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Geometric Software: Moderate Performance

May 6, 2003

Geometric on a standalone basis has posted a strong 50% rise in profits sequentially, but has taken a marginal hit of 2% on its revenues for 4QFY03 sequentially. The reason for the decline was that several customers delayed large orders through the last two quarters, and war jitters resulted in weakness in the manufacturing sector, globally. However, despite a rising rupee, the company saw its revenues grow by 3% and profits by 5% for the year ended March 2003.

Standalone Figures (in Rs m)
(Rs m) 3QFY03 4QFY03 Change FY02 FY03 Change
Net Sales 155 152 -1.8% 572 591 3.3%
Other Income 9 20 133.6% 39 48 21.9%
Expenditure 120 110 -8.2% 436 445 2.1%
Operating Profit (EBDIT) 35 42 20.1% 136 146 7.4%
Operating Profit Margin (%) 22.6% 27.6%   23.8% 24.7%  
Interest - - - - - -
Depreciation 11 11 0.3% 45 45 0.9%
Profit before Tax 32 51 56.9% 131 149 13.9%
Extraordinary items 0 -1   1 1 0
Tax 2 6 158.9% 3 14 -
Profit after Tax/(Loss) 30 45 50.3% 129 135 5.2%
Net profit margin (%) 19.3% 29.6%   22.5% 22.9%  
No. of Shares 5.2 5.2   5.2 5.2  
Diluted Earnings per share* 23.0 34.6   24.5 26.0  
P/E Ratio   12.0     16.0  
(* annualised)            

For FY03, the consolidated revenues of the company (along with its subsidiaries Ė 3D PLM Software Solutions Ltd., GSS Pte. Ltd., Singapore and GSS Inc., USA) have risen by around 35%. The consolidated net profit has also seen a growth of 47%. This rise in revenues can be attributed to growth in businesses flowing through Geometricís partners. Dassault Systemes reported strategic, large wins in the automotive sector, while EDS PLM successfully consolidated its products and integration strategy.

Consolidated Figures (in Rs m)
(Rs m) 3QFY03 4QFY03 Change FY02 FY03 Change
Net Sales 219 224 2.1% 625 841 34.6%
Operating Profit (EBDIT) 64 67 4% 144 233 62%
Operating Profit Margin (%) 29.4% 29.9%   23.0% 27.7%  
Profit before Tax 57 62 7.9% 136 208 52.9%
Profit after Tax/(Loss) 51.47 55 6.9% 130.6 192 47.0%
Net profit margin (%) 23.5% 24.6%   20.9% 22.8%  
Diluted Earnings per share (Rs)* 34.3 36.7   21.8 32.0  
P/E Ratio (x)   11.3     13.0  
(* annualised)            

The Geometry Business Unit (BU) continues to be the largest entity and contributes 59% to the total revenues, followed by Information Management BU (IMBU) at 34% and Collaborative Engineering BU (CEBU) at 7%. The Geometry BU completed a wide variety of projects for OEMs and industrial clients, and also started working with new partners in Europe. The growth in contribution from IMBU was a result of steady growth in the services business from EDS and MatrixOne. The company also made its first entry in the Indian market by engaging in projects from two large Indian corporates. During Q4, the CEBU witnessed an enhancement to its existing relationship with Powerway to a strategic level. The quarter also saw the BUís entry into the Manufacturing Process Management (MPM) market. For FY04, the company plans to grow the IMBU and CEBU at a rate greater than the company average.

The company continues to make progress in forming alliances. In 4QFY03, the company added 15 new clients, of which 5 were industrial customers. This figure is higher than the 12 clients it added in the December quarter. In partnership with IBM, the company started business with Ford Motors in 4QFY03. Geometric also signed an agreement with HP India Software Operations to provide Product Lifecycle Management (PLM) services to HP and its customers worldwide.

Taking note of the geopolitical uncertainties, the company continues with the trend of reducing dependence on the North American market by increasingly emphasizing on Europe and the Far East including Japan. Consequently, while US led revenues decreased from 86% last year to 70% in FY03, Europe saw significant growth from 10% in FY02 to 25% of revenues currently.

Geographical Mix of Revenues (%) 3QFY03 4QFY03 FY02 FY03
US 86 71 86 70
Europe 11 24 10 25
Asia Pacific 3 5 4 5

The cost control measures adopted on controllable costs like local travel, communication, power and fuel helped the operating margins rise from 22.6% in 3Q to 27.6% in the last quarter. More importantly, sales expenses decreased by 33% in the last quarter as Q3 included the impact of one time recruitment expense. But for the whole year, the effect of these reductions in key expenditure on the operating margins is nullified as the company faced a huge decline in its onsite margins, from 36% in FY02 to 27% in FY03, as assignments came to an end and new assignments were at lower rates necessitating higher travel and relocation expenses. This shows in a very marginal increment in its margins for FY03.

On a consolidated basis, however, the operating margins have seen a rise of over 450 basis points, mainly due ramping up of operations by 3D PLM. Also, this subsidiaryís entire revenues were derived from high-margin offshore operations provided to Dassault Systemes group.

At the current market price of Rs 415, the stock is trading at a P/E multiple of 13x its FY03 earnings, as per the consolidated figures. The company has given a guidance of a 20% growth in both consolidated revenues and PBT. Also, the company expects industrial customers to contribute 20%+ to its consolidated revenues.

One of the few concerns for Geometric is that, on the outsourcing front, the company suffers from conservatism of foreign manufacturing companies as its business pertains a lot to the design core of the company. But the company, through its business model of growing through partnerships has been able to circumvent this risk. Also an enhancement to Geometricís range of offerings is its foray into Engineering Services (ES) practice, whereby it will offer end-to-end services in the PLM space.

During FY03-04, the company plans of investing in developing its Engineering Services (ES) practice and, as such, warns of an adverse impact on the P&L in the first two or three quarters. The positive results from this practice might be realized only from FY05 onwards. As a part of its ES strategy, the company will be concentrating on the Aero and Auto domains, emphasize design development activities, and establish and refine the delivery process. The long-term growth for the company is likely to come from serving industrial customers. Since the business model of the company is still evolving and maturing, it may be a while before valuations of the company attain stability.

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