Geometric - Equitymaster Report

As per an analyst note sent by Geometric Software, the management has estimated the company¿s 1QFY06 consolidated revenues to show a decline on a QoQ basis. This, the management has indicated taking into consideration that several projects, which were scheduled to commence in the first quarter, have now been shifted to the next quarter, i.e., 2QFY06. The revenue and profit growth guidance has been, thus, revised downwards by 5% to 8% each.

In the recent analyst meet held after the company had announced its FY05 results, while the management had projected some kind of weakness in 1QFY06 due to an adjustment in resource requirements by one of its major customers, it had anticipated a pick up in other activities. However, now with the postponement of some projects to the next quarter, and a delay in completing a major fixed price contract, the company is likely to report a decline in revenues during this quarter, on a sequential basis.

Investors should note that this kind of problem is duly visible with small companies like Geometric that have a resource crunch and follow a project-based model whereby it requires new projects to fill up the completed space as and when a contract gets over. If this does not happen, i.e., when a project gets over and there is no other project in the pipeline, the utilisation reduces thus, impacting the company on the margins front. In another case, as is being seen now, if the company delays the execution of an ongoing project, it has to leave some revenues on the table, as there is then an employee scarcity to meet requirements of a new project. In our recent interaction with the management, it had indicated that the company has initiated several annuity-based contracts of late and that this will provide them with a better visibility on the revenues front. However, annuity based contracts will still take some time to provide sustainable contribution to the company¿s topline and, to that extent, investors will have to bear the quarterly volatility on Geometric¿s performance.

This change warrants us to re-look at our projections for the full-year. Our current estimates indicate a profit growth of 59% in FY06, which would now have to be revised downwards. At this growth, the EPS for FY06 stands at Rs 39 per share. Thus, at the current price of Rs 570, the stock¿s price to earnings multiple is at 14.5 times FY06E earnings, which is at the higher end of the valuation spectrum. However, considering the strong growth in FY07, the price to earnings ratio works out to 10 times, which is still attractive.

In January 2005, we had recommended a buy on the stock with a target price of Rs 750 in the long term. The stock has witnessed a rise of 46% since then. While we believe that the valuations are rich from a short-term perspective, long-term investors can continue holding on to the stock, as we maintain our recommendation. There is, in fact, no need to panic from this one quarter of downward revision in the guidance.

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