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Geometric: Inorganic growth - Views on News from Equitymaster
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  • Jul 11, 2002

    Geometric: Inorganic growth

    Geometric has posted a strong sequential (QoQ) growth of 6% in consolidated revenues for 1QFY03. The net profits have, however, declined 12% compared to 4QFY02. This is due to a significant decline in other income. On a YoY basis, the numbers look impressive. The topline growth is 47% and the bottomline growth is 45%.

    The YoY topline growth for the consolidated entity has been steep due to the fact that a number of subsidiaries and JVs formed during the year have started to generate revenues. Last year, only Geometric Software US existed. In 1QFY03, consolidated numbers include numbers for Geometric Software India, its fully owned subsidiaries (Geometric Software USA, Geometric Software Singapore) and 3D PLM Software, a 70:30 joint venture with Dassault Systemes.

    (Rs m) 4QFY02 1QFY03 Change
    Sales 183 194 6.2%
    Other Income 14 5 -60.9%
    Expenditure 142 148 4.2%
    Operating Profit (EBDIT) 40 46 13.5%
    Operating Profit Margin (%) 22.1% 23.6%  
    Interest - -  
    Depreciation 13 14 9.7%
    Profit before Tax 42 37 -10.5%
    Extra-ordinary income / (expense) - (1)  
    Tax 5 4 -9.1%
    Profit after Tax/(Loss) 37 33 -12.2%
    Net profit margin (%) 20.3% 16.7%  
    Diluted number of shares 5.3 5.3  
    Diluted Earnings per share* 27.9 24.5  
    P/E (x)   16.7  

    The sequential growth in product sales was 28%, while services grew by a small 3%. Consequently the contribution to total revenues from products increased from 13% 4QFY02 to 16% 1QFY03 and share of services declined from 87% to 84%. This could have aided the improvement in margins. The company’s products business has operating margins of about 46%. The considering the fact that chunk of the revenues come from the services business, a low growth in this segment could be cause for concern. Product sales tend to be highly volatile. Of the total revenues from projects, 68% came from offshore projects.

    The management has guided of an average 10% (QoQ) growth in revenues for the fiscal. This translates to a 51% growth in topline for the full year. In this light, the 6% growth (QoQ) for the first quarter of FY03 looks reasonable. This is considering the fact that the stand-alone revenues of Geometric declined sequentially by 12%. Geometric Software stand-alone contributes 75% to the consolidated revenues of the Geometric group. A similar decline in Geometric Software’s stand-alone number was seen last year also. Thus, the fall in stand-alone revenues could be a cyclical event.

    Particulars 4QFY02 1QFY03 Change
    Sales (Rs m)      
    Geometric Software (A) 167 146 -12.1%
    Subsidiaries and JVs (B) 16 48 194.3%
    Consolidated (C = A +B) 183 194 6.2%
    % Contribution Geometric (A/C) 91.1% 75.4%  
    % Contribution subs and JVs (B/C) 8.9% 24.6%  
    Operating margins      
    Geometric Software 22.8% 22.4%  
    Subsidiaries and JVs 1.3% 6.7%  
    Consolidated 22.1% 23.6%  

    To meet is objective of an average 10% sequential growth for the first half of FY03, the consolidated revenues should grow by 17% QoQ in 2QFY03. This does not seem to be a tall order considering the fact that the company’s revenue base is small. It has also made concentrated efforts to tap new business opportunities and increase its geographical presence benefits of which might be seen in the coming quarters.

    In 1QFY03, the company announced a consulting and services partnership with Dassault Systemes. Geometric will now provide services, training and support around Dassault Systemes' 3D PLM software suite. The software suite includes engineering design packages like CATIA. Geometric already has joint venture with Dassault Systemes called 3D PLM Software Solutions. The company provides software development services to Dassault Systemes.

    In another development Geometric also entered into an alliance with IBM. The company feels that it is making steady progress on the partnership with Wipro. Currently, the joint engagement has two clients. To improve its geographic reach, a new office was opened in Singapore.

    At the current market price of Rs 411, the stock is trading at a P/E multiple of 17x its 1QFY03 annualised earnings. Undoubtedly, the company has a strong business model in place and has performed exceedingly well over the past few quarters. But the small size of the company and high client concentration continue to be the major concerns.



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