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Geometric: Subdued performance - Views on News from Equitymaster

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Geometric: Subdued performance

Apr 21, 2008

Performance summary
  • Topline grows by 27% YoY during FY08, 2% QoQ during 4QFY08. Growth for the fiscal largely led by the services business, which grew its sales by 33% YoY. Product revenues decline by 15% YoY.
  • Operating margins contract by 6.5% YoY during the fiscal owing to higher employee costs (as percentage of sales).

  • Net profits decline by 14% YoY during FY08, 32% QoQ during 4QFY08. Growth during the fiscal would have been lower but for a strong 82% YoY rise in other income.

  • Adds 47 new clients during the fiscal, thus taking the total clientele to 122.

  • Inducts 195 employees during 4QFY08. Total employee strength stands at 2,968 (including 738 in subsidiaries)

Consolidated financial performance: A snapshot…
(Rs m) 3QFY08 4QFY08 Change FY07 FY08 Change
Sales 1,240 1,264 2.0% 3,831 4,858 26.8%
Expenditure 1,096 1,107 1.0% 3,189 4,365 36.9%
Operating profit (EBITDA) 143 157 9.7% 642 493 -23.1%
Operating profit margin (%) 11.5% 12.4%   16.7% 10.2%  
Other income 26 (11) -141.3% 112 203 81.8%
Depreciation 51 52 1.9% 212 198 -6.9%
Interest 17 8 -49.7% 35 57 64.0%
Profit before tax 101 86 -15.2% 506 442 -12.7%
Tax 19 33 72.3% 68 66 -2.2%
Minority interest 14 7 -53.5% 64 55 -14.7%
Profit after tax/(loss) 68 46 -32.1% 374 321 -14.2%
Net profit margin (%) 5.5% 3.7%   9.8% 6.6%  
No. of shares (m)       61.9 62.1  
Diluted earnings per share (Rs)         5.2  
P/E ratio (x)         13.2  
* On a trailing 12 months basis

What has driven performance in FY08?
  • In rupee terms, Geometric recorded a 27% YoY growth in topline during FY08. This growth was aided by strong performances from the company’s software and engineering service businesses, which grew by 10% YoY and 86% YoY respectively. However, the product segment (7% of consolidated sales) recorded a 15% YoY decline in during the year. The management has indicated continuation of pressure in the Detroit automobile market, from where the company (including its subsidiary Modern Engineering) derives a large share of its products revenues.

      FY07 FY08  
    Segment Share Rs m Share Rs m Change
    Software product 38.0% 1,456 34.4% 1,671 14.8%
    Business partners 22.9% 877 17.9% 870 -0.9%
    Direct industrial 39.1% 1,498 47.7% 2,317 54.7%

  • Geometric’s operating margins contracted by 6.5% YoY during the fiscal. This was largely owing to the rupee’s appreciation (11% YoY) against the US dollar and a higher share of revenue coming from onsite projects, which have relatively lower margins as compared to offshore projects. Reduction in utilisation and increased traveling expense also impacted the operating margins negatively. As a matter of fact, the company’s utilisation (excluding trainees) levels dropped from 90% in FY07to 84% in FY08, substantiating the fact that the company is going through a tough phase.

  • Geometric recorded a 14% YoY decline in net profits during FY08. This was on account of a sharp contraction in operating margins and was despite an 81% YoY rise in other income.

What to expect?
At the current price of Rs 68, the stock is trading at 13.2 times FY08 consolidated earnings. In line with its past few quarters’ performance, 4QFY08 has been another lacklustre period for Geometric. While the company has seen its attrition rate decline to 13.3% (19.6% in 3QFY08), the fact that the broader business situation remains tight is concerning. However, as a key takeaway from the conference call post the result announcement, the management seems confident of turning around Geometric’s performance going forward. The company is expecting the engineering services business to be a major growth driver in the future. The company is also targeting Europe and Asia-Pacific markets for growth, thereby reducing its dependence on the US. Another key indication that the management has given is that Geometric will be concentrating on its annuity business for bringing a greater amount of stability in business going forward.

While Geometric has performed almost in line with out FY08 topline estimates, the company’s actual net profits are 23% lesser than what we had estimated. As such, we will have to review our numbers for the company. We shall put forth a more concrete view on the stock thereafter.

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