Geometric Ltd: Buy

Improvement in top clients, steady stream of deals, and enhanced traction in key segments and geographies are positives for the company.

A select set of mid-cap IT companies, especially those focussed on segments such as manufacturing and automotives, has managed to ride on the wave of increased outsourcing from clients in these verticals.

Geometric is one such player that has benefitted from the revival in IT spends of clients after the freeze in 2008-09.

Ramp up in top clients, steady stream of deals, and enhanced traction in key segments and geographies are positives for the company.

Operationally, a fairly high utilisation level has meant that the company has been able to optimise costs.

At Rs 71, the share trades at eight times its likely per share earnings for FY13. This is at a discount to peers such as Infotech Enterprises. The stock has run up by more than 50 per cent over the past two-three months. Although valuations are still attractive, given the steep nature of the climb, the Geometric stock can be accumulated on any corrections linked to the broader market.

In the first nine months of this fiscal, the company's revenues grew by 29.4 per cent to Rs 583 crore, while net profits expanded by 16.9 per cent to Rs 46.4 crore.

Business positives

Over the past two-three quarters, Geometric has seen revenues from its top client grow at faster than the overall company rate. Rising steadily from 20 per cent in December 2010, its top client now accounts for 30 per cent of overall revenues. The company's top 10 clients too have grown at a healthy pace, suggesting robust execution and client mining capabilities.

In terms of verticals, industrial and automotive are key areas where Geometric operates. For these segments, the company provides software services and engineering services.

The relatively high margin (over 30 per cent EBIT) software services accounts for 55.4 percent of revenues, while engineering services accounts for 39.4 per cent, making it a healthy blended offering.

From an industry perspective, manufacturing and automotives as 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.

Despite entrenched players competing, Geometric's robust growth in these segments suggests that it has also managed to sustain even though large outsourcing customers undertook vendor rationalisation exercises.

Operational improvements

The number of clients in the $5-10 million range has increased by two in the last one year, while number of customers in the $1-5 million bucket has improved by four.

The US business that provides 72 per cent of Geometric's revenues continues to grow at or around the company rate (25-36 percent year-on-year) over the past three quarters. Being a key market, especially for automotives, this bodes well for the company.

While there has been some decline in contribution from the Europe business, it has not been alarming.

Interestingly, India which provides 6.4 per cent of revenues has been growing at a rapid pace. Being a fast growing automotive market, an increasing footprint could reduce the economic risks associated with developed markets.

Utilisation has been steadily rising for Geometric and is currently at 90.9 per cent, among the highest in the industry. This makes for fairly thin bench strength or unbilled resources and hence optimises costs. This also suggests that volumes (person-months billed) have been quite steady for the company.

The other key positive for Geometric is its revenue-mix. Over 40 per cent of its revenues comes from services delivered from low-cost destinations, offshore or offsite. This compares favourably with most mid-tier companies and significantly optimises costs.


Attrition in the company, though declining, continues to be uncomfortable at 16.5 percent. Any wage hikes to stem this would affect margins.

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