Buy Geometric; target of Rs 93: SPA Research

“Geometric came out with strong Q1FY13 results. The revenues for the quarter were up 6.4% sequentially to $47.8mn on the back of a strong volume growth. The EBITDA margins though hampered by consulting fees of INR 85mn witnessed a 770bps expansion to 20.2% on the back of improving operational efficiencies and currency tailwinds. The Q1FY13 results have reinstated our confidence in the sound financial and business growth prospects of the company and we continue to recommend BUY with a 2-year target price of INR 93.0.”

“The company has continued to register strong sequential growth of 6.4% in Q1FY13 to $47.8mn. With this, given a week global scenario, the company has witnessed a ten quarters CQGR of 6.2% in USD revenue growth. Q1FY13 USD revenue growth was backed by 6.4% volume growth with flat pricing. 3DPLM revenue grew to $13.1mn contributing 50% to the company's incremental growth. EBITDA Margin (incl. consultant costs of INR 85mn in Q1FY13, INR 82mn in Q4FY12 and INR 22mn in Q3) expanded by 770bps sequentially to 20.2% (730bps expansion to 23.3% on like to like basis QoQ excl. consultant fees). This was primarily due to INR depreciation and improvement in operational efficiency. Q2FY13 would be the last quarter for incurring consultant fee, of INR 30mn.”

“Company has guided towards a 16%-18% USD revenue growth. We consider this to be plausible given the strong deal flow from Engineering and Software services client's strategic spending in US and Europe. We have estimated a 16.5% USD revenue CAGR over FY12-14E. Increasing contribution from higher margin 3DPLM business, steady growth in IP revenues and improvement in operational efficiency has allowed us to build EBITDA Margin expectations of 13.6%/15.9% in FY13/14. With US subsidiary turning profitable and US tax rates increasing from 34% to 39%, effective tax rates have moved north of 28% as against 25% resulting in an EPS CAGR of 28% over FY12-14E.The stock trades at a valuation of 7.2x FY13E and 5.1x FY14E EPS. Thus on the back of strong volume growth, margin expansion and cheap valuation we retain our BUY recommendation and a 2 year target price of INR 93 discounting FY14E earnings of INR 15.7 at 6x,” says SPA Research report.    

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