Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
GEOMETRIC LIMITED
RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.87
FY12E P/E: 7.6X
q 3QFY11 results of Geometric were a mixed bag for us. While revenues
came in above expectations, margins disappointed.
q Volumes grew by 8.9%, which was impressive; more so as it came after
a 7% QoQ rise in 2Q. This likely indicates improving demand scenario
and better execution.
q EBIDTA margins fell on a sequential basis by 143bps. Margins disappointed
even after considering a one-time impact.
q Mid-term salary hikes, variable pay and higher training costs impacted
margins, validating our concerns over lack of margin levers.
q The management has indicated that, more discretionary budgets are being
released and there is demand from both, OEMs and industrial customers.
q The amount of new orders booked increased to $9.42mn ($8.3mn) after
declining for two quarters. The company has invested more in business
generation activities, and will continue to do so, we believe.
q Geometric is now focusing on verticalised services and solutions to increase
relevance to customers. Value engineering and cost reduction for
clients are the focus areas.
q We have adjusted earnings estimates to accommodate for 3QFY11 results.
For FY11E we expect a revival in volumes to drive a c19% PAT
growth. For FY12, higher tax rates may restrict PAT growth to 14%.
q We have been indicating that, maintaining margins will be a challenge
for Geometric due to the high capacity utilization ratio (about 90%) and
need to invest in S&M. Consequently, we have assumed margins to move
in a narrow band.
q We expect an EPS of Rs.9.1, which is expected to move up to Rs.10.4 in
FY12.
q Our DCF - based price target works out to Rs.87, based on FY12E earnings.
We maintain ACCUMULATE. Our exit multiple works out to 8x
FY12E EPS.
n Revenues during the quarter were higher by 7.4% QoQ. In ISD terms, the growth
was even better at 10.5%.
n This growth came on the back of an 8.9% rise in volumes. Pricing was up by 1%
and cross currency impact was 0.2%.
n Volume growth has been strong for Geometric in FY11 (5.9% rise in 1Q, 7% rise
in 2Q and 8.9% in 3Q).
n Volumes grew on the back of higher wallet share from existing accounts. While
Geometric's top client gave 7% more revenues QoQ, the top 5 accounts grew by
a solid 11% QoQ (32% in 2Q).
n Management commentary indicates a degree of stability in top clients and certain
accounts which were sharply impacted by client ramp downs and pricing
pressure in the earlier quarters.
n Of late, most of the revenue stability has come about on account of increasing
traction in accounts like Ford and Goodyear (largely on-site). Offsite revenues too
have grown in USD terms as auto client accounts like Caterpillar and Volvo
grew
n Some OEMs, which have had management changes, are in the process of reassigning
work flow to vendors like Modern.
n Revenue traction was strong in Industrial customers, which gave 10% higher revenues
QoQ (14%).
n This is in line with the company's focus on industrial accounts. The company has
been de-focusing the ISVs.
n On a geographical basis, US revenues (73% of revenues) rose 7% QoQ, while
Europe grew by a faster 10%. This is the second quarter of growth in Europe
after a 15% rise in 2Q. This is encouraging keeping in mind the sustainability of
the growth rate sin the medium to long term
n Engineering services revenues are seeing traction as clients seek cost reductions.
We note that, the US subsidiary reported profits of $426,000 ($3,40,000) during
the quarter.
Margins down QoQ
n Continuing with the significant volatility, EBITDA margins were lower QoQ by
133bps. This was disappointing
n There was a one off G&A expense of Rs.12.1mn, which impacted the profitability.
However, even after considering this, margins came below expectations.
n We had anticipated an improvement in margins. The management had also
guided to an improvement of about 200bps in 2H over the 2Qmargins.
n The company did mid-term increments, gave variable pay and paid for training
of employees, with a view to control attrition which was at 19.8%
n While the significant volatility makes it difficult to forecast margins, we believe
that, revenue growth will be the only major lever for the company to improve
and sustain margins.
n Currently, Geometric has high utilization rates and also faces pressures from salary
increases / rupee appreciation.
Financial prospects - make marginal changes
n While still cautious on future prospects, most companies have indicated confidence
on volume growth for the current fiscal, based on their client interactions.
n With discretionary spends likely up, we believe Geometric should see higher volumes.
n The management in its interaction has said that the demand environment is better
than 2Q ago and believes the outlook for IT spends has improved.
n Thus, we have incorporated a revenue growth of 21% for FY11 and 23% for
FY12. Rupee is expected to remain strong at about 45 per USD in FY12E.
n Because of the factors mentioned above, we have assumed marginal improvement
in margins over FY12E despite the low base.
n We have also assumed higher tax rates of about 20% in FY12 and consequently,
net profit is expected to go up to 633mn, a growth of about 14%. Earnings are
expected to be at Rs.10.4 per share in FY12E.
Valuations
n Our FY12E DCF - based price target for Geometric stands at Rs.87. At our TP, our
FY12E earnings will be discounted by 8x, which we believe is fair.
n Thus, we maintain ACCUMULATE and will look at an improvement in the margin
profile of Geometric, to become more bullish on the stock.
n INR appreciation beyond our assumed levels and slower revival in user economies
pose downside risks to our recommendation.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
GEOMETRIC LIMITED
RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.87
FY12E P/E: 7.6X
q 3QFY11 results of Geometric were a mixed bag for us. While revenues
came in above expectations, margins disappointed.
q Volumes grew by 8.9%, which was impressive; more so as it came after
a 7% QoQ rise in 2Q. This likely indicates improving demand scenario
and better execution.
q EBIDTA margins fell on a sequential basis by 143bps. Margins disappointed
even after considering a one-time impact.
q Mid-term salary hikes, variable pay and higher training costs impacted
margins, validating our concerns over lack of margin levers.
q The management has indicated that, more discretionary budgets are being
released and there is demand from both, OEMs and industrial customers.
q The amount of new orders booked increased to $9.42mn ($8.3mn) after
declining for two quarters. The company has invested more in business
generation activities, and will continue to do so, we believe.
q Geometric is now focusing on verticalised services and solutions to increase
relevance to customers. Value engineering and cost reduction for
clients are the focus areas.
q We have adjusted earnings estimates to accommodate for 3QFY11 results.
For FY11E we expect a revival in volumes to drive a c19% PAT
growth. For FY12, higher tax rates may restrict PAT growth to 14%.
q We have been indicating that, maintaining margins will be a challenge
for Geometric due to the high capacity utilization ratio (about 90%) and
need to invest in S&M. Consequently, we have assumed margins to move
in a narrow band.
q We expect an EPS of Rs.9.1, which is expected to move up to Rs.10.4 in
FY12.
q Our DCF - based price target works out to Rs.87, based on FY12E earnings.
We maintain ACCUMULATE. Our exit multiple works out to 8x
FY12E EPS.
n Revenues during the quarter were higher by 7.4% QoQ. In ISD terms, the growth
was even better at 10.5%.
n This growth came on the back of an 8.9% rise in volumes. Pricing was up by 1%
and cross currency impact was 0.2%.
n Volume growth has been strong for Geometric in FY11 (5.9% rise in 1Q, 7% rise
in 2Q and 8.9% in 3Q).
n Volumes grew on the back of higher wallet share from existing accounts. While
Geometric's top client gave 7% more revenues QoQ, the top 5 accounts grew by
a solid 11% QoQ (32% in 2Q).
n Management commentary indicates a degree of stability in top clients and certain
accounts which were sharply impacted by client ramp downs and pricing
pressure in the earlier quarters.
n Of late, most of the revenue stability has come about on account of increasing
traction in accounts like Ford and Goodyear (largely on-site). Offsite revenues too
have grown in USD terms as auto client accounts like Caterpillar and Volvo
grew
n Some OEMs, which have had management changes, are in the process of reassigning
work flow to vendors like Modern.
n Revenue traction was strong in Industrial customers, which gave 10% higher revenues
QoQ (14%).
n This is in line with the company's focus on industrial accounts. The company has
been de-focusing the ISVs.
n On a geographical basis, US revenues (73% of revenues) rose 7% QoQ, while
Europe grew by a faster 10%. This is the second quarter of growth in Europe
after a 15% rise in 2Q. This is encouraging keeping in mind the sustainability of
the growth rate sin the medium to long term
n Engineering services revenues are seeing traction as clients seek cost reductions.
We note that, the US subsidiary reported profits of $426,000 ($3,40,000) during
the quarter.
Margins down QoQ
n Continuing with the significant volatility, EBITDA margins were lower QoQ by
133bps. This was disappointing
n There was a one off G&A expense of Rs.12.1mn, which impacted the profitability.
However, even after considering this, margins came below expectations.
n We had anticipated an improvement in margins. The management had also
guided to an improvement of about 200bps in 2H over the 2Qmargins.
n The company did mid-term increments, gave variable pay and paid for training
of employees, with a view to control attrition which was at 19.8%
n While the significant volatility makes it difficult to forecast margins, we believe
that, revenue growth will be the only major lever for the company to improve
and sustain margins.
n Currently, Geometric has high utilization rates and also faces pressures from salary
increases / rupee appreciation.
Financial prospects - make marginal changes
n While still cautious on future prospects, most companies have indicated confidence
on volume growth for the current fiscal, based on their client interactions.
n With discretionary spends likely up, we believe Geometric should see higher volumes.
n The management in its interaction has said that the demand environment is better
than 2Q ago and believes the outlook for IT spends has improved.
n Thus, we have incorporated a revenue growth of 21% for FY11 and 23% for
FY12. Rupee is expected to remain strong at about 45 per USD in FY12E.
n Because of the factors mentioned above, we have assumed marginal improvement
in margins over FY12E despite the low base.
n We have also assumed higher tax rates of about 20% in FY12 and consequently,
net profit is expected to go up to 633mn, a growth of about 14%. Earnings are
expected to be at Rs.10.4 per share in FY12E.
Valuations
n Our FY12E DCF - based price target for Geometric stands at Rs.87. At our TP, our
FY12E earnings will be discounted by 8x, which we believe is fair.
n Thus, we maintain ACCUMULATE and will look at an improvement in the margin
profile of Geometric, to become more bullish on the stock.
n INR appreciation beyond our assumed levels and slower revival in user economies
pose downside risks to our recommendation.
No comments:
Post a Comment