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Geometric: Where to from here? - Views on News from Equitymaster
 
 
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  • Feb 21, 2005

    Geometric: Where to from here?

    Geometric Software Solutions (GSS) is one of the niche players in the Indian software industry that has had a good past performance record. The company is focused on the PLM (Product Lifecycle Management) space, and provides innovative products and solutions to the automotive, aerospace and hi-tech industries in the areas of engineering, design, CAD/CAM, CAE and PDM. The main focus of PLM solutions is to help industries manage product lifecycles in the fast-moving competitive environment. The company's presence in the domain of geometry provides it with a competitive advantage in the form of high entry barriers on account of high-levels of technical skill-set requirements.

    A growth story all the way
    GSS has shown a very consistent growth rate over the last 3 years. From FY02 to FY04, the company's sales and profits have grown at CAGR of 30% and 27% respectively. What's more, in the nine month period ended December 2004, GSS' sales have already surpassed its entire FY04 sales, and are in line with the management's estimates of a 35% YoY growth rate for FY05.

    (Rs m) FY02 FY03 Change FY04 Change 9mFY05
    Net sales 625 841 34.6% 1,060 26.0% 1,183
    Operating profit (EBDITA) 144 233 62.2% 289 24.1% 336
    EBDITA margin (%) 23.0% 27.7%   27.3%   28.4%
    Profit after tax/(loss) 129 171 32.7% 208 22.3% 194
    Net profit margin (%) 20.6% 20.3%   19.7%   16.4%
    No. of shares (m) 5.3 5.3   5.4   11.1
    Diluted earnings per share (Rs)* 11.6 15.4   18.8   23.3
    (* annualised)            

    The management has set a target of US$ 100 m in revenues for the company by FY07. In order to achieve this target, the company will have to grow at a CAGR of over 60% for the next three years, which is undoubtedly a highly ambitious target. However, while we shall refrain from making an outright comment on the possibility of the company achieving the target, we are slightly cautious on this front. The management has indicated that it would apply a mix of organic and inorganic growth strategies to achieve his target. A case in point was the company's recent acquisition of TekSoft and Cimtronics, subsidiaries of OnCourse Technologies, for a consideration of US$ 1.75 m.

    Business break-up
    The company divides its revenues into two segments: products and projects. As of now, products do not comprise a major portion of the company's revenues, accounting for a little over 10% of revenues in FY04. It is the projects business that has been growing at a very fast clip, clocking an impressive CAGR of 34% during FY02 and FY04, while the products business has grown at a much more modest CAGR of 7% during the same period.

    (Rs m) FY02 FY03 Change FY04 Change
    Products
    Net Sales 98 122 24.6% 112 -8.6%
    EBIT 32 57 75.8% 48 -15.2%
    EBIT margin (%) 33.0% 46.6%   43.3%  
    Projects
    Net Sales 527 719 36.5% 949 31.9%
    EBIT 259 375 44.8% 463 23.4%
    EBIT margin (%) 49.1% 52.1%   48.8%  

    As can be seen from the table above, the company enjoys high EBIT margins in both its businesses. Contribution from products went down in FY04, on account of the slowdown that the global engineering industry was witnessing in the previous years. Project revenues on the other hand, have registered consistently high growth, and margins have also been healthy. Going forward, as the company increases the focus on development of its products, and also forges new partnerships with global PLM majors, we expect the growth to be much stronger and steadier.

    Partnerships are the key
    GSS has mentioned that partnerships are an extremely important way of growing, not just in terms of scale, but also with reference to -

    1. leveraging the partners' technology to offer superlative technology and industry expertise to offer value-added services to the end-customer,

    2. becoming development partners,

    3. marketing the partner's suite of products and services in India,

    4. collaborating with them to provide solutions to their customers, and

    5. making strategic investments in order to enable the company to acquire greater domain expertise.

    Over the years, the company has been dedicated to building long-term relationships with a view to achieving long-term growth. In this light, GSS has forged partnerships with a number of OEMs like EDS, Matrix One and Dassault Systemes, with whom it has also formed a joint venture called 3D PLM Software, which is a development contractor for Dassault's brands in the marketplace. It has also formed partnerships with major service providers and system integrators such as IBM, HP and UGS PLM Solutions, through whom it provides PLM solutions to large industries all over the world.

    To 'round' it off...
    As indicated above, GSS is a highly focused player in the PLM space, and has been leveraging on its competencies and high skills required to operate in this space. This serves as an entry barrier for potential competitors. Given the steps the company is taking in order to achieve its target of US$ 100 m by FY07, organic and inorganic, as well as its competencies in the PLM space, we feel that it is poised for strong growth going forward.

    At the current price of Rs 460, the stock trades at 19.7 times annualised 9mFY05 earnings. The stock has seen a run-up recently, and is currently at the higher end of the valuation spectrum. However, for investors with a long-term investment horizon, valuations do seem to be reasonable, given the management's vision and the company's growth prospects.

     

     

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