Urbanization In Developing Markets Is Fueling United Technologies Growth

May.31.13 | About: United Technologies (UTX)
    Quick Take
  • In developing countries like China and India, urbanization is behind spending growth on building homes, commercial complexes and infrastructure.
  • This is growing the market for elevators, heating and ventilation systems, building fire-safety and security systems that are manufactured by United Technologies (UTC).
  • In addition, UTC is focusing on innovation, cost-cutting and portfolio rationalization to maintain its leadership in the global elevator, heating and air-conditioning, and building safety and security markets.

We had recently written on how United Technologies is benefiting from the growing demand from commercial aviation. In this article, we focus on how rising global urbanization is driving sales and profits at United Technologies‘ (NYSE:UTX) building market related businesses - Otis and Climate, Controls & Security.

In the emerging countries, especially China and India, a large number of people are migrating from rural areas to the cities, which is raising the government and private spending on housing, commercial construction and infrastructure. New building constructions are driving demand for new equipment installations of elevators and escalators, heating, ventilation and air-conditioning (HVAC) systems, and building fire-safety and security systems that are manufactured by United Technologies.

In 2012, Otis generated $12 billion and Climate, Controls & Security, which consists of UTC’s HVAC, fire-safety and security businesses, generated $17.1 billion of the company’s $57.7 billion revenues [UTC’s 2012 10-K, February 7 2013, www.utc.com]. We currently have a stock price estimate of $109 for UTC, around 15% ahead of its current market price.

Rising Global Urbanization Will Drive Growth At Otis and Climate, Controls & Security

In Western Europe and the U.S., over 80% of the population lives in urban areas [Urbanization by country, May 24 2013, www.wikipedia.com]. In comparison, in the developing regions of Asia-Pacific and Latin America, a much lower percentage of population lives in the cities. In China around 50% of the population, and in India around 31% of the population lives in urban areas. As urbanization levels in these developing regions rise with time, the sales of elevators/escalators, HVAC systems, building fire-safety and security systems that are manufactured by UTC will also rise.

Additionally, despite more than a decade of high economic growth experienced by some of these developing countries, including China and India, enormous growth potential remains in them. For instance, in the elevator market, China and India currently have 1.7 and 0.2 elevators per 1,000 people, respectively, compared to 10.9 elevators per 1,000 people in Western Europe. Similarly, on HVAC systems, China and India spend $7 and $1 per person, respectively, compared to $38 spent per person in the U.S.; and on commercial refrigeration, China and India spend $0.3 and $0.1 per person, respectively, compared to $8 spent per person in the U.S [UTC’s presentation at the Electrical Products Group conference, May 21 2013, www.utc.com]. This low current penetration of elevators, HVAC systems and commercial refrigeration units in the developing countries provides for long term growth potential at the building market related businesses of UTC.

In the near term, equipment orders at both Otis and Climate, Controls & Security (NYSE:CCS) are expected to post healthy growth. At Otis, over the last three quarters, new installation orders have grown at rates higher than 10%, and at CCS, equipment orders over the last two quarters have grown at around 5%. Recently, Otis also won its largest ever order from India involving supply, installation and maintenance of 670 elevator/escalator units for the Hyderabad metro rail project [Otis wins a large contract in India, April 23 2013, www.otisworldwide.com].

Product Innovation And Other Measures Will Help UTC Maintain Market Leadership

Apart from growth driven by urbanization, UTC on its part, is also taking several steps to grow its sales and maintain its leadership position in these markets. The company is laying emphasis on innovation focused on local requirements. In the recent past, UTC has launched several new commercial products that include Gen2 Core, Gen2 Flex II and Gen2 Switch Otis elevators, high efficiency roof top Carrier air-conditioners, acoustic gas leak detection systems, Infinity series of heat pumps and Prism video management security systems. During 2009-12, at CCS, the company also raised its research and development expense as a percentage of its sales by 60 basis points.

In addition, at Otis, UTC has undertaken extensive restructuring and cost-cutting to grow its margins as well as to price its products more competitively, and at CCS, it has rationalized its product portfolio, exiting from low-growth and low-margin businesses like man guarding, bottle coolers, fire hoses and trucks.

Disclosure: No positions