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GEOMETRIC LIMITED
PRICE: RS.45 RECOMMENDATION: BUY
TARGET PRICE: RS.61 FY13E P/E: 4.2X
q 2QFY12 results were better than our estimates.
q Volumes grew by about 7%, partly due to the consolidation of Delmia,
which was acquired by 3DPLM, the partly owned subsidiary of Geometric.
Delmia's financials were not disclosed by the company.
q EBIDTA margins improved due to the rupee depreciation, pyramid impact
and better utilization levels.
q The management has indicated that, it is not witnessing any project cancellations
or deferrals. Also, there is demand from both, OEMs and industrial
customers.
q The amount of new orders booked fell marginally to about $8mn during
the quarter ($9.4mn). The company is investing 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 The management has indicated greater focus on improving margins
through levers like utilization rates and G&A leverage along with better
utilization of the employee pyramid.
q Consultancy charges may set off any margin improvement over the next
2 - 3 quarters. Company has retained a consulting firm to restructure
business operations.
q We have adjusted earnings estimates to accommodate for 2QFY12 results.
We also introduce FY13E earnings. Our earnings estimates stand at
Rs.9.4 and Rs.10.7, respectively for FY12 and FY13, respectively.
q Our DCF - based price target works out to Rs.61 (Rs.67 earlier), based on
FY13E earnings. We upgrade the stock to BUY based solely on valuations.
q Further signs of stability and sustainability in the revenue profile and an
improvement in the margin profile of Geometric will make us more bullish
on the stock. Our exit multiple works out to 6x FY13E EPS.
n Revenues during the quarter were higher by 11% QoQ. In USD terms, the
growth was 7.3%.
n The growth came partly on the back of the consolidation of Delmia with the
partly owned subsidiary of Geometric, 3DPLM.
n We believe that, about 3% growth could have come due to this consolidation.
The management has declined to give separate numbers for the same.
n On an organic business, we believe that, volumes grew by 3.5%.
n Volumes have likely grown on the back of higher wallet share from existing accounts.
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) and Caterpillar and
Volvo (off-site).
n Geometric's top client gave 28% more revenues QoQ partly due to the inorganic
initiative. The Top 10 clients gave about 10% higher revenues organically (INR
terms), we believe.
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 During the quarter, Geometric added $8mn worth of orders. It has made some
good entries into accounts, which will ramp up in the future quarters.
n While the company has seen good scale up in the Top clients, it expects the
remaining accounts to contribute to growth in future quarters.
n We understand that, Geometric has become the Tier ! vendor for a large
aeroplane manufacturer and revenues have started flowing and should improve
over the next few quarters.
n Within geographies, US revenues have risen QoQ and that geography is expected
to contribute to a large part of the growth.
n The overall realizations have moved up by about 0.8%. The company has got
some price increases from clients but expects them to remain stable in the near
future, due to the macro uncertainties.
Macro scene conducive
n Within verticals, automotive is doing well in terms of demand as companies are
looking at innovative ways of reducing costs for their solutions. The company is
witnessing more demand for solution-orientation.
n In aerospace, companies have very long order cycles of upto 5 - 7 years. This
cushions the impact of any economic slowdown on demand for IT companies.
Thus, Geometric has not seen any impact on its business from these companies.
n On the industrial equipment side also, the company is seeing no impact of the
current uncertain macro scene.
Margins improved QoQ
n EBITDA margins improved by about 447bps QoQ. This was due to the currency
impact, utilization of the pyramid more effectively and also improved employee
utilization rates.
n The improvement in margins was higher than expected.
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 is looking at other levers like utilization rates, the
pyramid effect, increasing off-shore content, G&A leverage, billing rate increases
and non-linearity to protect and improve margins.
n Currently, Geometric has high utilization rates, we believe.
n The company is taking services of a consultancy firm to restructure the various
processes of the company. These charges are expected to set off any potential
improvement in margins in the next two quarters.
Other income and EO tax provision
n The company had a revaluation gain of about Rs.62mn during the quarter, which
helped the PAT growth.
n Geometric had hedge position as on 30th September 2011 of about $180mn at
an average rate of Rs.48.67 / USD.
n During the quarter, Geometric's subsidiary, 3DPLM, bought out one building
from Geometric on which Geometric made a gain and paid tax on the same.
n On a consolidated basis, while the transaction netted off, the one-time tax is
reflected in the results.
n While the cash balance has increased, so has the debt which 3DPLM took for
the purchase.
Financial prospects
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 are likely up, we believe Geometric should see higher
volumes. However, there may be volatility in the near term in case the delays in
decision making persists.
n We have incorporated a revenue growth of 26% for FY12 (including Delmia).
Rupee is expected to be at about Rs.48 per USD in 2H.
n Margins are expected to improve due to the rupee depreciation, higher utilization
and the pyramid effect. PAT growth is expected to be muted due to higher
taxes.
n We introduce FY13 earnings estimates. Revenues are expected to rise by about
15%. Rupee is assumed to move to an average of about Rs.46 / USD in FY13.
n Margins are expected to be lower due to the rupee appreciation and salary
hikes. The gains are expected to be partly offset by the benefits from the restructuring
currently underway in the company.
n PAT is expected to grow by 14% leading to an EPS of Rs.10.7.
Valuations
n Our DCF - based price target for Geometric stands at Rs.61. At our TP, our FY13E
earnings will be discounted by 5.6x, which we believe is fair.
n With more solutions approach being demanded by clients, Geometric needs to
develop the consulting capability and also package its products as a solution by
blending in with its software & engineering services.
n We upgrade the stock to BUY based purely on the potential upsides. We will
wait for more stability and sustainability in the revenue profile and will also look
at an improvement in the margin profile of Geometric before becoming 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
PRICE: RS.45 RECOMMENDATION: BUY
TARGET PRICE: RS.61 FY13E P/E: 4.2X
q 2QFY12 results were better than our estimates.
q Volumes grew by about 7%, partly due to the consolidation of Delmia,
which was acquired by 3DPLM, the partly owned subsidiary of Geometric.
Delmia's financials were not disclosed by the company.
q EBIDTA margins improved due to the rupee depreciation, pyramid impact
and better utilization levels.
q The management has indicated that, it is not witnessing any project cancellations
or deferrals. Also, there is demand from both, OEMs and industrial
customers.
q The amount of new orders booked fell marginally to about $8mn during
the quarter ($9.4mn). The company is investing 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 The management has indicated greater focus on improving margins
through levers like utilization rates and G&A leverage along with better
utilization of the employee pyramid.
q Consultancy charges may set off any margin improvement over the next
2 - 3 quarters. Company has retained a consulting firm to restructure
business operations.
q We have adjusted earnings estimates to accommodate for 2QFY12 results.
We also introduce FY13E earnings. Our earnings estimates stand at
Rs.9.4 and Rs.10.7, respectively for FY12 and FY13, respectively.
q Our DCF - based price target works out to Rs.61 (Rs.67 earlier), based on
FY13E earnings. We upgrade the stock to BUY based solely on valuations.
q Further signs of stability and sustainability in the revenue profile and an
improvement in the margin profile of Geometric will make us more bullish
on the stock. Our exit multiple works out to 6x FY13E EPS.
n Revenues during the quarter were higher by 11% QoQ. In USD terms, the
growth was 7.3%.
n The growth came partly on the back of the consolidation of Delmia with the
partly owned subsidiary of Geometric, 3DPLM.
n We believe that, about 3% growth could have come due to this consolidation.
The management has declined to give separate numbers for the same.
n On an organic business, we believe that, volumes grew by 3.5%.
n Volumes have likely grown on the back of higher wallet share from existing accounts.
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) and Caterpillar and
Volvo (off-site).
n Geometric's top client gave 28% more revenues QoQ partly due to the inorganic
initiative. The Top 10 clients gave about 10% higher revenues organically (INR
terms), we believe.
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 During the quarter, Geometric added $8mn worth of orders. It has made some
good entries into accounts, which will ramp up in the future quarters.
n While the company has seen good scale up in the Top clients, it expects the
remaining accounts to contribute to growth in future quarters.
n We understand that, Geometric has become the Tier ! vendor for a large
aeroplane manufacturer and revenues have started flowing and should improve
over the next few quarters.
n Within geographies, US revenues have risen QoQ and that geography is expected
to contribute to a large part of the growth.
n The overall realizations have moved up by about 0.8%. The company has got
some price increases from clients but expects them to remain stable in the near
future, due to the macro uncertainties.
Macro scene conducive
n Within verticals, automotive is doing well in terms of demand as companies are
looking at innovative ways of reducing costs for their solutions. The company is
witnessing more demand for solution-orientation.
n In aerospace, companies have very long order cycles of upto 5 - 7 years. This
cushions the impact of any economic slowdown on demand for IT companies.
Thus, Geometric has not seen any impact on its business from these companies.
n On the industrial equipment side also, the company is seeing no impact of the
current uncertain macro scene.
Margins improved QoQ
n EBITDA margins improved by about 447bps QoQ. This was due to the currency
impact, utilization of the pyramid more effectively and also improved employee
utilization rates.
n The improvement in margins was higher than expected.
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 is looking at other levers like utilization rates, the
pyramid effect, increasing off-shore content, G&A leverage, billing rate increases
and non-linearity to protect and improve margins.
n Currently, Geometric has high utilization rates, we believe.
n The company is taking services of a consultancy firm to restructure the various
processes of the company. These charges are expected to set off any potential
improvement in margins in the next two quarters.
Other income and EO tax provision
n The company had a revaluation gain of about Rs.62mn during the quarter, which
helped the PAT growth.
n Geometric had hedge position as on 30th September 2011 of about $180mn at
an average rate of Rs.48.67 / USD.
n During the quarter, Geometric's subsidiary, 3DPLM, bought out one building
from Geometric on which Geometric made a gain and paid tax on the same.
n On a consolidated basis, while the transaction netted off, the one-time tax is
reflected in the results.
n While the cash balance has increased, so has the debt which 3DPLM took for
the purchase.
Financial prospects
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 are likely up, we believe Geometric should see higher
volumes. However, there may be volatility in the near term in case the delays in
decision making persists.
n We have incorporated a revenue growth of 26% for FY12 (including Delmia).
Rupee is expected to be at about Rs.48 per USD in 2H.
n Margins are expected to improve due to the rupee depreciation, higher utilization
and the pyramid effect. PAT growth is expected to be muted due to higher
taxes.
n We introduce FY13 earnings estimates. Revenues are expected to rise by about
15%. Rupee is assumed to move to an average of about Rs.46 / USD in FY13.
n Margins are expected to be lower due to the rupee appreciation and salary
hikes. The gains are expected to be partly offset by the benefits from the restructuring
currently underway in the company.
n PAT is expected to grow by 14% leading to an EPS of Rs.10.7.
Valuations
n Our DCF - based price target for Geometric stands at Rs.61. At our TP, our FY13E
earnings will be discounted by 5.6x, which we believe is fair.
n With more solutions approach being demanded by clients, Geometric needs to
develop the consulting capability and also package its products as a solution by
blending in with its software & engineering services.
n We upgrade the stock to BUY based purely on the potential upsides. We will
wait for more stability and sustainability in the revenue profile and will also look
at an improvement in the margin profile of Geometric before becoming 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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