Geometric :STRONG TRACTION IN ENGINEERING SERVICES: IFCI research

Organisation restructuring structure will help enhance growth
The management has restructured organisation in order to get more growth from engineering services. The organisation has been divided it into two teams, each handling sales and delivery separately. This structure is expected to provide higher efficiency, improve response time to customer and increase sales.

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High exposure in service lines with a bright outlook
Geometric derives 41% of its revenues from engineering services, which is expected to be a USD 22bn opportunity globally as per NASSCOM by 2015. Revenue from engineering services has grown 61%YoY in FY12 for Geometric. The company has also outperformed peers in reporting stronger growth in engineering services over the last two quarters.
Strong growth outlook in US manufacturing
Geometric derives 71% of its revenues from US and has relatively higher exposure to that market vis-a-vis peers. Revenues from the US market have grown at a CAGR of 11% (FY09-12). The company derives 62% of its revenue from the manufacturing vertical and has no exposure to the BFSI vertical, which is under pressure in US. It has recently won several large deals in engineering services, in the range of USD 4-6mn.
Client mining efforts to boost volume growth
Geometric has a large client base of 109 clients, which provides immense scope for client mining. Geometric derives 70% of its revenues from top 10 clients and the contribution from these large clients has been stable over the last 5 years. New client addition will also improve growth as Geometric expands its offerings in the oil/gas, aerospace and other industrial verticals.
Valuation
We initiate coverage on the stock with a BUY recommendation and a target price of Rs 85 based on 7x FY14E earnings.


Valuation
Geometric has guided for a USD revenue growth of 16-18% for FY13 and a 10%YoY growth in EPS. We expect Geometric to do better than the guidance, supported by the positive impact of the rupee depreciation. Geometric has also been able to report double-digit revenue growth in the range of 22-30% for FY11 and FY12; in line with peers. However, the EBIDTA margin of Geometric has remained under pressure; due to its increased focus on engineering services, which is a low margin business. The stock has traded at an average PER of 9x (FY09-13). We believe the revenue growth will remain strong for Geometric, but margins will continue to remain in the range of 14-14.5% for FY13 and FY14. We provide a target PER multiple of 7x for FY14E as margins are expected to remain under pressure.
We initiate coverage on the stock with a BUY recommendation and target price of Rs 85 based on 7x FY14E earnings.