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Geometric Software: Destined for big things!
May 30, 2005

Geometric Software Solutions (GSS) is a niche player in the Indian software space. The company operates in the product lifecycle management (PLM) space, servicing the global engineering, mechanical, manufacturing and high-tech industries. GSS provides software development services and research and development (R&D) services for global PLM original equipment manufacturers (OEMs), such as Dassault Systemes, as well as for industrial consumers, such as IT departments of global auto majors. We attempt to take a look at what are the potential growth opportunities for GSS and what steps the company is taking in order to capitalize on these opportunities.

Strong growth opportunity
GSS operates in a highly niche segment, where entry barriers are high due to the high level of domain expertise required. The global PLM market is poised for strong growth, going forward. As per CIMdata, a research and consulting firm on the global PLM industry, the PLM market size was US$ 16.9 bn in 2004, growing by 10% annually. CIMdata forecasts the PLM market to grow at 8% annually over the next five years, to touch nearly US$ 25 bn by 2009.


Source: CIMdata

The PLM market is divided into two segments – Authoring and Analysis Tools (such as CAD/CAM/CASE) and collaborative Product Definition management (cPDm). Of this, the cPDm market grew at a faster rate of 17% in 2004 to touch US$ 5.4 bn. In the near future as well, this segment is expected to clock a faster growth rate than the tools market, with an expected CAGR of 15% until 2009, to touch US$ 11 bn. The tools market, on the other hand, is expected to grow at a slower CAGR of 4.5% until 2009, to touch US$ 14 bn.


Source: CIMdata

As regards the addressable market for GSS, as per our calculations, the total market for license sales of OEM vendors and PLM services in FY05 was US$ 67.8 bn. Out of this, license sales by OEM vendors accounted for US$ 6.8 bn (10%), while the balance US$ 61 bn was the PLM services market. As per GSS’ estimates, for every US$ 1 spent towards licenses, US$ 9 is spent towards services. Taking GSS’ estimates of 25% of license sales going towards R&D and 20% of that amount being outsourceable, US$ 339 m was the addressable market for GSS in FY05 in the R&D space. As regards the services space, given 25% being outsourceable and 50% off-shored, the market is estimated at US$ 7.6 bn in this space. Thus, the total market for GSS as per our calculations is estimated at nearly US$ 8 bn. Of this, GSS’ revenues constitute less than 0.5%. This clearly shows the huge opportunity that GSS has to exploit.

How will GSS exploit this opportunity?
We have seen some figures that point to very strong growth potential ahead for GSS. How the company will exploit this opportunity is the major factor that one needs to consider while contemplating an investment in the stock.
  • Geometric has reiterated its faith in the partnership model, where it works with leading OEMs and industrial partners and executes work for them through setting up of offshore development centres and the like. The company also jointly bids for projects with OEMs like Dassault Systemes. This model has worked well for GSS and in the near future as well, the management has indicated that it expects to continue to use this model and leverage its existing relationships with large OEMs and industrial partners to get more business and show better visibility in revenues.

  • The company is focussing on increasing the depth of penetration with its existing clients rather than tapping new ones, unless it sees value in the relationship. It has segregated its clients into key accounts and potential key accounts with an objective to mine these accounts to the fullest. Regular review of the progress on this front will be done on a monthly basis. Given the fact that most of GSS’ key partners are leading OEMs like Dassault and major industrial customers, the potential for mining is very strong.

  • GSS sees good growth in the engineering services division and has set an ambitious revenue target of US$ 5 m in FY06 for this division, a 233% growth from US$ 1.5 m in FY05. The company expects to grow this division partly through an acquisition, for which it is short-listing potential firms.

  • GSS is also looking at strong growth in the PDM segment of the PLM market. The company, in a recent analyst meet, has given this as one of its key focus areas in the products business. This segment has been growing at a faster rate than the authoring and analysis tools segment and is expected to account for a major portion of the growth in the PLM market over the next few years.

Conclusion
Given GSS’ strategy of concentrating on the partnership model and its strength with major OEMs and industrial partners, we expect the company to be a major beneficiary of the strong growth expected in the global PLM market over the next few years. With its increasing brand visibility in the global markets, this can be a key lever that the company can use to get more business, mine its existing partners and benefit more from the potential that is present.

At the current price of Rs 594, the stock is trading at a price to earnings multiple of 11.2 times our expected FY07 earnings. We expect the company to show strong growth over the next few years in revenues as well as profits. While GSS has set a target of reaching US$ 100 m in revenues by FY07, we believe that the company will fall short of the same considering the current pace of growth. However, the steps that the management is taking are certainly in the right direction from the long-term perspective. Resource constraints and quarterly fluctuations will, however, remain key concerns for the company.

We will soon update our research report on the company after a meeting with the management.

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