Oct. 24, 2009 (The Hindu Business Line) --
diversified offerings.
Vidya Bala
A well-entrenched presence in the automation and process solutions space, especially in hydrocarbons and other process industries, combined with steady business from the parent company (OOTC:KIDSQ) hold out good prospects for HAIL’s earnings growth. The company’s almost zero-debt status and utilisation of accruals for expansion also lend strength to its financial credibility.
At Rs 2000, the HAIL stock offers a good buying opportunity; it currently trades at 14 times its likely per share earnings for the year ending December 2009. Investors with a two-year perspective can add the stock on declines linked to broad markets.
Business drivers
HAIL is an 81 per cent subsidiary of Honeywell (NYSE:HON) US. The company derives its business from five major divisions — process solutions, building solutions, environment and combustion control, sensing and control and the export business group. The first division, with a contribution of over 65 per cent to revenues, has been the key growth driver. HAIL has traditionally been a domestic market leader in the hydrocarbon space, and tops the ranking in the list of process control equipment players in the country (CMIE Market Size & Shares 2007-08), with market share of 22 per cent.
ABB stands second in this list. However, it is important to note that larger players such as ABB (NYSE:ABB) and Siemens (NYSE:SI) are leaders in the power automation space, specialising in power transmission and distribution equipment, while HAIL’s market share in this space is miniscule.
This limited contribution could have stemmed from the company’s lack of participation in state utility orders as they limit the profitability from after-market revenue streams (such as annual maintenance contracts) given that they are typically pegged to tariffs.
HAIL has, therefore, been selective in this space and has been targeting captive power projects.
However, with increased private participation in the power generation space, HAIL may be expected to actively participate in this segment as well. The company has bagged orders from private power players such as Tata Power. HAIL’s strength in the hydrocarbon space has enabled it to partner with clients such as ONGC, HPCL, IOC, BPCL. A high level of automation and after-sales services sought by the hydrocarbon industry tie in with HAIL’s sales-cum-service business model. Maintenance contracts often account for as much as 15 per cent of the project cost in the process solution segment. This could translate into an extended alternative revenue stream for HAIL, in times of slowdown in capex spending in the above industries.
