growth for robotics, servo motion,
sensors, vision software, etc. The Indian
robotics market is expected to see high
double-digit growth and is currently
estimated at USD150-200mn with presence
of all major global giants, including Fanuc,
ABB, Yaskawa and KUKA.
Edelweiss Securities Limited
ABB INDIA
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Disruptions in manufacturing has led to growth for short-cycle products in ABB in recent years
Source: Capitaline, Company, Edelweiss Research
Parents R&D spend as a % of revenues is rising and is ahead of peers
Source: Company, Edelweiss Research
New products - Emax 2 – Digital circuit breaker
Source: Company, Edelweiss Research
Ultra low harmonic drives
Source: Company, Edelweiss Research
0.0
2.4
4.8
7.2
9.6
12.0
-15.0
-1.0
13.0
27.0
41.0
55.0
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
(%)
(%)
ABB revenue growth - LHS BSE200 (Ex IT, BFSI) revenue growth - LHS BSE200 (Ex IT, BFSI) PAT margin - RHS
2.5
2.9
3.3
3.7
4.1
4.5
0
320
640
960
1,280
1,600
FY10 FY12 FY15 FY18 FY20
(%)
(USD
mn
)
R&D R&D as a % of revenue
ABB INDIA
Edelweiss Securities Limited
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Mine optimiser
Source: Company
Major and differentiated orders bagged by ABB India in CY19
Segment Client Project details
Electrification
Pune, Bangalore and Mumbai Metros ABB to provide 33kV Primary AIS, GIS & 25kV traction GIS for power distribution
for the metro rail
Kalinga nagar Tata Steel plant Largest order of Low voltage switchgear
Shri Mata Vaishno Devi Shrine Board,
Katra Reliable and smart power distribution along the route
Retail & Cloud Computing Companies Datacenter
Motion
Sulzer India Single largest MV motor order
SMC Power Bagged the largest order for IE 4 motor
KONE cranes Large Drive order
Chittaranjan Locomotive Works (CLW)
and Diesel Locomotive Works (DLW),
Varanasi
Propulsion system and composite converter orders
Industrial automation
HPCL, IOCL BSVI Advanced Blending application
Mahanagar Gas Gas distribution solutions for Mumbai
Miscellaneous Breakthrough data centre automation for multiple locations
Miscellaneous First breakthrough for digitalization order in mining sector
Robotics and Discrete
Automation
Multinational consumer goods company Robotic automation of multiple production sites
Indian and Japanese Automotive OEM Painting and sealing system
Leading consumer electronics brands Automate their local assembly lines
Source: Company, Edelweiss Research
Edelweiss Securities Limited
ABB INDIA
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 79
Valuation: Multiple legs of growth
What is changing for ABB: We see a few strategic initiatives by ABB India, most
of which is a function of parent strategies: a) significant step up in value addition
for Indian plants across segments, which is gradually gaining critical mass, which
is well complemented with a more active digital platform initiatives (recent
launch of e-mart etc. to tap Tier II markets). b) Access to parent
technology/know-how has gone up in recent years, suggesting parents greater
ambition for Indian market and making ABB India future ready for a greater
global role in helping parent deliver future digital-ambitions. These multiple
levers in our view will structurally change ABBs growth/return structure
imparting solid competitive edge versus peers, driving a much higher market
share gains versus other global peers.
Structural benefits versus near term earnings; what’s reflecting in valuations:
Biggest dilemma in investors mind for ABB has been near-mid-term growth
versus valuations. In our view, ABB India’s growth is clearly shifting from cyclical
to a more structural growth story with significant scale up in
digital/service/exports revenues, driving a much higher earnings/return scale up
over medium to long term. With parent catching up on digital versus larger peers
and recent change in future growth strategy, India capability and investment will
clearly further intensify. These factors, in our view, are not factored in current
earnings, creating challenge for investors. We argue for a sharper earnings catch
up over 3-5 years led by better domestic and global footprint, which leads us to
upgrade ABB to a BUY/SO (versus HOLD/SP) and a revised TP of INR 1650 (versus
900) assigning peak valuation band of 70 (versus 40x).
Global & Indian companies revenue and EBITDA CAGR (CY10-19)
Source: Company, Edelweiss Research
ABB India
Siemens India HAIL
Cummins IndiaABB
Siemens
Honeywell
Cummins
Fanuc
Yaskawa
KUKA
0.0
6.0
12.0
18.0
24.0
30.0
0.0 3.0 6.0 9.0 12.0 15.0
CY1
0-1
9 E
BIT
DA
CA
GR
CY10-19 Revenue CAGR
ABB India, we argue is already undergoing
multiple changes driven by parent’s global
ambition and rising India opportunities. We
see a material step up in export mandate, as
parent expands India offerings including
digital. Additionally, we see far stronger
pace of localisation with rising parent
attention to expand India offerings given
widening automation adoption in global
leadership segment for ABB.
ABB INDIA
Edelweiss Securities Limited
80 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
Global & Indian MNC companies ROE and 1 year forward PE
Source: Bloomberg, Company, Edelweiss Research
One-year forward PE band
Source: Bloomberg, Edelweiss Research
One-year forward PB band
Source: Bloomberg, Edelweiss Research
Alternative DCF valuation – Key assumptions
Particulars %
Cost of equity (Beta @0.8) 10.8
Debt/Equity 0.0
WACC 10.8
Tax rate 25.2
Terminal growth rate 8.9
Source: Bloomberg, Edelweiss Research
ABB India
Siemens India
HAIL
Cummins IndiaABB
SiemensHoneywell
Cummins
0.0
25.0
50.0
75.0
100.0
125.0
0.0 8.0 16.0 24.0 32.0 40.0
1 y
ear
forw
ard
PE
(x)
CY19 ROE (%)
10
24
38
52
66
80
Jan
-06
Jan
-07
Jan
-08
Jan
-09
Jan
-10
Jan
-11
Jan
-12
Jan
-13
Jan
-14
Jan
-15
Jan
-16
Jan
-17
Jan
-18
Jan
-19
Jan
-20
Jan
-21
(x)
1 year fwd PE Average
+1 Std dev -1 Std dev
0.0
3.0
6.0
9.0
12.0
15.0Ja
n-0
6
Jan
-07
Jan
-08
Jan
-09
Jan
-10
Jan
-11
Jan
-12
Jan
-13
Jan
-14
Jan
-15
Jan
-16
Jan
-17
Jan
-18
Jan
-19
Jan
-20
Jan
-21
(x)
1 year fwd PB Average+1 Std dev -1 Std dev
Edelweiss Securities Limited
ABB INDIA
Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 81
DCF table
INR mn CY21E CY22E CY23E CY24E CY25E CY26E CY27E CY28E CY27E CY30E Terminal
Revenues 73,682 82,731 92,436 1,02,763 1,13,990 1,26,347 1,40,291 1,55,548 1,72,759 1,91,893
YoY growth (%) 18.4 12.3 11.7 11.2 10.9 10.8 11.0 10.9 11.1 11.1
EBITDA 5,901 7,047 8,652 9,823 10,872 12,011 13,304 14,692 16,609 18,381
EBTIDA margin (%) 8.0 8.5 9.4 9.6 9.5 9.5 9.5 9.4 9.6 9.6
EBIT 4,867 5,945 7,506 8,584 9,539 10,585 11,783 13,078 14,901 16,579
EBIT margin (%) 6.6 7.2 8.1 8.4 8.4 8.4 8.4 8.4 8.6 8.6
Tax 1,524 1,840 2,308 2,673 3,045 3,442 3,898 4,402 5,071 5,735
Tax rate (%) 25.2 25.2 25.2 25.2 25.2 25.2 25.2 25.2 25.2 25.2
Depreciation 1,034 1,102 1,146 1,239 1,333 1,427 1,520 1,614 1,707 1,801
WC changes 1,995 607 64 392 2,022 874 915 1,049 1,271 1,487
Capex -1,300 -1,300 -1,300 -1,300 -1,300 -1,300 -1,300 -1,300 -1,300 -1,300
Free cashflow 5,072 4,514 5,108 6,242 8,548 8,144 9,021 10,039 11,510 12,833 14,131
Discounted cashflow 4,074 4,161 4,589 5,672 4,877 4,875 4,897 5,067 5,099 5,614
DCF CY22-30E 43,309
Terminal Value 2,90,529
Total value 3,33,837
Add: Net Cash 15,905
Value of equity 3,49,742
No of shares 212
Value per share 1,650
Source: Edelweiss Research
ABB INDIA
Edelweiss Securities Limited
82 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset
Additional Data
Management
Chairman J C Deslarzes
MD Sanjeev Sharma
CFO T. K. Sridhar
Non Executive Nasser Munjee
Auditor BSR & Co LLP
Holdings – Top 10* % Holding % Holding
Life Insurance 4.51 Vanguard Group 0.75
Reliance Capita 2.99 Standard Life A 0.54
Sbi Funds Manag 2.40 L&T Mutual Fund 0.37
Credit Agricole 1.17 Kotak Mahindra 0.27
Icici Prudentia 0.89 Motilal Oswal A 0.20
*Latest public data
Recent Company Research Date Title Price Reco
05-Nov-20 Tuned in to emerging trends; Result Update
894.15 Hold
24-Jul-20 House in order amid covid-19; cashing on emerging trends key; Result Update
913 Hold
03-Jul-20 Annual Report Insights: Translating innovations into growth; Company Update
963 Hold
Recent Sector Research Date Name of Co./Sector Title
04-Jan-21 Engineering and capital goods
Better H2; leaders set to steal the show; Sector Update
09-Dec-20 Kalpataru Power Capex casts a shadow; Company Update
27-Nov-20 Siemens Showing agility amid structural shifts; Result Update
Rating Interpretation
Source: Bloomberg, Edelweiss research
Daily Volume
Source: Bloomberg
Rating Distribution: Edelweiss Research Coverage
Buy Hold Reduce Total
Rating Distribution* 163 64 14 241
>50bn >10bn and <50bn <10bn Total
Market Cap (INR) 189 56 6 251
* stocks under review
Rating Rationale
Rating Expected absolute returns over 12 months
Buy: >15%
Hold: >15% and <-5%
Reduce: <-5%
TP1,850
TP1,325
TP1,325 TP
1,250
700
930
1160
1390
1620
1850
Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20
(IN
R)
ABB IN Equity Buy Hold Reduce0
4
8
12
16
20
Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20
(Mn
)
Edelweiss Securities Limited
ABB INDIA
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ABB INDIA
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