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Sunday, October 4, 2009

Honeywell Automation India Ltd and McNally Bharat Engineering Company Ltd:Future growth prospects and outlook

1)Scripscan:Honeywell Automation India Ltd

Story:Look at a company like Honeywell Automation India Ltd (HAIL) which registered a sales growth of 2%, 17% and 25%, respectively, in the past three quarters. HAIL is a provider of integrated automation and software solutions. It operates in five different verticals – process solutions, building solutions, global engineering services, environmental & combustion control and sensing & control business. Its business growth is linked to new projects – industrial and infrastructure. Unless these two segments slow down sharply, its revenue growth will continue. Ongoing projects are unlikely to be shelved, now that the scare of a severe slowdown in growth and a liquidity crisis has dissipated. Honeywell has won some prestigious projects like the Delhi Airport Terminal & Building Management System and Delhi Metro Rail Tunnel Ventilation Control system. Operating profit in the September and December quarters was 35% and 19%, respectively. In March, operating profit surged to 161%. The average operating profit margin for the past three quarters was 15%. For a foreign company that comes with a minimum level of governance, the stock is cheap.A good safe heaven at dips.

2)Scripscan:McNally Bharat Engineering Company Ltd

Story:McNally Bharat Engineering Co Ltd reported a sales growth of 81%, 92% and 161%,respectively, in the past three quarters. It is an engineering company that executes material-handling projects for power, steel, mineral and mining industries. The order book stood at Rs2,415 crore as on 31 March 2009. The company is also bidding for projects worth Rs4,075 crore. Despite the slowdown in steel and non-ferrous industries, operating profit growth is robust – 117%, 116% and 175%, respectively, in the past three quarters over the corresponding period last year. There are two major drawbacks of this stock. One, operating profit margin is a low 9% which means it has very little cushion; and two, the company is controlled by the BM Khaitan group (GP Birla group has a 24% stake) and neither of these two groups has a great record of creating shareholder value.McNally Bharat has signed an MoU with KHD Humboldt Wedag International GMBH and its subsidiaries in Germany, India and Hong Kong to acquire their engineering workshop in Cologne, Germany and their coal and mineral technology (CMT) business based in Germany, India, South Africa, Russia and China. Buy the stock at around Rs140.

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