january 2021 sector report

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



2 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset

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.



Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset 3

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.




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.




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

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Rev

enu

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(%)

Ind

ust

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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

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%

FY11-20 revenue CAGR

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8.0

16.0

24.0

32.0

40.0

0.0

20.0

40.0

60.0

80.0

100.0

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AB

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Fan

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Yask

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Ro

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Rev

enu

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are

(%)

Ind

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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

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FY1

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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




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

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Ind

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BG

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BB

Ind

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Siem

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Cu

mm

ins

Inc

Cu

mm

ins

Ind

ia

(%)

10 year performance

L&T50%

ABB 15%

Honeywell12%

Siemens10%

BEL5%

KEC5%

BHFC3%




Global industrial automation landscape

Source: Company, Edelweiss research




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




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.




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

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90

120

150

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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




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

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(%)

Ind

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(%

)


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.




Market coverage and revenue share for MNC’s in India


India revenue pool for global players at INR370bn (10% CAGR)


Industry EBITDA clocking higher 13% CAGR, pegged at INR50bn+


0.0

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(%)

Ind

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(%

)


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

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%

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.




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





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)


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.




R&D spend as a % of revenues rising for large global players


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


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


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


%

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.




USD 10bn plus of USD 25bn global M&A by global players in last 5 years happened in digital/IIOT based space


> 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




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.




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.




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


Our thoughts on competitive edge and growth strategy


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.




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


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 %




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


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


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

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Shar

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(15

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Revenue CAGR Stock CAGR

-20.0

-10.0

0.0

10.0

20.0

30.0

Pet

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(10

-13

)

Joe

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(13

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)

Dr.

Arm

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(10

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(13

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0.0

13.0

26.0

39.0

52.0

65.0

Dav

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(10

-16

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Ad

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(15

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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


Honeywell India listed versus unlisted entity


ABB parent revenue


ABB India revenue


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


%

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


%

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


%

INR

Mn

Indian listed entity revenue EBITDA margin




Schneider parent revenue


Schneider India listed versus unlisted entity


Siemens parent revenue


Siemens India listed versus unlisted entity

Source: Company, Edelweiss Research * Unlisted includes 4 large entities in India

Emerson parent revenue


Emerson India revenue


10.0

11.0

12.0

13.0

14.0

15.0

23,000

24,000

25,000

26,000

27,000

28,000


%

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


%

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


%

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


%

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


%

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


%

INR

Mn

Revenue EBITDA margin




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…


…the same is true for Siemens as well


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.




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.





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.


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




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

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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


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




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

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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

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10

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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.




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.




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


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




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


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


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




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


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.




Time to market could come down significantly across multiple sectors





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

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6.0

12.0

18.0

24.0

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20

00

20

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(IN

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Gross Block (LHS) Capex OCF

FY12-20

GB CAGR: 7% OCF CAGR: 16%

FY00-12:

GB CAGR: 31% OCF CAGR: 12%




Manufacturing capex driven by global trade...

Source: Bloomberg, Edelweiss Research

…as well as global manufacturing prices


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...


…but lags w.r.t closest peers


(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

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FY7

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FY8

0

FY9

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(%)

(IN

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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

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20

01

20

03

20

05

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07

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(%)

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

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20

05

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07

20

09

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11

20

13

20

15

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17

20

19

(%)

Manufacturing % of GDP (EM)

China Malaysia Indonesia India




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…


…could drive additional investment of ~INR3.5tn on a best case basis


0

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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.




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


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


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





Global & Indian companies Revenue and EBITDA CAGR (CY10-19)


Global & Indian companies OCF-EBITDA & FCF-PAT (CY17-19)


Global & Indian companies ROE and 1 year forward PE


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


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 (%)




Industrial automation leaders translating better cash/growth


Significant scope for revenue/margin scale up for ABB, SIEM


Valuation snapshot – Coverage universe


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

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Avg

FY1

9-2

0 E

BIT

DA

mar

gin

(%

)

Avg FY19-20 FA turns (x)




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


Edelweiss model portfolio weighting


L&T50%

ABB 15%

Honeywell12%

Siemens10%

BEL5%

KEC5%

BHFC3%




Edelweiss portfolio performance versus benchmark


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


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




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




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




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




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




Yaskawa MPX2600 painting robot

Source: Company

Yaskawa servo motor

Source: Company

Robodrill by FANUC

Source: Company

Motion control systems by FANUC

Source: Company




COMPANIES


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

https://www.edelweissresearch.com/Research/Company?Id=4522

https://www.edelweissresearch.com/Podcasts?Search=Honeywell+Automation&FromDate=&ToDate=28%2F01%2F2021

https://www.edelweissresearch.com/CorporateAccess

https://www.edelweissresearch.com/Videos


HONEYWELL AUTOMATION


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.




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




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




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


Rise share of HAIL revenues in Honeywell Inc.


* 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




Market potential in excess of USD300bn


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


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




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.


HAIL--Domestic correlation to BSE200 growth

Source: Capitaline, Company, Edelweiss Research

BSE 200 segment-wise revenue CAGR


(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




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




Pressure sensors

Source: Company

Motion and position sensors

Source: Company




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


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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.




One-year forward P/B


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


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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





Financial Outlook

Exports to drive growth


Recurring services share moving up…


…with rising mandates for Indian entity


Margin expansion to sustain


Cash flow translation to remain healthy


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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.




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.




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




Product profile

Source: Company

Various businesses catering to variety of segments

Process solution


Building solution


Environment control


Sensing & control


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




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

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Manufacturing sector in India, especially

process industries remain one of the prime

domestic revenue stream for HAIL.




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.




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


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


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.




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


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


0.0

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14.0

21.0

28.0

35.0

Siemens ABB India Honeywell Cummins

(%)

Service revenue as % of total revenue


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.


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

https://www.edelweissresearch.com/Research/Company?Id=2076

https://www.edelweissresearch.com/Podcasts?Search=ABB+India&FromDate=&ToDate=28%2F01%2F2021

https://www.edelweissresearch.com/CorporateAccess

https://www.edelweissresearch.com/Videos


ABB INDIA


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



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


Higher exports driving margins


4.0

5.0

6.0

7.0

8.0

9.0

0.0

50.0

100.0

150.0

200.0

250.0


(%)

(%)

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


(%)

(%)

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.


ABB INDIA


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



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


ABB INDIA


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


Electrification – ABBS global segment mix


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



Industrial automation – ABBS global segment mix


Motion – ABBs global segment mix


Robotics and Discrete automation


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.


ABB INDIA


Disruptions in manufacturing has led to growth for short-cycle products in ABB in recent years


Parents R&D spend as a % of revenues is rising and is ahead of peers


New products - Emax 2 – Digital circuit breaker


Ultra low harmonic drives


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


(%)

(USD

mn

)


ABB INDIA



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



ABB INDIA


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)


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


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



Global & Indian MNC companies ROE and 1 year forward PE

Source: Bloomberg, Company, Edelweiss Research

One-year forward PE band


One-year forward PB band


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


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


ABB INDIA


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


ABB INDIA



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

)


ABB INDIA


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ABB INDIA



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This research report is a product of Edelweiss Securities Limited ("ESL"), which is the employer of the research analysts who have prepared the research report. The research analysts preparing the research report are resident outside the Canada and are not associated persons of any Canadian registered adviser and/or dealer and, therefore, the analysts are not subject to supervision by a Canadian registered adviser and/or dealer, and are not required to satisfy the regulatory licensing requirements of the Ontario Securities Commission, other Canadian provincial securities regulators, the Investment Industry Regulatory Organization of Canada and are not required to otherwise comply with Canadian rules or regulations regarding, among other things, the research analysts' business or relationship with a subject company or trading of securities by a research analyst.

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This report is distributed in Hong Kong by Edelweiss Securities (Hong Kong) Private Limited (ESHK), a licensed corporation (BOM -874) licensed and regulated by the Hong Kong Securities and Futures Commission (SFC) pursuant to Section 116(1) of the Securities and Futures Ordinance “SFO”. This report is intended for distribution only to “Professional Investors” as defined in Part I of Schedule 1 to SFO. Any investment or investment activity to which this document relates is only available to professional investor and will be engaged only with professional investors.” Nothing here is an offer or solicitation of these securities, products and services in any jurisdiction where their offer or sale is not qualified or exempt from registration. The report also does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of any individual recipients. The Indian Analyst(s) who compile this report is/are not located in Hong Kong and is/are not licensed to carry on regulated activities in Hong Kong and does not / do not hold themselves out as being able to do so. Copyright 2009 Edelweiss Research (Edelweiss Securities Ltd). All rights reserved.

Aditya Narain

Head of Research

[email protected]

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai 400 098Tel: +91 22 4009 4400. Email: [email protected]

january 2021 sector report

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