geometric stock note

7/29/2019 Geometric Stock Note

1/13

Retail Research 1

Stock Note January 08, 2013

HDFCSec Scrip ID Industry CMP Recommendation

Averaging bandTarget Time Horizon

GEOMETEQNR IT Rs. 109.3 Buy at CMP and add on declines Rs. 92-Rs.96 Rs. 148 1-2 quarters

BackgroundHeadquartered in Mumbai, India, and incorporated in 1994, Geometric is aspecialist in the domain of engineering solutions, IT services and technologies.Its portfolio of Global Engineering services and Digital Technology solutions forProduct Lifecycle Management (PLM) enables companies to formulate,implement, and execute global engineering and manufacturing strategiesaimed at achieving greater efficiencies in the product realization lifecycle.

Triggers Geometric is a focussed player on select verticals with strong expertise in

areas like PLM. It is 30% owned by Godrej group, and has good governance practices. By implementing recommendations of a management consultant,

Geometric could benefit out of cost control and mine existing clients forlarger business. This could, apart from boosting topline, also lead to bettermargins from non-PLM business.

Geometric has delivered impressive financial performance, high returnratios and healthy cash generation led by low capital investmentrequirement and high asset utilization.

It is equipped to benefit out of significant opportunities across Automotive& Engineering, Manufacturing and off-highway equipment industries.

Concerns Geometric derives 29%/58%/73% of its revenues from Top1/5/10 client/s.

Loss of a key customer could severely impact revenues and profitability ina particular period (like in Q2FY13).

As it mainly derives its revenues from US and European markets, forexfluctuations can dent margins in a particular quarter and impact profits.

There has been increase in global uncertainty, which can impact deal flow

and decision by clients. Globally, there could be increase in competition, which could lead topressure on pricing.

The company is highly dependent on talent and failure to attract and retaintalent and control costs could impact its financial performance.

Consolidated Financials at a Glance:Particulars (Rs. in Cr) FY11 FY12 FY13E FY14E

Net Sales 620.6 807.9 1075.1 1295.4

% Growth (y-o-y) 21.3 30.2 33.1 20.5EBITDA 75.0 111.6 226.8 275.9

% Growth (y-o-y) -15.5 48.8 103.2 21.6PAT (Adjusted) 57.5 59.2 97.1 132.5

% Growth (y-o-y) 23.3 2.8 64.2 36.5

EPS 9.2 9.4 15.5 21.1% Growth (y-o-y) 23.3 2.8 64.2 36.5PE 11.9 11.6 7.1 5.2

Valuation & RecommendationWe expect the companys revenues to grow at a CAGR of 26.6% over FY12-14. PAT is expected to grow at a CAGR over 49.7% over the same period. AtCMP, the stock is currently trading at 5.2x FY14E EPS. Based on strongbalance sheet, shareholder friendly management, good execution record andrecent emphasis on revenue maximization and cost control, we value the stockat 7xFY14E EPS, which gives us target price of Rs 148. We feel that investorscould buy the stock at the CMP and add on declines to the Rs.92 to 96 band(~4.5xFY14E EPS) for a target of Rs.148 over the next one to two quarters.

Geometric Ltd CMP: Rs. 109.3

Price Chart

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1-GEOMETRIC.Geometric Limited.NSE -04/01/13 Trend7

Weekly

Stock Details

BSE Code 532312

NSE Code GEOMETRIC

Bloomberg GEO INPrice (Rs) as on J an. 7,2013 109.3

Equity Capital (Rs Cr) 12.6

Face Value (Rs) 2.0

Eq. Shares O/s (cr) 6.3

Market Cap (Rs Cr.) 685.9

Book Value (Rs) 29.8

Avg. Volume (52 Week) 210,689

52 wk H/L 125.5/47.6

Shareholding Pattern

(As on Sept 30, 2012) % Holding

Promoters * 37.4

Institutions 11.8

Public & Others ** 51.0

Total 100.0 * Godrej group 30.1% and Manu Parpia 7.3%** Includes Rakesh J hunjhunwala 16.6%


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Business and Operations:

Geometric is a specialist in the domain of engineering solutions, services and technologies. Its portfolio of Global Engineeringservices and Digital Technology solutions for Product Lifecycle Management (PLM) enables companies to formulate,implement, and execute global engineering and manufacturing strategies aimed at achieving greater efficiencies in the productrealization lifecycle. Geometric offers its customers a wide range of services and solutions spanning the entire productrealization cycle, and the right mix of near shore, onshore and low cost centers to meeting their global engineering and

manufacturing needs.

Geometric began as a part of the EBE division of Godrej & Boyce in 1984 and incorporated as an independent company in1994. Today it is one of the leading providers of global engineering services, PLM solutions, and outsourced productdevelopment in the world. Geometric has over two decades of proven experience in CAx, PDM and MPM, as well as over sixdecades of experience in engineering service, providing customers unparalleled solutions for their product realization needs.Geometrics strategic alliances with global PLM giants including Dassault Systmes, Siemens PLM Software,PTC and Oracle have further strengthened its position in the PLM space. Being one of the pioneers of software technology inIndia, Geometric launched one of the first drafting software on the UNIX platform as early as 1987. The very same year sawthe launch of its first solid modeling CAM and FEA software.

Besides being founder promoters, Godrej continues to be one of its largest shareholders with 30.08% equity. The co-promoterand founder of the company, Mr. Manu Parpia and family, also continue to be key shareholders with 7.38% equity.

Geometric has carved a niche for itself in the product realization space, with long-term relationships with most of the leading

PLM software OEMs; strategic partnerships for offshore product development; world-class in-built point productivity solutionsand technologies; un-paralleled experience in engineering services; and a unique global engineering model.

Over the years, Geometric has exhibited stability, profitability and growth. The company had done well till 2007, was impactedduring the global economic crisis in 2008 and 2009 wherein the profitability was severely impacted, bounced back in 2010 and2011 and had initiated restructuring /optimization of overall business in 2012. The employee strength of 4500 has almostdoubled in the past five years, with revenues of US Dollars 167.5 million for the year ended March 2012. The companyoperates across 12 global delivery locations in the US, France, Romania, India, and China.

Geometric has 8 wholly owned subsidiaries, namely, Geometric Americas Inc., Geometric SRL Romania, Geometric SASFrance, Geometric Asia Pacific Pte, Geometric China, Geometric J apan K. K. , Geometric Europe GmbH, Delmia SolutionsPvt. Ltd. and a 58: 32 J oint venture 3D PLM with Dassault Systemes.

Geometric has organized its business into three distinct segments:(i) Software Solutions

(ii) Engineering Solutions and Services.(iii) Products Software Solutions (now referred to as Intellectual property - IP):

Service Lines - FY11

57%

36%

7%

Software Services

Engineering

Services

IP

Service Lines - FY12

56%39%

5%Software Services

Engineering

Services

IP

Software Solutions:

Geometric continued to reinforce its engagements with direct industrial customers in FY12. It also worked closely with its ISV(Independent software vendors) partners to address the needs of customers as they executed the technology changeprograms initiated in 2010. The company maintained its focus on building process solutions and offerings that combinesoftware and engineering capabilities. Its approach has been to simplify the PLM landscape for customers and help them getmore out of their PLM investments through solutions and specialized AMS (Application Management Services) for theengineering IT landscape. Multiple AMS wins recently have contributed to revenue predictability. The business has wonmarquee customers in its strategic verticals of aerospace and oil & gas engineering furthering its strategy of diversifying from


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automotive centric markets. India continued to be a growing market for the Company with promising adoption of enterprisePLM systems. The companys focus on the region, strong partnerships and consulting approach has led to addition of threeOEM customers in India.

The company continued to win fixed price engagements for its CAX services and solutions. Its highly differentiatedcapabilities in the CAX software development backed by its own IP from its Geometry Technology Solutions portfolio hashelped to extend such services to domains like ship building and apparel design through multi-year contracts. Lately

Geometric saw very good success in helping both its existing and new customers improve the efficiencies of theirengineering operations by building KBE (Knowledge Based Engineering) solutions on various CAD platforms.

Customer Segment Revenue Contribution (excl Products

and 3D PLM JV)

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60.0%

80.0%

Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13

Direct Industrial Software ISVs Through Partners

Vertical wise revenue contribution

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20.0%

30.0%

40.0%

50.0%

Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13

Industrial Automotive Strategic

Engineering Solutions and Services:

Geometric provides engineering solutions and services for product engineering, manufacturing engineering and industrialengineering to customers across all its target industries. The company saw good success with its key customers and won newengagements based on its true global engineering model through its engineering locations in USA, India, China and Romania.This helps the company with better customer alignment with their local engineering requirements, and also helps thecustomers reach these markets with the right products and at the right price. Manufacturing engineering is one of thecompanys highly differentiated capabilities and it won engagements to support its customers in their manufacturing plantsacross the globe including in India.

In the automotive sector, Geometrics strong track record with automotive OEMs helped to win and grow its engineeringengagements with leading tier-1 suppliers both in Europe as well as in USA. Engineering services drove the growth in multi-million dollar accounts in the off-highway sector as the company continued to add new customers in this category. IP ledengineering offerings like should costing saw further customer acceptance in heavy vehicles, off-highway and aerospaceindustries. Traction in China, which was below initial estimates, is promising as the company setup engagements with globalcustomers to support their local engineering requirements in China.

Products:

Products and Technology portfolio of Geometric includes Design and Manufacturing solutions, visualization and collaborationsolution, and CAM product. Portfolio also includes interoperability solutions that integrate engineering and manufacturingapplications within and across PLM and other enterprise systems. On one hand, the Products business is seen as asignificant differentiator for the services business, while on the other it has been able to leverage service businessengagements to gain market access and improvement opportunities for its products. Keeping with the new technology

trends, Geometric has launched new multi-platform visualization offering recently - Glovius that is available on iPad/iPhoneand other popular handheld devices running Android. It will leverage cloud-based infrastructure for data optimization andcollaboration.

Geography FY11

67%

22%

5%

6%

US

Europe

APAC

India

Geography - FY12

72%

18%

4%

6%

US

Europe

APAC

India


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Past Acquisitions

From an R&D center to a globally acclaimed engineering services and PLM player, Geometric has been creating value for itscustomers and shareholders through organic and inorganic growth. Through its acquisition strategy, it has been able to tapnewer markets, geographies, and competencies, while also providing customers a true global engineering proposition.

The acquired companies in the Geometric ecosystem include:

3 Cap Technologies GmbH

Geometric has acquired 100% stake in 3Cap Technologies GmbH (3Cap), a specialist in electronics engineering, primarily forthe automotive industry, based in Oberschleiheim near Munich, Germany through its German subsidiary, Geometric EuropeGmbH. 3Cap offers a multitude of services to its customers ranging from Embedded Systems Development Verification andValidation, and Calibration in the areas of powertrain and chassis. The acquisition was announced on J anuary 2, 2013.

3Cap was founded in 2004 by Mr. Henri Sadoune. 3Cap has been valued at Euros 11 million of which Euros 7.5 million will bepaid up front. Geometric is funding the acquisition out of accrued cash. The balance payments will be subject to earn-outunder mutually agreed terms and conditions over a maximum period of 3 years. In the calendar year 2012, 3Cap hadrevenues close to Euros 11 million. The company has been growing at around 15% over the past few years and EBITDAmargins have been around 10%. The transaction is expected to be EPS accretive.

3Cap employs over 110 people, all of whom work out of Germany. It has seven customers, which are mostly tier 1 automotivesuppliers and there is no overlap of customers with existing customers of Geometric. Top 2 clients contribute around 80-85%of revenues. Around 95% of the revenues are from Automotive vertical while rest comes from emerging verticals likeAerospace and Energy. The acquisition is effective 1st January 2013. Mr. Sadoune has entered into a long term agreementwith Geometric and will take responsibility for all embedded systems activities, including Geometrics existing embeddedsystems projects.

Geometric would primarily benefit from enhanced presence in Europe and Automotive vertical. The company has been alreadyrunning at an efficient level and the management does not expect any improvement in the operating margins and would cross-sell/up-sell technologies to respective customers.

Teksoft Inc. (renamed to Geometric Technologies - part of Geometric Americas)

Geometric had acquired Teksoft Inc., a USD 2.7 million CAD/CAM products company based in Scottsdale, Arizona, USA fromOnCourse Technologies Inc (OCTH) in J anuary 2005. Teksoft and Geometric had a ten-year history of working together prior

to the acquisition, and Geometric was the development partner for Teksoft's flagship product, CAMWorks.

The business of the acquired company has been rechristened to form Geometric Technologies - a division of GeometricAmericas, Inc., and continues to develop and market CAMWorks. In addition, the subsidiary is a distributor for Geometric'sother software products and technologies for the manufacturing industry, as well as the marketing arm for the company'sDesktop Products & Technologies Unit. This acquisition has helped Geometric add a reseller network and develop channelpartners for its leading products and technologies for the manufacturing industry like Feature Recognition, NestLib, eDrawingsPublisher, DFMPro, GeomCaliper, and 3DSearchIT.

Modern Engineering (renamed Geometric Americas, Inc)

Geometric had acquired Modern Engineering, Inc. (now renamed Geometric Americas, Inc.), a 60 year old Detroit-basedengineering services company, in 2006.

Modern Engineering, Inc., originally a wholly-owned subsidiary of Virtual Supply Chain Engineering, Inc., has been a leading

provider of staffing, engineering and design services to the worldwide manufacturing industry since 1946. Modern's expertiseincludes program management, product design & engineering, supply chain engineering, manufacturing engineering, tool andrack design, data management, software development, technical staffing and IT services. With the acquisition of the company,Geometric gained expertise in services offerings for all major CAD systems, including: UGS' NX portfolio (NX, I-deas NXSeries, Femap, NX Nastran), Unigraphics, CATIA v4 and v5, SDRC-iDEAS, Pro-Engineer, AutoCAD, SolidWorks,FactoryCAD, as well as a large portfolio of simulation tools. Along with this expertise and on-shore as well as near-shoredevelopment centers, Geometric also acquired Modern Engineering's supply-chain engineering technology - The VirtualEngineer.

Geometric's acquisition of Modern Engineering was a significant step in realizing the true potential of global engineering. Themerged entity is well positioned to meet the demand of customers with a broader range of services. The increased scale,scope and global capabilities have enhanced the long-term value for shareholders, customers and employees alike.


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Joint venture with Dassault Systemes

Product Development

Geometric is a Gold partner of Dassault Systmes (DS). The partnership began with the establishment of 3D PLM SoftwareSolutions Ltd. in 2002 with 58% ownership from Geometric. 3DPLM comprises a dedicated team of more than 800 peopleworking on product development of all DS brands in a secure center.

Services

Geometric is a preferred PLM partner for DS and offers a wide range of services based on its 'offshore/ onsite' model. Theseinclude development, customization, implementation, migration, integration, customization, training and support servicesacross various CAD systems.

Investment Rationale:

Focussed player with differentiated offerings

Geometric offers its customers a true Global Engineering service delivery model, combining deep domain expertise inproximity locations coupled with process and task level scalability in near-shore and offshore locations. As productmanufacturers look to increase their competitiveness in the post-recession economic scenario, Geometric's positioning will

enable new and broader opportunities to the market. It has deep relationships with 20 odd large customers, most of whom areFortune 500 companies. The domain knowledge acquired over years could be used to acquire new clients and to developdeeper relationships with existing clients. While Software services brings more value add, in Engineering services growthpotential is higher.

Product Lifecycle management (PLM) segment expected to continue to show strength

PLM system market continues to show strong growth. Many new initiatives have been taken up by major PLM vendors likeadoption of latest technologies, more intuitive decision support in design and engineering, connectivity between directmodeling and history-based modeling in computer-aided design (CAD), social product development in the cloud, etc.Geometric sees great opportunities in contributing to these initiatives as well as helping customers implement them.

Major software products providers for the engineering domain, many of whom are also Geometric' customers or partners arealso undertaking major software modernization programs to leverage the advancements in software technology, moreimmersive 3D and simulation capabilities. This provides strong opportunities for Geometric to partner with them on multi-year

turnkey software product development programs which is clearly Geometric's strength.

The Comprehensive PLM software and services market is expected to reach $ 41.4 Bn in 2015 from $26 Bn for 2010. Theexpected 5 years CAGR is 9.8% as per CIM data 2011 PLM Market Report.

Restructuring / rationalization measures to yield benefits

The company had initiated a strategy roadmap in 2012 wherein it outlined areas which needed focus and improvement. Thecompany had entered into an agreement with a leading consulting company in FY12 to help it transform Geometric. It includesintegrating its operations especially Geometric Americas, the US subsidiary. It includes improving its cash flow by streamliningthe collection process and revamping its subsidiary structure and operations.

The consultant has helped the Company in its quest to build a scalable enterprise by identifying key areas. As a result, thecompany is driving forward four initiatives:

1. Cost Control: This was the first initiative that was launched. It is seeing results in the form of an improvement in bothcontribution and operating margins. G&A as a percentage of revenue is expected to continue to decline.

2. Lean and Efficient: This initiative was launched three quarters ago and is being rolled out throughout the Indian Operationsover the next few months. It will help improve both quality and productivity, and the impact will be seen gradually in thequarters to come.

3. Growth Initiative: This initiative was launched two quarters back. The objective is to address customers in a more systematicand therefore efficient manner. The approach bodes well with the new organization structure emphasizing the Power of Two.If successful, it will enable the company to improve its growth rate. Geometric intends to develop account plans for eachcustomer and implement Go-to-market initiative. It plans to enhance offerings to existing customers showing clear valueproposition.


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4. Backbone: The company believes that many of its process and information capture needs to be revamped if it is to growprofitably, react fast and reduce risk. Thus, it is essential that it leverage the enterprise software.

The company had proposed to introduce lean in the North American operations during the December quarter. It is expected tosee a positive impact on both revenue and margins in the next financial year. The growth initiative is also helping to improvethe effectiveness of the sales force. In the next two quarters, it will drastically trim the tail and ensure focus on majoraccounts. Separately it is upgrading its offerings to ensure it can offer comprehensive solutions to customers problems.

Dassault JV on a strong footing

3D PLM has completed 10 years of operation and continues to add value to Dassault Systems (DS). Last year, in the contextof strengthening global R&D activities in India and creating stronger synergies between all R&D teams, Dassault Systems andGeometric had signed an agreement to combine DS R&D labs in Bangalore with 3D PLM. With this, 3D PLM now works on 6major brands of DS, viz, ENOVIA, CATIA, 3DVIA, SIMULIA, SOLIDWORKS and DELMIA.

3D PLM continues to focus on substantially enhancing their productivity, promoting innovation, while being lean and effective.Over the years, 3D PLM has charted an impressive growth by delivering highly innovative products and supporting DS inforging successful relationships with customers with its customers worldwide.

The revenue model of this J V is cost plus; but continuous cost improvements need to be demonstrated. Below chart gives Netsales, EBITDA and PAT trends for 3D PLM on a standalone basis. The profitability of the joint venture was lower in FY12 on astandalone basis as it has come under full tax bracket. Delmia Solutions was merged with 3D PLM during FY12. On a

consolidated basis, revenues were Rs 222.6 crore, EBITDA Rs 68.7 crore and PAT Rs 37.1 crore.

3D PLM Joint venture

0.0

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Net sales INR EBITDA PAT

Positive outlook across industries and Solution led approach to drive engagement and revenues

Major industries that Geometric operates in provide a positive outlook for FY13. It offers many opportunities to engage withthe existing customers as well as acquire new customers. The company sees significant opportunities arising out ofpartnerships and alliances.

Geometric customers are increasingly seeking closer collaboration in defining requirements and demanding solutions to theirproblems for providing competitive advantage. Geometric sees a great opportunity in being seen as a solution providerthrough its consulting practice and intellectual property led offerings.

Industry OverviewGeometric operates in the Engineering to Manufacturing space and predominantly for the engineering intensive discretemanufacturing industries. Its services, solutions and technology portfolio referred to as Engineering Services, covering productrealization services and solutions, such as Product Lifecycle Management, Software Product Development and GlobalEngineering services aims to increase the effectiveness and efficiency of design, engineering and manufacturing businessprocesses for firms across the globe.

Overall, the economic challenges have led corporations to redraft their IT policies and the benefits to be derived from IToutsourcing. Customers no longer intended to have IT outsourcing just as a cost arbitrage and efficiency improvement tool, butdemanded business transformation and innovation as the focal point of IT outsourcing. This led the customers to work with theIT vendors on differentiated services and new business models like partnerships, business outcomes based pricing, profitsharing, pay per use, dedicated centres of excellence, IP sharing and so on. The thrust on innovation and the customer


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acceptance and adaptability of the same started happening at a faster pace than earlier. Imperatively, IT vendors who can fastacclimate with this phenomenon will lead the growth in the coming years.

Despite the sustained slowdown in the world economy, global ER&D spend has been resilient. As per NASSCOM Booz Allenreport, India Engineering Research and development outsourcing is estimated to reach USD 22 billion by 2015 and USD 45billion by 2020 and Global Engineering research and development to USD 118 billion in 2020. While continued growth isexpected, Indian ESPs need to invest in capability building to transition to higher value ER&D services.

The ER&D, OSPD and software products segments are expected to have generated exports of USD 13 Billion, a growth ofnearly 14% over financial year 2011. FY12 saw Geometric's major markets positively recovering from the global recession andtaking forward looking decisions that had been put on hold in the preceding years. The industry saw vigor returning in globalengineering resulting in a gradual increase in demand and volumes for the key offerings.

The future of the IT services industry shall be defined by Consumerisation of IT, characterized by customers focusing on ITas a key differentiator to their businesses and IT service providers investing in a combination of services, solution accelerators,products and platforms, to deliver customer-value. Indian IT services vendors have been increasingly focusing onstrengthening front-ending teams, deepening vertical specialization, expanding services portfolio, building non-linear revenuestreams and global delivery models. Conscious of the increasing concerns of protectionism, Indian IT majors have beenramping up their onshore and near-shore presence.

Increased specialization in verticals, Off-shoring as an Innovation hub, Emergence of hybrid ESP-captive model, and Adoptionof risk-reward models are some of the key trends in ER&D Outsourcing. Factors driving ER&D spend across verticals include

Time-to-market, Localization and product variants, Mobility, Digitization and Green initiatives.

Automotive industry:

The automotive industry, an important market for Geometric, progressed ahead on strategic initiatives like selling specificbrands and becoming lean. This has provided opportunities for Geometric to strengthen its engagements with leadingautomotive OEMs and their key suppliers. Automotive majors have settled their deconsolidation programs and have movedahead on their engineering IT investments and sourcing engineering from India and China. As auto companies try to remaincompetitive by focusing on more feature rich, technologically advanced, fuel and cost-effective vehicles, it becomes imperativefor them to shift production and outsourcing work from high cost countries to low cost ones including India, while continuinginvestment in research. The automotive industry has certainly opened up opportunities for Geometric through new andexisting customers, however given the industry's sourcing maturity and the economic uncertainties that the industry is trying tobalance, it would also put pressure on prices.

Off-highway Equipment:

The Off-highway Equipment (Construction, Agriculture and Mining) industry is slated to have a very exciting year with some ofthe companies having the highest level of order backlog. With much of such backlog across the industry to be delivered overthe next couple of years, it augurs well for Geometric to capitalize on the global engineering services and engineeringproductivity needs of the industry. The industry has already laid out plans for capital investment running into billions of dollar,essentially for plant modernization and global production capabilities providing an opportunity to serve the industry locally inregions like China and India.

Aerospace and Engineering:

Aerospace and Engineering for Oil & Gas and Energy are Geometric's strategic markets. The commercial aircraft sectorcontinued to trend upwards in 2011, building upon its production momentum. Aerospace companies achieved the highestproduction level in commercial aircraft history in 2011. This increase in production is driving parallel production activityincreases in the aerospace supply chain, from engines, to avionics, to wiring harnesses, passenger seats and landing gear

among others. Reported sales orders for the year rose to second highest in history. Commercial aircraft demand is expectedto expand over the next 20 years given the economic growth in emerging markets, demand for fuel-efficient planes and enginetechnologies which bodes well for Geometric's core engineering offerings. To gear up towards this the major players in theindustry are looking at robust IT modernization programs leading to opportunities for Geometric, though the sales cycles willcontinue to be stretched.

In the manufacturing industry at large, the restructuring measures and process improvement programs continue to drive ITand engineering outsourcing, with focus on areas like standardization of manufacturing processes, competitive sourcing ofcomponents, and increasing integration between various enterprise level systems. Research and Development will continuefor green technologies and localization of products for the new growth market. All of these trends are poised to deepen andwiden the opportunities available for Geometric.


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Risks & ConcernsHigh Client concentration

The company derives majority of its revenues from few large clients. Excessive exposure to a few large clients has thepotential to impact profitability and to increase credit risk. A repeat of what happened in Q2FY13 (loss of one major client dueto quality issues with its impact on revenues and profits) cannot be ruled out altogether.

Strategy Risk based on focus, scale and business model:

Over reliance on a single vertical (e.g. automotive) may make its business volatile or cyclical. Dependence on a few productsalso ties the company to the fortunes of these products and the companies that own these products. On the other hand, toomuch of diversification has the potential to impair its competitive edge and may spread it too thin. The addition of Aerospaceand Oil & Gas Engineering to the focus verticals is expected to mitigate this risk largely in addition to making business lesscyclical.

Foreign exchange rate fluctuations

As the Company uses India as a major source of manpower, the exchange rate of the Rupee vis-a-vis the US Dollar andother currencies could affect its ability to compete, the movement in Rupee exchange rate vis-a-vis US dollar could also resultin fluctuation in the companys operating margins and have short term impact on profitability. Geometric attempts tominimize the risk by building sales opportunities in diverse regions, diversifying the currency in which it invoices its customers

and by taking forward covers where appropriate.Security concerns

Increased emphasis by customers on low cost captive centers, motivated by IP risks and a predisposition to keep as muchengineering activity in house while leveraging the advantages of an offshore model. Geometric aims to mitigate this risk byoffering mission critical or core activities at a proximity center or within the customer's premises to address IP risk, which ispossible through its Global Engineering service delivery model. In addition, Geometric can also offer captive centerstechnology solutions that will enable them to operate more efficiently within the customer's global network.

Global uncertainty

Eurozone crisis is a cause of concern and any major upheaval can affect short-term performance of the Company withincreased economic uncertainties. As majority of its business is from US (64% of revenues in Q2FY13), any downturn in USeconomy can adversely impact its business. Geometric attempts to minimize the risk through diversification acrossgeographies and better operating efficiencies.

Increase in competition and pressure on pricing

As competition increases, acquiring and retaining customers would be challenging. In a highly competitive environment,customers have tough expectations on pricing.

People cost and talent management:

The fast growth of the industry is expected to result in a scramble for attraction and retention of human resources, pushing upthe cost of talent which may not be matched by the increase in the realizations from the customers. Immigration restrictions inkey markets are also resulting in longer lead time for servicing the customers and higher costs. Attraction and retention of toptalent is also crucial for growth, particularly, for opening new customer accounts or for creation of new offerings.

Legislation in existing markets could restrict companies to outsource:

With about 64% of revenues from US, any restrictions on outsourcing services and Visas by US government negativelyimpacts the business. One example of this is, in recent times the rejection rates for L1 visa petitions, which are used for intra-company transfers of employees from foreign offices to US offices has gone up. Between 2005 and 2007, the denial rate for L-1 petitions ranged from 6 to 7%, in 2008 it rose to 22% and reached 27% in 2011. While this will not impact the business in amajor way, any other substantive anti-outsourcing legislation may hurt its prospects.

High utilisation rate

The company operates at a utilization rate of around 86% including trainees and 89% excluding trainees. While high utilizationrates aids margins, the company could face supply risk in case of short term increase in demand.


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Quarterly Review Consolidated

The Companys consolidated revenues stood at $47.67 million, a drop of 0.3% Q-o-Q. Y-o-Y it had a growth of 15.1%.Consolidated revenues grew 0.3% q-o-q and 36.8% y-o-y to reach Rs. 261.6 crore, as compared to Rs. 260.8 crore inQ1FY13 and Rs. 191.2 crore in Q2FY12 in rupee terms.

The companys operating profit rose to Rs. 47.7 crore this quarter, from Rs. 44.4 crore in the previous quarter and from Rs.

20.1 crore in Q2FY12; a rise of 7.5% and 137.7% respectively. Operating margins improved to 18.3% in this quarter from 17%last quarter and 10.5% in the same quarter last year as charges payable to the management consultant were significantlylower. However, due to a significant improvement in the value of the rupee as on 30th September, the Profit before taxdeclined from Rs 37.4 crore to Rs 33.7 crore.

The company had provided a salary increase to many of its staff in high cost countries effective 1st August. The Company hadalready given hike to the India employees in April 2012. In future, all salary revisions will be granted effective 1st Aprilirrespective of location.

The company had both positive and negative developments this quarter and the current month. It won a multi-year contractfrom a large industrial equipment manufacturing company. The engagement will initially start with onsite activity moving tonear shore and then offshore activity. The company expects to commence billing in the current quarter and the relationshiphas the potential to evolve into a multi-million dollar engagement. It also signed a Master Services Agreement with a largeaerospace company. While this in itself will not result in immediate business, it opens the door to grow the relationship overthe next few years and adds to ability to expand into the aerospace arena.

The adverse developments include the loss of an order worth $3.6 million, which was to be executed over a period of oneyear. This happened due to quality problems in execution and therefore unsatisfactory performance on companys part.Consequently the company not only lost the follow-on order but it had to give a rebate of $650K, which affected both revenuesin the current quarter, as also the profitability. The lost order was a fixed price engagement and on the engineering side of thebusiness. The lost contract will also have an adverse impact on the next few quarters. The other development is the companyhas begun to see softness in demand from its largest customer in North America. The company expects this softness tocontinue for the next two quarters and will adversely impact its revenues by at least $1 million per quarter.

However, the company continues to see demand from a number of other customers that will offset this decline in the comingquarter. It has been advised that demand from this customer will begin to grow towards the end of the next quarter viz. Q4.Consequently the company expects Q3 to be more subdued than Q4. Q3 margins are expected to be impacted due to theproject ramp-ups in Onsite and lower billing days. Also, the utilization will come down due to loss of large client.

Strong employee engagement resulted in annualized attrition for the quarter dropping to 12.9% as compared to 14.8% in Q1FY13.

The company added 11 new customers and Won new deals worth USD 14.64 million.

Conclusion:

Geometric has launched a number of strategic initiatives in the year and plans to build on these to achieve continuousimprovement and steady business performance in the coming year/s. The company focuses on reducing proportion of Generaland Administrative expenses, Cost of revenues will be controlled by the employing right people and improving the efficiencies,delivering more value to improve the margins going forward. The Company is confident of achieving revenue growth guidanceof 16-18% (higher end) for the FY'13 and expects more than 10% earnings growth despite loss of one large client. Thecompany is in a comfortable position to beat earnings guidance. It is confident on guidance as it foresees visibility from othercustomers/areas.

The management does not see any pricing pressure and is confident on maintaining and improving margins and expects tomaintain utilization at current level despite loss of a client (leaving aside short term impact in Q3 and a little in Q4).

In case of niche companies, catering to specialized fields or domains, the market potential will be better because customerswill look at implementing the best-of-breed solutions for their organizations, to get maximum mileage in order to bounce backand remain competitive. Companies with good cash reserves will be able to invest in building assets as well as competenciesnecessary to meet the rising demand and leverage opportunities available in the market.

Focused business and expertise, Strong promoter background, Healthy cash generation, recent initiatives based onrecommendations of a management consultant and financial performance could act as a trigger for the stock while high clientconcentration and increase in competition are the major concerns. Geometric could report better growth in PAT in FY13 andFY14 due to improvement in operating performance post implementation of consultants recommendations, no consultant fees


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Retail Research 10

and lower forex losses. We expect the companys revenues to grow at a CAGR of 26.6% over FY12-14. PAT is expected togrow at a CAGR over 49.7% over the same period.

At CMP, the stock is currently trading at 5.2x FY14E EPS. Based on healthy balance sheet, shareholder friendly management,good execution record and recent improvement in performance, we value the stock at 7x FY14E EPS, which gives us a targetprice of Rs 148. We feel that investors could buy the stock at the CMP and add on declines to the Rs.92 to 96 band(~4.5xFY14E EPS) for a target of Rs.148 over the next one to two quarters.

Consolidated Financials

Quarterly Financials (Rs crore)

Particulars Q2FY13 Q2FY12 Var. % Q1FY13 Var. % H1FY13 H1FY12 Var. %

Operating revenue (USD) 47.7 41.4 15.1 47.80 -0.3 95.5 80.0 19.4

Exchange rate 54.9 46.2 54.56

Total Income 261.6 191.2 36.8 260.8 0.3 522.4 363.9 43.5

Total Expenditure 205.2 163.6 25.4 208.1 -1.4 413.3 319.8 29.2

Cost of revenues 162.2 127.3 27.4 157.3 3.1 319.5 247.7 29.0

S&M 11.1 8.2 35.0 10.1 10.1 21.21 17.11 24.0

G&A 31.9 28.1 13.5 40.7 -21.8 72.62 55.01 32.0

EBITDA 56.4 27.6 104.4 52.7 7.1 109.1 44.1 147.3

Other income -14.0 11.7 -7.0 -21.1 19.5

EBIDTA incl. OI 42.4 39.3 7.7 45.6 -7.2 88.0 63.5 38.5

Interest 0.8 0.1 580.5 0.8 1.5 1.66 0.15 1023.0

PBDT 41.5 39.2 5.9 44.8 -7.3 86.3 63.4 36.2

Depreciation 7.8 7.4 5.9 7.4 5.2 15.2 13.9 9.8

PBT 33.7 31.8 5.9 37.4 -9.8 71.1 49.5 43.6

Tax 10.3 8.5 21.6 13.3 -22.4 23.6 12.4 89.6

Reported PAT 23.4 23.3 0.3 24.1 -2.9 47.5 37.1 28.1

Minority Interest 5.5 3.2 3.4 9.0 5.0Profit/Loss of AssociateCompany 0.0 0.0 0.0 0.0 0.0

Net Profit after Min. Int. & P/LAss. Co. 17.9 20.1 -11.0 20.7 -13.4 38.5 32.1 20.1

Extra-ordinary Items 0.0 6.7 0.0 0.0 7.0

Adjusted PAT 17.9 13.4 33.6 20.7 -13.4 38.5 25.1 53.4

EPS (Rs.) 2.9 2.1 33.6 3.3 -13.4 6.1 4.0 53.4

Equity 12.6 12.6 12.6 12.6 12.6

FV 2.0 2.0 2.0 2.0 2.0

OPM (%) 21.6 14.4 49.5 20.2 6.7 20.9 12.1 72.3

PATM (%) 6.8 7.0 -2.3 7.9 -13.7 7.4 6.9 6.9

Profit & Loss A/C Rs.Cr.

YE March (Rs. Cr.) FY11 FY12 FY13E FY14E

Total Income 620.6 807.9 1075.1 1295.4

% growth rate(YOY) 30.2% 33.1% 20.5%

Cost of revenues 410.3 529.7 644.0 775.9

% growth rate (Y-o-Y) 29.1% 21.6% 20.5%

% of sales 66.1% 65.6% 59.9% 59.9%

S&M 32.8 36.2 43.0 53.1

% growth rate (Y-o-Y) 10.1% 18.9% 23.5%

% of sales 5.3% 4.5% 4.0% 4.1%

G&A 102.4 130.4 161.3 190.4

% growth rate (Y-o-Y) 27.3% 23.7% 18.1%

% of sales 16.5% 16.1% 15.0% 14.7%

Total Operating Expenses 545.6 696.3 848.3 1019.5


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% growth rate(YOY) 27.6% 21.8% 20.2%

% of sales 87.9% 86.2% 78.9% 78.7%

EBITDA 75.0 111.6 226.8 275.9

% growth rate(YOY) 48.8% 103.2% 21.6%

Other Income 21.9 20.5 -18.1 -8.5

% growth rate (Y-o-Y) -6.4% -188.3% -53.0%

EBITDA incl. OI 96.9 132.1 208.7 267.4% growth rate(YOY) 36.3% 58.0% 28.1%

Interest 0.9 1.8 3.5 4.1

% growth rate(YOY) 114.3% 89.5% 17.1%

Depreciation 26.0 28.8 33.2 35.9

% growth rate(YOY) 10.7% 15.5% 8.0%

PBT 70.1 101.5 172.0 227.5

% growth rate(YOY) 44.8% 69.5% 32.2%

Provision for Tax 1.7 21.2 55.9 73.9

% of PBT 2.4% 20.9% 32.5% 32.5%

PAT 68.4 80.3 116.1 153.5

% growth rate(YOY) 17.4% 44.6% 32.2%

Earnings in Affiliates 0.0 0.0 0.0 0.0Minority Interest 10.8 14.2 19.0 21.0

Reported PAT 57.6 66.1 97.1 132.5

% growth rate(YOY) 14.9% 46.9% 36.5%

Extra Ordinary Items 0.1 7.0 0.0 0.0

Adjusted PAT 57.5 59.2 97.1 132.5

% growth rate(YOY) 2.8% 64.2% 36.5%

Equity 12.6 12.6 12.6 12.6

Face Value 2.0 2.0 2.0 2.0

EPS 9.2 9.4 15.5 21.1Source: Company, HDFC Sec Research)

Balance Sheet Rs.Cr.

YE March (Rs. Cr.) FY11 FY12 FY13E FY14EEquity & Liabilities

Shareholders Funds 217.8 186.6 267.6 381.7

Share Capital 12.5 12.5 12.6 12.6

Reserves & Surplus 205.3 174.0 255.0 369.2

Share application money pending allotment 0.0 0.0 0.0 0.0

Minority Interest 38.4 54.1 69.1 90.1

Non-Current Liabilities 7.9 8.8 10.0 11.9

Long-term borrowings 0.0 0.0 0.0 0.0

Deferred tax liabilities (net) 3.0 0.4 0.8 0.4

Other long-term liabilities 4.1 7.1 9.2 11.5Long Term Provisions 0.8 1.4 0.0 0.0

Current Liabilities 84.0 243.1 223.3 270.2

Short Term Borrowings 4.5 67.5 43.8 52.6

Trade Payables 3.0 9.2 7.5 9.4

Other Current Liabilities 58.3 72.2 75.9 92.9

Short Term Provisions 18.1 94.2 96.1 115.3

Total Equity & Liabilities 348.1 492.6 570.0 754.0

Assets


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Retail Research 12

Non-Current Assets 101.0 142.4 147.3 167.2

Fixed Assets 84.7 89.1 97.2 106.4

Tangible Assets 68.1 73.2 81.2 90.2

Intangible assets 16.5 14.5 14.5 14.5

CWIP 0.2 1.4 1.5 1.7

Deferred tax assets (net) 0.0 4.2 4.9 5.9

Long-term loans and advances 13.6 48.3 44.5 53.4Other non current assets 2.7 0.7 0.7 1.5

Current Assets 247.1 350.2 422.6 586.8

Current investments 13.9 69.6 90.4 99.5

Trade Receivables 118.3 144.5 156.1 187.3

Cash & Cash Equivalents 10.9 56.1 74.0 174.0

Short Term Loans & Advances 50.0 29.2 33.6 40.3

Other Current Assets 54.0 50.8 68.6 85.7

Total Assets 348.1 492.6 570.0 754.0(Source: Company, HDFC Sec Research)

Key Ratios Rs.Cr.YE March FY11 FY12 FY13E FY14E

No of Equity Shares 6.2 6.3 6.3 6.3

Current Market Price 109.3 109.3 109.3 109.3

Market Capitalization 685.9 685.9 685.9 685.9

Entreprise Value 665.6 627.6 565.3 465.0

FD EPS 9.2 9.4 15.5 21.1

Cash EPS (PAT +Depreciation) 13.4 14.0 20.8 26.8

P/E(x) 11.9 11.6 7.1 5.2

Book Value (Rs.) 34.9 29.8 42.6 60.8

P/BV (x) 3.1 3.7 2.6 1.8

EBITDA (%) 12.1 13.8 21.1 21.3

PBT (%) 11.3 12.6 16.0 17.6NPM (%) 9.3 7.3 9.0 10.2

ROCE (%) 31.9 40.7 56.4 53.3

RONW (%) 26.4 31.7 36.3 34.7

Debt-Equity 0.0 0.4 0.2 0.1

Current Ratio 2.9 1.4 1.9 2.2

Mcap/Sales(x) 1.1 0.8 0.6 0.5

EV/EBITDA 8.9 5.6 2.5 1.7(Source: Company, HDFC Sec Research)

Cash Flow Statement

YE March (Rs. Cr) FY11 FY12 FY13E FY14E

Profit Before Tax 70.1 101.5 172.0 227.5

Net Operating Cash Flow 42.0 72.7 102.5 167.1

Net Cash from Investing Act. -19.0 -80.1 -38.2 -55.7

Net Cash from financing Act. -29.9 47.9 -42.5 -11.4

Cash & Cash Equivalents 10.9 56.1 74.0 174.0

Net Inc/(Dec) in Cash -6.9 40.5 21.8 100.0(Source: Company, HDFC Sec Research)


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Analyst: Ravindra Agrawal Email ID:[email protected]

RETAIL RESEARCH Fax: (022) 3075 3435Corporate Office:HDFC Securities Limited, I Think Techno Campus, Building B, Alpha, Office Floor 8, Near Kanjurmarg Station, Opp.Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Fax: (022) 30753435 Website: www.hdfcsec.com

Disclaimer: This document has been prepared by HDFC Securities Limited and is meant for sole use by the recipient and not for circulation.This document is not to be reported or copied or made available to others. It should not be considered to be taken as an offer to sell or asolicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate orcomplete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell securitiesreferred to herein. We may from time to time solicit from, or perform investment banking, or other services for, any company mentioned in thisdocument. This report is intended for non-Institutional Clients

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