Geometric - Inorganic venture - Step in the right direction - Prabhudas Lilladher

Geometric has acquired 100% stake in Munich (Germany) based '3Cap Technologies GmbH', a specialist in automotive embedded system for ~Euro11m. The acquisition is inline with the company's stated objective of strengthening revenues from Europe, Automotive vertical and Embedded System. We retain our "Accumulate" rating.

- About 3Cap: 3Cap founded in 2004 by Mr. Henri Sadoune (French national) has 110 employees. He has entered into a long-term agreement with Geometric to take responsibility for all embedded systems activities, including Geometric's existing embedded systems projects. In CY12, 3Cap delivered revenue of Euro11m (CY11 ~Euro9.16m) with an EBITDA margin of ~10%. It has seven clients (no overlap with Geometric), predominantly based out of Germany. ~80% and 95% revenue contribution is from the top two clients and automotive vertical, respectively.

- The deal - 1x Trailing revenue: Geometric will pay Euro11m (1x CY12 revenue), of which, Euro7.5m will be paid upfront and balance payments will be subject to earnout under mutually agreed terms and conditions over a period of three years. The deal is EPS accretive and would be integrated in Q4FY13.

- Opportunities to cross-sell: a) Use 3Cap expertise to deliver embedded system solution to existing automotive OEM clients of Geometric b) Cross-sell Geometric's offerings to 3Cap's existing client base & consider offshoring the same in the near-to-medium term c) Value-added electronics contributes ~30-40% of the overall IT spend for automotive OEMs.

- FCF for Geometric on recovery path: FCF generation for Geometric has steadily improved over last three-years (average at ~46%). Cash & cash equivalents + Investments as on Q2FY13 stand at Rs1,136.2m which is sufficient enough to fund the upfront payment of Euro7.5m (Rs540m). We expect 50% of the earn-outs to be financed by 3Cap cash flow.

- Valuation and Recommendation - 'Accumulate', with TP of Rs140: Geometric has steadily improved both its revenue momentum and margin profile. The acquisition will strengthen its service offerings and geographical mix. We reiterate 'Accumulate' rating with a TP of Rs140, 8x FY14E earnings estimates.

Source : Equity Bulls

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