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GEOMETRIC LIMITED
RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.77
FY12E P/E: 6.2X
q 4QFY11 results of Geometric were below expectations on the operational
side. A higher other income component led to PAT being higher than
estimates.
q Volumes grew by 2.6%, which was marginally lower than our estimates.
This comes on the back of an8.6% rise in volumes in 3Q and likely indicates
improving demand scenario.
q EBIDTA margins rose on a sequential basis by 97bps. However, they were
disappointing as they contained reversals of provisions.
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 reduced to $7.25mn ($9.42mn). 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 4QFY11 results.
For FY12, higher tax rates may restrict PAT growth to 10.6%.
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.10.2 in FY12.
q Our DCF - based price target works out to Rs.77 (Rs.87 earlier), based on
FY12E earnings. We maintain ACCUMULATE. Our exit multiple works out
to 8x FY12E EPS.
n Revenues during the quarter were higher by 4.2% QoQ. In USD terms, the
growth was 4.4%.
n This growth came on the back of a 2.6% rise in volumes. Pricing was higher and
cross currency impact was 0.5%.
n The volume growth was slightly lower than our estimates. In fact, 4Q saw a positive
impact on revenues because of some closure of FP projects. Volume growth
had been strong for Geometric in FY11 (5.9% rise in 1Q, 7% rise in 2Q and
8.9% in 3Q).
n Volumes have grown on the back of higher wallet share from existing accounts.
Geometric's top client gave 4% more revenues QoQ and the Top 10 gave 3%
higher revenues QoQ.
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 remained strong in Industrial customers, which gave 5% (10%)
higher revenues QoQ.
n This is in line with the company's focus on industrial accounts. The company has
been de-focusing the ISVs, which saw revenues grow by only 2% QoQ.
n On a geographical basis, US revenues (72% of revenues) rose 3% QoQ, while
Europe grew by a faster 9%. This is the third quarter of growth in Europe after a
15% rise in 2Q and 10% rise in 3Q. This is encouraging keeping in mind the
sustainability of the growth rates in the medium to long term.
n Europe is the largest market for several engineering services but Geometric derives
only about 17% of its revenues from this geography. It is thus, focusing on
strongly growing revenues from this geography.
n Engineering services revenues are seeing traction as clients seek cost reductions.
We note that, the US subsidiary reported profits of $886,000 ($426,000) during
the quarter.
Margins flat QoQ - excluding one - offs
n EBITDA margins were almost flat on a QoQ basis. This is after excluding the
impact of a write back of provision for bad-debts of about Rs.9.6mn. This was
disappointing.
n We had anticipated an improvement in margins. The management had also
guided to an improvement in margins in 4Q.
n The margins were impacted by lower utilization rates as the company added 246
employees on a net basis (total employees in 4Q - 3905).
n In 3Q. the company had given 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 major lever for the company to improve and
sustain margins. The company has other levers like increasing off-shore content,
SG&A leverage, billing rate increases and non-linearity to protect and improve
margins.
n Currently, Geometric has high utilization rates and also faces pressures from salary
increases / rupee appreciation.
n The company will be increasing off-shore salaries by 12-14% WEF April 2011
and on-site salaries marginally.
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
and believes the outlook for IT spends has improved.
n Thus, we have incorporated a revenue growth of 26% for FY12. Rupee is expected
to remain at about 45 per USD in FY12E.
n Because of the factors mentioned above, we have assumed marginal improvement
in margins over FY11E despite the low base.
n We have also assumed higher tax rates of about 26% in FY12 and consequently,
net profit is expected to go up to 635mn, a growth of about 11%. Earnings are
expected to be at Rs.10.2 per share in FY12E.
Valuations
n Our FY12E DCF - based price target for Geometric stands at Rs.77. 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.77
FY12E P/E: 6.2X
q 4QFY11 results of Geometric were below expectations on the operational
side. A higher other income component led to PAT being higher than
estimates.
q Volumes grew by 2.6%, which was marginally lower than our estimates.
This comes on the back of an8.6% rise in volumes in 3Q and likely indicates
improving demand scenario.
q EBIDTA margins rose on a sequential basis by 97bps. However, they were
disappointing as they contained reversals of provisions.
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 reduced to $7.25mn ($9.42mn). 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 4QFY11 results.
For FY12, higher tax rates may restrict PAT growth to 10.6%.
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.10.2 in FY12.
q Our DCF - based price target works out to Rs.77 (Rs.87 earlier), based on
FY12E earnings. We maintain ACCUMULATE. Our exit multiple works out
to 8x FY12E EPS.
n Revenues during the quarter were higher by 4.2% QoQ. In USD terms, the
growth was 4.4%.
n This growth came on the back of a 2.6% rise in volumes. Pricing was higher and
cross currency impact was 0.5%.
n The volume growth was slightly lower than our estimates. In fact, 4Q saw a positive
impact on revenues because of some closure of FP projects. Volume growth
had been strong for Geometric in FY11 (5.9% rise in 1Q, 7% rise in 2Q and
8.9% in 3Q).
n Volumes have grown on the back of higher wallet share from existing accounts.
Geometric's top client gave 4% more revenues QoQ and the Top 10 gave 3%
higher revenues QoQ.
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 remained strong in Industrial customers, which gave 5% (10%)
higher revenues QoQ.
n This is in line with the company's focus on industrial accounts. The company has
been de-focusing the ISVs, which saw revenues grow by only 2% QoQ.
n On a geographical basis, US revenues (72% of revenues) rose 3% QoQ, while
Europe grew by a faster 9%. This is the third quarter of growth in Europe after a
15% rise in 2Q and 10% rise in 3Q. This is encouraging keeping in mind the
sustainability of the growth rates in the medium to long term.
n Europe is the largest market for several engineering services but Geometric derives
only about 17% of its revenues from this geography. It is thus, focusing on
strongly growing revenues from this geography.
n Engineering services revenues are seeing traction as clients seek cost reductions.
We note that, the US subsidiary reported profits of $886,000 ($426,000) during
the quarter.
Margins flat QoQ - excluding one - offs
n EBITDA margins were almost flat on a QoQ basis. This is after excluding the
impact of a write back of provision for bad-debts of about Rs.9.6mn. This was
disappointing.
n We had anticipated an improvement in margins. The management had also
guided to an improvement in margins in 4Q.
n The margins were impacted by lower utilization rates as the company added 246
employees on a net basis (total employees in 4Q - 3905).
n In 3Q. the company had given 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 major lever for the company to improve and
sustain margins. The company has other levers like increasing off-shore content,
SG&A leverage, billing rate increases and non-linearity to protect and improve
margins.
n Currently, Geometric has high utilization rates and also faces pressures from salary
increases / rupee appreciation.
n The company will be increasing off-shore salaries by 12-14% WEF April 2011
and on-site salaries marginally.
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
and believes the outlook for IT spends has improved.
n Thus, we have incorporated a revenue growth of 26% for FY12. Rupee is expected
to remain at about 45 per USD in FY12E.
n Because of the factors mentioned above, we have assumed marginal improvement
in margins over FY11E despite the low base.
n We have also assumed higher tax rates of about 26% in FY12 and consequently,
net profit is expected to go up to 635mn, a growth of about 11%. Earnings are
expected to be at Rs.10.2 per share in FY12E.
Valuations
n Our FY12E DCF - based price target for Geometric stands at Rs.77. 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.
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