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Geometric: Pressures mounting? - Views on News from Equitymaster

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Geometric: Pressures mounting?
Jan 15, 2008

Performance summary
  • Topline grows by 1% QoQ during 3QFY08 in rupee terms - growth led by higher volumes and better product mix. Dollar terms sales growth at 2.4% QoQ.

  • Operating margins expands by 1.2% during the quarter, largely due to costs rationalisation.

  • Bottomline declines by 25% QoQ due to lower other income and higher taxes.

  • Adds 17 new customers in 3QFY08 - total number of active customers now stands at 118.

  • Modern Engineering recorded an EBITDA loss of US$ 97,000 during 3QFY08 (down from EBITDA loss of US$ 0.5 m in 2QFY08).

(Rs m) 2QFY08 3QFY08 Change 9mFY07 9mFY08 Change
Sales 1,225 1,240 1.2% 2,588 3,594 38.9%
Expenditure 1,098 1,096 -0.2% 2,104 3,258 54.8%
Operating profit (EBITDA) 127 143 13.1% 484 336 -30.5%
Operating profit margin (%) 10.3% 11.5%   18.7% 9.4%  
Other income 53 26 -51.2% 49 214 340.9%
Depreciation 48 51 6.6% 156 146 -6.4%
Interest 16 17 2.9% 16 49 199.7%
Profit before tax 116 101 -12.2% 361 356 -1.3%
Tax 10 19 87.4% 46 32 -29.4%
Minority interest 15 14 -3.0% 45 48 7.3%
Profit after tax/(loss) 91 68 -25.0% 270 275 2.0%
Net profit margin (%) 7.4% 5.5%   10.4% 7.7%  
No. of shares (m)         62.0  
Diluted earnings per share (Rs)*         6.1  
P/E ratio (x)*         12.9  
* On a trailing 12 months basis

What has driven performance in 3QFY08?
  • In rupee terms, Geometric recorded a 1.2% QoQ growth in topline aided by strong growth in volumes. The product segment recorded 11% QoQ growth while the services segment recorded 0.5% QoQ growth. Offshore revenue grew by 2.9% QoQ, offsite revenue increased by 16.2% QoQ and onsite revenue came down marginally by 0.2% QoQ. Overall engineering services revenue decreased by 0.3% QoQ and Geometric Engineering (erstwhile Modern Engineering) revenue dropped 0.8% QoQ. The company added 17 new clients in 2QFY08 and the total number of active clients now stands at 118.

    Revenue by customer profile Over the past quarters
    Customer segment Q3FY08 Q2FY08 Q1FY08 Q4FY07 Q3FY07 Q4FY06
    Software Product 34.1% 32.5% 33.6% 29.7% 34.0% 50.0%
    Business Partners 18.1% 20.9% 16.9% 15.9% 22.0% 26.0%
    Direct Industrial 47.7% 46.6% 49.5% 54.4% 44.0% 24.0%

  • Geometric recorded a 13% QoQ growth in operating profits during 3QFY08. The operating margins of the company expanded from 10.3% in 2QFY08 to 11.5% in 3QFY08. This was mainly due to overall costs rationalisation. While the manpower and traveling costs have not changed, software development costs have come down by 1%, which resulted in margin expansion. Reduction in effective billed realisation of 5.6% and average exchange rate from 40.11 to 39.63 had a negative impact on the operating margin.

    Revenue by service line Over the past quarters
    Service line Q3FY08 Q2FY08 Q1FY08 Q4FY07 Q3FY07 Q4FY06
    Software 57.1% 56.5% 52.8% 52.7% 59.0% 77.0%
    Engineering 35.6% 36.6% 40.1% 39.3% 31.0% 8.0%
    Product 7.3% 6.9% 7.1% 8.0% 10.0% 15.0%

  • Geometric recorded 25% QoQ decline in net profits mainly due to lower other income, which fell by 51% QoQ in 3QFY08. The company in 2QFY08 implemented hedge accounting, which resulted in Rs 14.4 m of exchange gains being accounted in balance sheet. This amount has now risen to Rs 20.9 m, an increase of Rs 6.5 m over 2QFY08. While the taxes have risen on QoQ basis, on a 9-month comparison, tax rates have actually fallen from 13% in 9mFY07 to 9% in 9mFY08.

Revenue by geography 2QFY08 3QFY08  
  Rs m % of total Rs m % of total Change
US 853 69.6% 873 70.4% 2%
Europe 258 21.1% 239 19.3% -7%
APAC 92 7.5% 100 8.1% 9%
India 22 1.8% 29 2.3% 29%

What to expect?
At the current price of Rs 79, the stock is trading at 7.3 times our estimated FY10 consolidated earnings, which makes it attractively valued. The company has reported yet another quarter of dismal performance on the topline as well as on the bottomline front. The only positive surprise has been the reduction of EBITDA loss in Geometric Engineering (erstwhile Modern Engineering).

While the company is confident of turning around Geometric Engineering by 4QFY08 at the EBITDA level, we believe that this target is very optimistic. First, Geometric Engineering has seen 3 consecutive quarters of revenue decline which is not a positive sign and secondly Geometric generates almost 70% of its engineering revenues from the auto sector (30% of the consolidated topline), which has been slowing down since the last nine months and the pressure is expected to continue. Despite this, we maintain our long-term positive view on the stock solely because the business is encouraging and it is available at very attractive valuations.

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