Q1FY10 results of Geometric saw a 9% q-o-q contraction in revenues, sharply impacted by client ramp downs and pricing pressure.
Voluntary discontinuation of low profitability projects, higher offshore and cost containment however helped operating margins that rebounded sharply q-o-q.
Lower losses on other income line also helped the company report net profits ahead of our estimates.
The management in its interaction has said that the demand environment is better than 2Q ago and believes the outlook for IT spends has stabilized with the likelihood of a recovery in 2HFY10.
It also believes that the value of new business added at $3.94mn, will likely start contributing to revenues only towards 2HFY10.
We adjust earnings estimates to accommodate for Q1FY10 results. FY10E is expected to remain weak with revenues declining 13% y-o-y; EBITDA is however expected to grow on the back of well-directed cost containment and pruning of low profitability accounts.
In FY10, we expect an EPS of Rs.5.6 (Rs.4.1 earlier) for FY10E assuming lower losses in the other income line given our INR appreciation assumption and estimated beneficial impact of cost containment measures.
Noting the upside to our target price and improved outlook on spends picking up in 2HFY10 we move the stock to an ACCUMULATE (Reduce earlier) with price target of Rs40 (Rs30).
Sustained improvements in financial performance and/or enhanced visibility will act as likely stock triggers.