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Geometric Software + Rolta India – Recommendation

October 21, 2008

Geometric Software Revenues grew by 8.7% sequentially to Rs1,526m. EBITDA grew a strong 52.1% (v/s a 17.7% decline in Q1) to Rs197m. EBITDA margins at 12.9% expanded handsomely by 369bps. A prior period adjustment shaved off Rs 14.1m from profits.

India and APAC (combined ~10% rev) witnessed strong growth which momentum is expected to continue going forward. Number of customers added was a modest 15 even as new deals won this quarter dwindled to a mere US$6.7m.

We now estimate an FY09 EPS of Rs.6.7 (Rs.7.0 earlier). Stripped of the extraordinaries’ incurred in Q1FY09, the core EPS for Geometric would stand at Rs.4.9 in FY09E. Sell Geometrcie Software on every rise and switch to front line IT counter.

Rolta’s Q1FY09 revenues were in line with estimates. Revenue grew by 7.8% QoQ to Rs 3,461mn, whereas EBITDA grew by 5.6% QoQ to Rs 1,185mn. EBITDA margins dipped slightly by 70bps to 34.2%, primarily due to wage hikes (offshore 15%, onsite 2%) effected during the quarter.

Rolta has had to provide for mark-to market provision of Rs613mn on its outstanding FCCBs of $150mn. This is the second straight quarter of mark-to-market provision (Rs302mn provided in Q4FY08). The FCCBs were raised when the rupee was trading at close to Rs41

Management did not increase FY09 guidance for a recent small acquisition a conservative step, in our view, given the current economic environment. However, management did state increased confidence in reaching the top end of guidance.

Rolta is expected to post a full year revenue growth of 44% at Rs 1,543 crore with a PAT of Rs 285 crore and an EPS of Rs 19.29 for FY09 and Rs 24 for FY10. Existing investors can stay invested while fresh accumulation can be done at Rs 150 levels.

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