Geometric - Buy

A clutch of mid-cap IT companies has managed to revive their fortunes after the global slowdown in 2008-09. They have weathered a turbulent 2011-12 as well and benefited from increased client spends. Investors can buy the shares of mid-tier software and engineering services player Geometric in light of its steady performance across key business parameters. A lucrative service-mix, ramp-up in top clients and strong performance in operational parameters such as utilisation and offshore-mix are key positives of the company. From an industry perspective, manufacturing and automotives segments have been growing at a healthy pace for top-tier players such as Infosys, HCL Technologies and TCS. This indicates a large potential market.

At Rs 104, the share trades at seven times its likely per share earnings for FY14. This valuation multiple places it at a discount to peers such as Infotech Enterprises and KPIT Cummins, making it a reasonable entry point for investments with a two-year horizon. In the first half of this fiscal, Geometric’s revenues grew by 43.5 per cent over the same period in FY12 to Rs 522.4 crore, while net profit rose by 53.4 per cent to Rs 38.1 crore.

Business positives: For the past couple of years, Geometric, which caters to segments such as industrials and automotives, has been growing at a pace faster than the overall industry’s. In FY13 too, the company has guided for a growth of 16-18 per cent in revenues (dollar terms), which is higher than many top tier players as well as the overall anticipated expansion rate for the industry. The relatively high margin (over 30 per cent EBIT) software services account for 55 per cent of revenues, while engineering services represents close to 40.6 per cent of the pie, making it a healthy blended offering. The top 10 clients of the company have steadily ramped up and now account for 73 per cent of the revenues, suggesting reasonably strong execution capabilities. Over the past one year, it has seen addition of large clients (more than $10 million) and also several in the mid-size segments ($ 1-10 million). Operationally, it has high utilisation level of more than 85 per cent, which is among the highest in the industry, suggesting steady volumes (man-hours billed). It also derives 62 per cent of its revenues from services delivered from offshore locations, which substantially optimises costs for the company. The key risk to this recommendation is pricing pressure from other mid-tiers, which can strain margins.

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