Jan 05, 2013 03:01 PM IST | Source:

Buy Geometric; target Rs 118: SPA Research

SPA Research is bullish on Geometric and has recommended buy rating on the stock with a target price of Rs 118 in its January 03, 2013 research report.

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SPA Research is bullish on Geometric and has recommended buy rating on the stock with a target price of Rs 118 in its January 03, 2013 research report.

"Geometric acquires 3Cap, a German electronic engineering and embedded systems company for Euro 11mn. The company, 3Cap, caters to Automotive industry with 110 employees and a revenue run-rate of Euro 11mn for FY12. Out of the Euro 11mn, Euro 7.5mn will be paid upfront (from internal accruals) and the rest of the amount will be disbursed over the next 3 years depending upon various milestones agreed upon by both the companies with a maximum pay out not to exceed Euro 11mn. We consider this to be a positive development for the company as it would expose the company to German automotive industry which would help in cross-selling the products. Although product business is a high margins business its affect on EPS is marginally positive (+2%).

3Cap Technologies GmbH is an electronic engineering and embedded systems company with CY12 revenues of Euro 11mn (Euro 9.4mn in CY11) at an EBITDA margin of 10%. It has presence across Automotive, Air-Space, Medical Devices, Defense and Energy Utilities sector, with 95% of its revenue coming from Automotive companies in Germany. It has 7 clients (all in Germany) with top 2 clients contributing 85% of the revenue. It provides services like Embedded Systems Development, Verification and Validation, Calibration of Powertrains, Electronic and Mechanical solutions etc. It has PAT margins upwards of 4% and a debt of Euro 70,000.

Geometric has acquired 3Cap at 1x MCap/Sales (Euro 11mn), out of which Euro 7.5mn will be paid up-front. This upfront payment of INR 538mn will be done through internal accruals as the company has Cash of ~839mn. The rest of the amount will be paid over 3 years subject to revenue and margin target related milestones set by the two companies for 3Cap to achieve. MD of 3Cap Mr. Henri Sadoune has agreed to handle not only 3Cap’s embedded systems portfolio but also that of Geometric. With significant domain expertise and client contacts especially in Germany this will augur well for the company from a cross-selling point of view. Geometric plans to offshore incremental business emanating from this team to improve margins further.

Due to a seasonally weak third quarter we expect the QoQ growth for Q3FY13 to be 2.38% to $48.81mn, however Q4FY14 will see revenue growth of 10.83% QoQ due to organic growth of 3.43% and integration of 3Cap from 1st January 2013 ($ 3.63mn). Margins due to buoyant INR/USD rate will remain at 19%+ for H2FY13.

Taking into consideration (i) continuation of depreciated INR levels and (ii) jump in revenue in Q4FY13E we have adjusted our USD revenue growth expectation to 19.67% CAGR over FY12-14E and average operating margins at 15% over the same period against 10% in FY12 and 18.6% in Q2FY13. This would result in an EPS CAGR of 24.32% over FY12-14E. Thus, we continue to recommend BUY with a 15-month TP of INR 118 at 8x FY14E earnings," says SPA Research report.

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