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Geometric: Right moves - Views on News from Equitymaster
 
 
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  • Mar 2, 2002

    Geometric: Right moves

    From of low of Rs 52 post September 11, Geometric Softwareís stock price has gone up to Rs 338 at close on the 1st of March 2002. A mind boggling 550%. However, far more exciting thing about Geometric is its business model. It is a software company with a difference because it has chosen to address information technology needs of the manufacturing industry. The company provides software components, solutions and services to the mechanical design and manufacturing markets. Geometric has dared to be bold enough to address this market that requires a high degree of engineering know-how.

    Geometric has three business units. The geometry business unit builds components (small independent software that satisfy a small function), and OEM (original equipment manufacturer) products in the CAD/CAM (computer aided design/manufacturing space). Geometricís components work along with more comprehensive CAD/CAM software like AutoCAD. For the OEM space, the company in 2QFY02 bagged project related to developing software for feature recognition from AutoDesk, USA. While Geometric will develop the software, it will be part of larger solution in the space from the OEM. The company also provides services for software development.

    The advantage Geometric has is that barrier to entry is very high for these kind of services. This is due to the fact that providing solutions for creating and manipulating geometry (2D and 3D models) requires significant mathematical know-how. Also, the software have a lot of business rules embedded (design engineering principles). Firstly, quality human resources are very hard to come by and second it is very difficult to replicate solutions. This is evident from the fact that globally the industry is consolidated with four companies: Dassault Systemes, PTC, UGS and SDRC. Geometric has a working relationship with three out of the four. Consequently, the competition is lesser.

    The company is also into product data management (PDM), which is handled by the information management business unit. PDM addresses the need to manage information about the products or the parts like who approved the final drawing, version control and keep a control that the proper version goes for manufacturing. The entry into the PDM arena marked a shift into Geometricís strategy.

    Understanding the viewing objects in solid form, and manipulating them should become more of an everyday affair rather than being the domain of a select few, Geometric ventured into the markets for collaborative engineering. The company has visualization software CollabView. However, the imperative being that geometry must be integrated to the enterprise software, Geometric has geared to offer services in this space also.

    To address a broader part of the collaborative engineering markets, Geometric Software has announced a tie up with Wipro. The later being the traditional software services company with strong expertise in application development, maintenance and integration. While Geometric will provide the solutions related to geometry, Wipro will help integrate these solutions with the enterprise systems.

    Entry in PDM and collaborative engineering marked a shift in Geometricís strategy. The company that had traditionally targeted OEMs but now entered the industrial markets with services in the area of PDM and collaborative engineering. This was for two reasons. Firstly, it was already working with three of the four major players in the CAD/CAM segment and therefore, growth was stagnating. The second was the newer areas are more service oriented in nature. This would give the company more visibility in revenues.

    Apart from itís offerings what separates Geometric from others is the fact that it has managed to successfully create and sell IPRs (intellectual property rights). The company during 3QFY01 concluded a significant technology sale to Spatial Corp., a CAD major in the U.S, which contributed revenues to the tune of Rs 46 m to topline

    More recently in January 2002, Geometric and Dassault Systemes (DS) formed a joint venture. The new company, to be named 3D PLM Software Solutions Ltd., will have an initial equity base of Rs 13 m of which Geometric and DS will hold 70% and 30% respectively. The company will begin working on software development projects outsourced from DS Group, thereby allowing the new company to generate revenues from day one. The new company will commence operations in February 2002 with projects on DS Group's leading edge solutions, CATIA and ENOVIA.

    With this tie up Geometric has probably taken its first step in entering the big league. This 3D PLM will work as an extension of DSí R&D Team. Thus, Geometric will have access to DSís experience, from which the company can create a superior competitive edge. In revenue terms, the opportunity is sizable. In FY00 DS spend around US$ 169 m (Rs 8 bn) on R&D. Compare this with Geometricís revenues for 9mFY01, which are Rs 540 m (US$ 11 m). The other benefits that will result as a consequence of this partnership will be credibility with DSí customers and access to world-class processes.

    Geometric has shown very strong financials for FY02. The topline has grown sequentially and operating margins have improved consistently over the three quarters of FY02. However, going has not always been smooth for the company. Infact FY01 was a roller coaster ride for Geometric. The company had a bad start to the year and was the first Indian company to give a profit warning. Geomtericís topline was not growing. The company was facing some problems with its subsidiary in the US. Immediate corrective action was taken. The management reorganised its sales and marketing functions. Dick Miller, CEO of Geometricís US subsidiary resigned with effect from September 30, 2001 and Manu Parpia, MD of Geometric Software, took over. And then Geometric started its turn around. For the 3QFY01 Geometric posted a QoQ (sequential) growth of 30% in revenues and posted profits once again.

    (Rs m) FY00 FY01 FY02*
    Revenues 319 449 611
    Growth - 40.8% 36.0%
    Operating Margin 28.1% 21.7% 21.1%
    Profit after taxes 206 89 104
    Net profit margin 64.6% 19.8% 17.0%
    Nof of shares (m) 5.2 5.2 5.2
    EPS (Rs) 39.6 17.1 20.0
    EPS growth - -57% 17%
    *9mFY02 annualsied numbers

    Geometric expects fourth quarter of FY02 to be even stronger. And therefore, the company expects the topline to be more than Rs 650 m and the net profits between Rs 120 m to Rs 130 m. This translates to the fact that the company is expecting a 10% plus sequential growth for 4QFY02 in topline. This is at a time when most companies are struggling to find growth opportunities. The company valuations could witness further upside on the back of robust growth in topline.

     

     

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