Geometric: Kotak Securities Research Report

Kotak Securities is optimistic on Geometric and has recommended an ACCUMULATE with the following investment rationale:

The 2QFY11 results of Geometric came in above expectations.

– Volumes of Geometric grew by 7% QoQ, on the back of improving demand scenario and better execution.

– EBIDTA margins of Geometric grew on a sequential basis as the impact of salary hikes diminished. In 1Q, there was a one-time gratuity provision.

-The management of Geometric has indicated that, more discretionary budgets are being released and there is demand from both, OEMs and industrial customers.

-However, the amount of new orders booked by Geometric fell for the second consecutive quarter to $8.3mn v/s $9mn QoQ indicating some continuing challenges. Geometric has invested more in business generation activities, and will continue to do so, we believe.

– 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.

-We have adjusted earnings estimates of Geometric to accommodate for 2QFY11 results. For FY11E we expect a revival in volumes to drive a 20% revenue growth. We now introduce FY12 estimates, where we expect volumes to rise by about 23%.

-We have been indicating that, maintaining margins will be a challenge for Geometric due to the high capacity utilization ratio (about 90%) and need to invest in S&M. Consequently, we have assumed margins of Geometric to move in a narrow band.

-In FY11E, we expect an EPS of Rs.9.7 for Geometric, which is expected to move up to Rs.10.5 in FY12. For FY12, we expect tax rate to increase to 20% v/s about 4% in FY11.

-Our DCF – based price target for Geometric works out to Rs.86, based on FY12E earnings (v/s Rs.71 earlier). We upgrade the stock to ACCUMULATE. Our exit multiple works out to 8x FY12E EPS.