Geometric Ltd Stock Note

CMP: Rs. 109.3 January 08, 2013

Averaging band CMP Rs. 109.3 Recommendation Buy at CMP and add on declines Rs. 92-Rs.96 Target Rs. 148 Time Horizon 1-2 quarters

HDFCSec Scrip ID Industry GEOMETEQNR IT

Price Chart
1-GEO METRIC.G eometric Limited.NSE - 04/01/13 Trend7 125 120 115 110 105 100 95 90 85 80 75 70 65 60 55 50 45 40 35 J10 M A J J A O N D F11 M M J J S O D J12 F A M J A S N D Weekly

Background Headquartered in Mumbai, India, and incorporated in 1994, Geometric is a specialist in the domain of engineering solutions, IT services and technologies. Its portfolio of Global Engineering services 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 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 for larger business. This could, apart from boosting topline, also lead to better margins from non-PLM business. Geometric has delivered impressive financial performance, high return ratios and healthy cash generation led by low capital investment requirement and high asset utilization. It is equipped to benefit out of significant opportunities across Automotive & Engineering, Manufacturing and off-highway equipment industries.

Stock Details
BSE Code NSE Code Bloomberg Price (Rs) as on Jan. 7, 2013 Equity Capital (Rs Cr) Face Value (Rs) Eq. Shares O/s (cr) Market Cap (Rs Cr.) Book Value (Rs) Avg. Volume (52 Week) 52 wk H/L 532312 GEOMETRIC GEO IN 109.3 12.6 2.0 6.3 685.9 29.8 210,689 125.5/47.6

Shareholding Pattern
(As on Sept 30, 2012) Promoters * Institutions Public & Others ** Total % Holding 37.4 11.8 51.0 100.0

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 in a particular period (like in Q2FY13). As it mainly derives its revenues from US and European markets, forex fluctuations 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 to pressure on pricing. The company is highly dependent on talent and failure to attract and retain talent and control costs could impact its financial performance.

* Godrej group 30.1% and Manu Parpia 7.3% ** Includes Rakesh Jhunjhunwala 16.6%

Consolidated Financials at a Glance: Particulars (Rs. in Cr) FY11 FY12 Net Sales 620.6 807.9 % Growth (y-o-y) 21.3 30.2 EBITDA 75.0 111.6 % Growth (y-o-y) -15.5 48.8 PAT (Adjusted) 57.5 59.2 % Growth (y-o-y) 23.3 2.8 EPS 9.2 9.4 % Growth (y-o-y) 23.3 2.8 PE 11.9 11.6 Valuation & Recommendation

FY13E 1075.1 33.1 226.8 103.2 97.1 64.2 15.5 64.2 7.1

FY14E 1295.4 20.5 275.9 21.6 132.5 36.5 21.1 36.5 5.2

We expect the companys revenues to grow at a CAGR of 26.6% over FY1214. PAT is expected to grow at a CAGR over 49.7% over the same period. At CMP, the stock is currently trading at 5.2x FY14E EPS. Based on strong balance sheet, shareholder friendly management, good execution record and recent emphasis on revenue maximization and cost control, we value the stock at 7x FY14E EPS, which gives us target price 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.

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Business and Operations: Geometric is a specialist in the domain of engineering solutions, services and technologies. Its portfolio of Global Engineering services 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 product realization lifecycle. Geometric offers its customers a wide range of services and solutions spanning the entire product realization 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 in 1994. Today it is one of the leading providers of global engineering services, PLM solutions, and outsourced product development in the world. Geometric has over two decades of proven experience in CAx, PDM and MPM, as well as over six decades 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 in India, Geometric launched one of the first drafting software on the UNIX platform as early as 1987. The very same year saw the 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-promoter and 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 solutions and 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 impacted during the global economic crisis in 2008 and 2009 wherein the profitability was severely impacted, bounced back in 2010 and 2011 and had initiated restructuring /optimization of overall business in 2012. The employee strength of 4500 has almost doubled in the past five years, with revenues of US Dollars 167.5 million for the year ended March 2012. The company operates 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 SAS France, Geometric Asia Pacific Pte, Geometric China, Geometric Japan K. K. , Geometric Europe GmbH, Delmia Solutions Pvt. Ltd. and a 58: 32 Joint 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

Service Lines - FY12

7% Softw are Services Engineering Services IP

5% Softw are Services Engineering Services IP

36% 57%

39%

56%

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 change programs initiated in 2010. The company maintained its focus on building process solutions and offerings that combine software and engineering capabilities. Its approach has been to simplify the PLM landscape for customers and help them get more out of their PLM investments through solutions and specialized AMS (Application Management Services) for the engineering IT landscape. Multiple AMS wins recently have contributed to revenue predictability. The business has won marquee 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 enterprise PLM systems. The companys focus on the region, strong partnerships and consulting approach has led to addition of three OEM customers in India. The company continued to win fixed price engagements for its CAX services and solutions. Its highly differentiated capabilities in the CAX software development backed by its own IP from its Geometry Technology Solutions portfolio has helped 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 their engineering operations by building KBE (Knowledge Based Engineering) solutions on various CAD platforms.
Custom er Segment Revenue Contribution (excl Products and 3D PLM JV)

Vertical wise revenue contribution

50.0%

80.0% 60.0% 40.0% 20.0% 0.0% Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13

40.0% 30.0% 20.0% 10.0% 0.0% Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Industrial Automotive Strategic

Direct Industrial

Softw are ISVs

Through Partners

Engineering Solutions and Services: Geometric provides engineering solutions and services for product engineering, manufacturing engineering and industrial engineering to customers across all its target industries. The company saw good success with its key customers and won new engagements 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 the customers reach these markets with the right products and at the right price. Manufacturing engineering is one of the companys highly differentiated capabilities and it won engagements to support its customers in their manufacturing plants across the globe including in India. In the automotive sector, Geometrics strong track record with automotive OEMs helped to win and grow its engineering engagements with leading tier-1 suppliers both in Europe as well as in USA. Engineering services drove the growth in multimillion dollar accounts in the off-highway sector as the company continued to add new customers in this category. IP led engineering offerings like should costing saw further customer acceptance in heavy vehicles, off-highway and aerospace industries. Traction in China, which was below initial estimates, is promising as the company setup engagements with global customers to support their local engineering requirements in China. Products: Products and Technology portfolio of Geometric includes Design and Manufacturing solutions, visualization and collaboration solution, and CAM product. Portfolio also includes interoperability solutions that integrate engineering and manufacturing applications within and across PLM and other enterprise systems. On one hand, the Products business is seen as a significant differentiator for the services business, while on the other it has been able to leverage service business engagements 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/iPhone and other popular handheld devices running Android. It will leverage cloud-based infrastructure for data optimization and collaboration.
6% 5% 22% 67%
US Europe APAC India Geography FY11

Geography - FY12

6% 4% 18%
US Europe APAC India

72%

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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 its customers and shareholders through organic and inorganic growth. Through its acquisition strategy, it has been able to tap newer 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 for the automotive industry, based in Oberschleiheim near Munich, Germany through its German subsidiary, Geometric Europe GmbH. 3Cap offers a multitude of services to its customers ranging from Embedded Systems Development Verification and Validation, and Calibration in the areas of powertrain and chassis. The acquisition was announced on January 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 be paid up front. Geometric is funding the acquisition out of accrued cash. The balance payments will be subject to earn-out under mutually agreed terms and conditions over a maximum period of 3 years. In the calendar year 2012, 3Cap had revenues close to Euros 11 million. The company has been growing at around 15% over the past few years and EBITDA margins 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 automotive suppliers 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 like Aerospace and Energy. The acquisition is effective 1st January 2013. Mr. Sadoune has entered into a long term agreement with Geometric and will take responsibility for all embedded systems activities, including Geometrics existing embedded systems projects. Geometric would primarily benefit from enhanced presence in Europe and Automotive vertical. The company has been already running at an efficient level and the management does not expect any improvement in the operating margins and would crosssell/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 from OnCourse Technologies Inc (OCTH) in January 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 Geometric Americas, Inc., and continues to develop and market CAMWorks. In addition, the subsidiary is a distributor for Geometric's other software products and technologies for the manufacturing industry, as well as the marketing arm for the company's Desktop Products & Technologies Unit. This acquisition has helped Geometric add a reseller network and develop channel partners for its leading products and technologies for the manufacturing industry like Feature Recognition, NestLib, eDrawings Publisher, 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-based engineering 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 expertise includes program management, product design & engineering, supply chain engineering, manufacturing engineering, tool and rack 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 NX Series, 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-shore development centers, Geometric also acquired Modern Engineering's supply-chain engineering technology - The Virtual Engineer. Geometric's acquisition of Modern Engineering was a significant step in realizing the true potential of global engineering. The merged 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 Software Solutions Ltd. in 2002 with 58% ownership from Geometric. 3DPLM comprises a dedicated team of more than 800 people working 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. These include development, customization, implementation, migration, integration, customization, training and support services across 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 in proximity locations coupled with process and task level scalability in near-shore and offshore locations. As product manufacturers 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 are Fortune 500 companies. The domain knowledge acquired over years could be used to acquire new clients and to develop deeper relationships with existing clients. While Software services brings more value add, in Engineering services growth potential 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 like adoption of latest technologies, more intuitive decision support in design and engineering, connectivity between direct modeling 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 are also undertaking major software modernization programs to leverage the advancements in software technology, more immersive 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. The expected 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. The company had entered into an agreement with a leading consulting company in FY12 to help it transform Geometric. It includes integrating its operations especially Geometric Americas, the US subsidiary. It includes improving its cash flow by streamlining the 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, the company 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 both contribution 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 Operations over the next few months. It will help improve both quality and productivity, and the impact will be seen gradually in the quarters to come. 3. Growth Initiative: This initiative was launched two quarters back. The objective is to address customers in a more systematic and 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 each customer and implement Go-to-market initiative. It plans to enhance offerings to existing customers showing clear value proposition.

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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 grow profitably, 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 to see a positive impact on both revenue and margins in the next financial year. The growth initiative is also helping to improve the effectiveness of the sales force. In the next two quarters, it will drastically trim the tail and ensure focus on major accounts. 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 context of strengthening global R&D activities in India and creating stronger synergies between all R&D teams, Dassault Systems and Geometric had signed an agreement to combine DS R&D labs in Bangalore with 3D PLM. With this, 3D PLM now works on 6 major 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 in forging successful relationships with customers with its customers worldwide. The revenue model of this JV is cost plus; but continuous cost improvements need to be demonstrated. Below chart gives Net sales, EBITDA and PAT trends for 3D PLM on a standalone basis. The profitability of the joint venture was lower in FY12 on a standalone 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

250.0 200.0 150.0 100.0 50.0 0.0 FY10 FY11 EBITDA FY12 PAT

Net sales INR

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 with the existing customers as well as acquire new customers. The company sees significant opportunities arising out of partnerships and alliances. Geometric customers are increasingly seeking closer collaboration in defining requirements and demanding solutions to their problems for providing competitive advantage. Geometric sees a great opportunity in being seen as a solution provider through its consulting practice and intellectual property led offerings.

Industry Overview
Geometric operates in the Engineering to Manufacturing space and predominantly for the engineering intensive discrete manufacturing industries. Its services, solutions and technology portfolio referred to as Engineering Services, covering product realization services and solutions, such as Product Lifecycle Management, Software Product Development and Global Engineering services aims to increase the effectiveness and efficiency of design, engineering and manufacturing business processes for firms across the globe. Overall, the economic challenges have led corporations to redraft their IT policies and the benefits to be derived from IT outsourcing. Customers no longer intended to have IT outsourcing just as a cost arbitrage and efficiency improvement tool, but demanded business transformation and innovation as the focal point of IT outsourcing. This led the customers to work with the IT vendors on differentiated services and new business models like partnerships, business outcomes based pricing, profit sharing, 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 fast acclimate 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 Allen report, India Engineering Research and development outsourcing is estimated to reach USD 22 billion by 2015 and USD 45 billion by 2020 and Global Engineering research and development to USD 118 billion in 2020. While continued growth is expected, 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 of nearly 14% over financial year 2011. FY12 saw Geometric's major markets positively recovering from the global recession and taking forward looking decisions that had been put on hold in the preceding years. The industry saw vigor returning in global engineering 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 IT as 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 on strengthening front-ending teams, deepening vertical specialization, expanding services portfolio, building non-linear revenue streams and global delivery models. Conscious of the increasing concerns of protectionism, Indian IT majors have been ramping up their onshore and near-shore presence. Increased specialization in verticals, Off-shoring as an Innovation hub, Emergence of hybrid ESP-captive model, and Adoption of 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 specific brands and becoming lean. This has provided opportunities for Geometric to strengthen its engagements with leading automotive OEMs and their key suppliers. Automotive majors have settled their deconsolidation programs and have moved ahead on their engineering IT investments and sourcing engineering from India and China. As auto companies try to remain competitive by focusing on more feature rich, technologically advanced, fuel and cost-effective vehicles, it becomes imperative for them to shift production and outsourcing work from high cost countries to low cost ones including India, while continuing investment in research. The automotive industry has certainly opened up opportunities for Geometric through new and existing customers, however given the industry's sourcing maturity and the economic uncertainties that the industry is trying to balance, 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 of the companies having the highest level of order backlog. With much of such backlog across the industry to be delivered over the next couple of years, it augurs well for Geometric to capitalize on the global engineering services and engineering productivity 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 in regions like China and India. Aerospace and Engineering: Aerospace and Engineering for Oil & Gas and Energy are Geometric's strategic markets. The commercial aircraft sector continued to trend upwards in 2011, building upon its production momentum. Aerospace companies achieved the highest production level in commercial aircraft history in 2011. This increase in production is driving parallel production activity increases 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 expected to expand over the next 20 years given the economic growth in emerging markets, demand for fuel-efficient planes and engine technologies which bodes well for Geometric's core engineering offerings. To gear up towards this the major players in the industry are looking at robust IT modernization programs leading to opportunities for Geometric, though the sales cycles will continue to be stretched. In the manufacturing industry at large, the restructuring measures and process improvement programs continue to drive IT and engineering outsourcing, with focus on areas like standardization of manufacturing processes, competitive sourcing of components, and increasing integration between various enterprise level systems. Research and Development will continue for green technologies and localization of products for the new growth market. All of these trends are poised to deepen and widen the opportunities available for Geometric.

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Risks & Concerns

High Client concentration The company derives majority of its revenues from few large clients. Excessive exposure to a few large clients has the potential to impact profitability and to increase credit risk. A repeat of what happened in Q2FY13 (loss of one major client due to 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 products also ties the company to the fortunes of these products and the companies that own these products. On the other hand, too much of diversification has the potential to impair its competitive edge and may spread it too thin. The addition of Aerospace and Oil & Gas Engineering to the focus verticals is expected to mitigate this risk largely in addition to making business less cyclical. 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 and other currencies could affect its ability to compete, the movement in Rupee exchange rate vis-a-vis US dollar could also result in fluctuation in the companys operating margins and have short term impact on profitability. Geometric attempts to minimize 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 much engineering activity in house while leveraging the advantages of an offshore model. Geometric aims to mitigate this risk by offering mission critical or core activities at a proximity center or within the customer's premises to address IP risk, which is possible through its Global Engineering service delivery model. In addition, Geometric can also offer captive centers technology 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 with increased economic uncertainties. As majority of its business is from US (64% of revenues in Q2FY13), any downturn in US economy can adversely impact its business. Geometric attempts to minimize the risk through diversification across geographies 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 up the cost of talent which may not be matched by the increase in the realizations from the customers. Immigration restrictions in key markets are also resulting in longer lead time for servicing the customers and higher costs. Attraction and retention of top talent 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 negatively impacts the business. One example of this is, in recent times the rejection rates for L1 visa petitions, which are used for intracompany transfers of employees from foreign offices to US offices has gone up. Between 2005 and 2007, the denial rate for L1 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 a major 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 utilization rates 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 in Q1FY13 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 significantly lower. However, due to a significant improvement in the value of the rupee as on 30th September, the Profit before tax declined 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 had already given hike to the India employees in April 2012. In future, all salary revisions will be granted effective 1st April irrespective of location. The company had both positive and negative developments this quarter and the current month. It won a multi-year contract from a large industrial equipment manufacturing company. The engagement will initially start with onsite activity moving to near shore and then offshore activity. The company expects to commence billing in the current quarter and the relationship has the potential to evolve into a multi-million dollar engagement. It also signed a Master Services Agreement with a large aerospace company. While this in itself will not result in immediate business, it opens the door to grow the relationship over the 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 one year. 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 revenues in the current quarter, as also the profitability. The lost order was a fixed price engagement and on the engineering side of the business. The lost contract will also have an adverse impact on the next few quarters. The other development is the company has begun to see softness in demand from its largest customer in North America. The company expects this softness to continue 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 coming quarter. 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 the project 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 Q1 FY13. 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 continuous improvement and steady business performance in the coming year/s. The company focuses on reducing proportion of General and 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 guidance of 16-18% (higher end) for the FY'13 and expects more than 10% earnings growth despite loss of one large client. The company is in a comfortable position to beat earnings guidance. It is confident on guidance as it foresees visibility from other customers/areas. The management does not see any pricing pressure and is confident on maintaining and improving margins and expects to maintain 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 customers will look at implementing the best-of-breed solutions for their organizations, to get maximum mileage in order to bounce back and remain competitive. Companies with good cash reserves will be able to invest in building assets as well as competencies necessary 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 on recommendations of a management consultant and financial performance could act as a trigger for the stock while high client concentration and increase in competition are the major concerns. Geometric could report better growth in PAT in FY13 and FY14 due to improvement in operating performance post implementation of consultants recommendations, no consultant fees

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and lower forex losses. We 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. 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 target price 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 Particulars Operating revenue (USD) Exchange rate Total Income Total Expenditure Cost of revenues S&M G&A EBITDA Other income EBIDTA incl. OI Interest PBDT Depreciation PBT Tax Reported PAT Minority Interest Profit/Loss of Associate Company Net Profit after Min. Int. & P/L Ass. Co. Extra-ordinary Items Adjusted PAT EPS (Rs.) Equity FV OPM (%) PATM (%) Profit & Loss A/C YE March (Rs. Cr.) Total Income % growth rate(YOY) Cost of revenues % growth rate (Y-o-Y) % of sales S&M % growth rate (Y-o-Y) % of sales G&A % growth rate (Y-o-Y) % of sales Total Operating Expenses (Rs crore) Var. % 19.4

Q2FY13 47.7 54.9 261.6 205.2 162.2 11.1 31.9 56.4 -14.0 42.4 0.8 41.5 7.8 33.7 10.3 23.4 5.5 0.0 17.9 0.0 17.9 2.9 12.6 2.0 21.6 6.8

Q2FY12 41.4 46.2 191.2 163.6 127.3 8.2 28.1 27.6 11.7 39.3 0.1 39.2 7.4 31.8 8.5 23.3 3.2 0.0 20.1 6.7 13.4 2.1 12.6 2.0 14.4 7.0

Var. % 15.1

Q1FY13 47.80 54.56 260.8 208.1 157.3 10.1 40.7 52.7 -7.0 45.6 0.8 44.8 7.4 37.4 13.3 24.1 3.4 0.0

Var. % -0.3

H1FY13 95.5

H1FY12 80.0

36.8 25.4 27.4 35.0 13.5 104.4 7.7 580.5 5.9 5.9 5.9 21.6 0.3

0.3 -1.4 3.1 10.1 -21.8 7.1 -7.2 1.5 -7.3 5.2 -9.8 -22.4 -2.9

522.4 413.3 319.5 21.21 72.62 109.1 -21.1 88.0 1.66 86.3 15.2 71.1 23.6 47.5 9.0 0.0

363.9 319.8 247.7 17.11 55.01 44.1 19.5 63.5 0.15 63.4 13.9 49.5 12.4 37.1 5.0 0.0 32.1 7.0 25.1 4.0 12.6 2.0 12.1 6.9

43.5 29.2 29.0 24.0 32.0 147.3 38.5 1023.0 36.2 9.8 43.6 89.6 28.1

-11.0 33.6 33.6

49.5 -2.3

20.7 0.0 20.7 3.3 12.6 2.0 20.2 7.9

-13.4 -13.4 -13.4

6.7 -13.7

38.5 0.0 38.5 6.1 12.6 2.0 20.9 7.4

20.1 53.4 53.4

72.3 6.9
Rs.Cr.

FY11 620.6 410.3 66.1% 32.8 5.3% 102.4 16.5% 545.6

FY12 807.9 30.2% 529.7 29.1% 65.6% 36.2 10.1% 4.5% 130.4 27.3% 16.1% 696.3

FY13E 1075.1 33.1% 644.0 21.6% 59.9% 43.0 18.9% 4.0% 161.3 23.7% 15.0% 848.3

FY14E 1295.4 20.5% 775.9 20.5% 59.9% 53.1 23.5% 4.1% 190.4 18.1% 14.7% 1019.5
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% growth rate(YOY) % of sales EBITDA % growth rate(YOY) Other Income % growth rate (Y-o-Y) EBITDA incl. OI % growth rate(YOY) Interest % growth rate(YOY) Depreciation % growth rate(YOY) PBT % growth rate(YOY) Provision for Tax % of PBT PAT % growth rate(YOY) Earnings in Affiliates Minority Interest Reported PAT % growth rate(YOY) Extra Ordinary Items Adjusted PAT % growth rate(YOY) Equity Face Value EPS Balance Sheet YE March (Rs. Cr.) Equity & Liabilities Shareholders Funds Share Capital Reserves & Surplus Share application money pending allotment Minority Interest Non-Current Liabilities Long-term borrowings Deferred tax liabilities (net) Other long-term liabilities Long Term Provisions Current Liabilities Short Term Borrowings Trade Payables Other Current Liabilities Short Term Provisions Total Equity & Liabilities Assets

87.9% 75.0 21.9 96.9 0.9 26.0 70.1 1.7 2.4% 68.4 0.0 10.8 57.6 0.1 57.5 12.6 2.0 9.2

27.6% 86.2% 111.6 48.8% 20.5 -6.4% 132.1 36.3% 1.8 114.3% 28.8 10.7% 101.5 44.8% 21.2 20.9% 80.3 17.4% 0.0 14.2 66.1 14.9% 7.0 59.2 2.8% 12.6 2.0 9.4

21.8% 78.9% 226.8 103.2% -18.1 -188.3% 208.7 58.0% 3.5 89.5% 33.2 15.5% 172.0 69.5% 55.9 32.5% 116.1 44.6% 0.0 19.0 97.1 46.9% 0.0 97.1 64.2% 12.6 2.0 15.5

20.2% 78.7% 275.9 21.6% -8.5 -53.0% 267.4 28.1% 4.1 17.1% 35.9 8.0% 227.5 32.2% 73.9 32.5% 153.5 32.2% 0.0 21.0 132.5 36.5% 0.0 132.5 36.5% 12.6 2.0 21.1
Rs.Cr.

Source: Company, HDFC Sec Research)

FY11 217.8 12.5 205.3 0.0 38.4 7.9 0.0 3.0 4.1 0.8 84.0 4.5 3.0 58.3 18.1 348.1

FY12 186.6 12.5 174.0 0.0 54.1 8.8 0.0 0.4 7.1 1.4 243.1 67.5 9.2 72.2 94.2 492.6

FY13E 267.6 12.6 255.0 0.0 69.1 10.0 0.0 0.8 9.2 0.0 223.3 43.8 7.5 75.9 96.1 570.0

FY14E 381.7 12.6 369.2 0.0 90.1 11.9 0.0 0.4 11.5 0.0 270.2 52.6 9.4 92.9 115.3 754.0

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Non-Current Assets Fixed Assets Tangible Assets Intangible assets CWIP Deferred tax assets (net) Long-term loans and advances Other non current assets Current Assets Current investments Trade Receivables Cash & Cash Equivalents Short Term Loans & Advances Other Current Assets Total Assets Key Ratios YE March No of Equity Shares Current Market Price Market Capitalization Entreprise Value FD EPS Cash EPS (PAT + Depreciation) P/E(x) Book Value (Rs.) P/BV (x) EBITDA (%) PBT (%) NPM (%) ROCE (%) RONW (%) Debt-Equity Current Ratio Mcap/Sales(x) EV/EBITDA Cash Flow Statement YE March (Rs. Cr) Profit Before Tax Net Operating Cash Flow Net Cash from Investing Act. Net Cash from financing Act. Cash & Cash Equivalents Net Inc/(Dec) in Cash

101.0 84.7 68.1 16.5 0.2 0.0 13.6 2.7 247.1 13.9 118.3 10.9 50.0 54.0 348.1

142.4 89.1 73.2 14.5 1.4 4.2 48.3 0.7 350.2 69.6 144.5 56.1 29.2 50.8 492.6

147.3 97.2 81.2 14.5 1.5 4.9 44.5 0.7 422.6 90.4 156.1 74.0 33.6 68.6 570.0

167.2 106.4 90.2 14.5 1.7 5.9 53.4 1.5 586.8 99.5 187.3 174.0 40.3 85.7 754.0

(Source: Company, HDFC Sec Research) Rs.Cr.

FY11 6.2 109.3 685.9 665.6 9.2 13.4 11.9 34.9 3.1 12.1 11.3 9.3 31.9 26.4 0.0 2.9 1.1 8.9

FY12 6.3 109.3 685.9 627.6 9.4 14.0 11.6 29.8 3.7 13.8 12.6 7.3 40.7 31.7 0.4 1.4 0.8 5.6

FY13E 6.3 109.3 685.9 565.3 15.5 20.8 7.1 42.6 2.6 21.1 16.0 9.0 56.4 36.3 0.2 1.9 0.6 2.5

FY14E 6.3 109.3 685.9 465.0 21.1 26.8 5.2 60.8 1.8 21.3 17.6 10.2 53.3 34.7 0.1 2.2 0.5 1.7

(Source: Company, HDFC Sec Research)

FY11 70.1 42.0 -19.0 -29.9 10.9 -6.9

FY12 101.5 72.7 -80.1 47.9 56.1 40.5

FY13E 172.0 102.5 -38.2 -42.5 74.0 21.8

FY14E 227.5 167.1 -55.7 -11.4 174.0 100.0

(Source: Company, HDFC Sec Research)

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Analyst: Ravindra Agrawal

Email ID: ravindra.agrawal@hdfcsec.com

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Fax: (022) 3075 3435

Corporate 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 a solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell securities referred to herein. We may from time to time solicit from, or perform investment banking, or other services for, any company mentioned in this document. This report is intended for non-Institutional Clients

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