1Q disappoints, Modern continues to report losses; high other income, lower taxes push up profits:

Geometric reported consolidated dollar revenue of 27.9m, down 1.4% QoQ. Rupee revenue was down 9.1% QoQ. EBITDA margin for 1QFY08 was down 640bp to 7% due to decline in dollar revenue, salary hikes, rupee appreciation and losses in Modern Engineering (net loss of US$0.321m). High forex gains and low tax rate pushed net profit up 15.5% QoQ to Rs117m v/s expected decline of 20.3%.

Y08 guidance of 50% dollar revenue and 30% rupee profit growth to be back-ended in FY08:

The management has revised its earlier guidance of 50% revenue growth in rupee terms down to 50% growth in dollar terms. The net profit guidance, however, remains intact at 30% rupee growth. The management is confident of achieving its guidance with stronger ramp ups in 2HFY08.

Losses in Modern Engineering to depress margins in FY08:

Losses in Modern are expected to be continued over the next two quarters. Given that Geometric’s scale of operations renders it sharply vulnerable to project delays, slower than expected project ramp ups could derail margin recovery in FY08.

Outlook and view:

While the demand environment for Geometric continues to be robust, we believe slower revenue ramp ups over the next few quarters and slower turnaround in Modern Engineering would dampen both revenue and margins over the next few quarters. Our downgraded estimates for FY08E and FY09E (diluted) reflect our expectations of slower revenue off take as well as higher rupee appreciation. At CMP, the stock trades at 15.6x FY08E and 11.5x FY09 EPS (diluted) estimates. We expect muted revenue and margin expectations to result in the stock underperforming the sector over the near–medium term. Downgrade to Neutral.