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Geometric Software: Small size effect!

Jul 21, 2004

Introduction to results
Geometric Software Solutions (Geometric) has announced its 1QFY05 results reporting a sequential fall in net profits despite a strong QoQ rise in revenues. Also, a greater rise on the expenditure front without a corresponding growth in topline has affected the company's margins.

Financial performance (Consolidated): A snapshot...
(Rs m) 4QFY04 1QFY05 Change
Net sales 309 349 13.0%
Other income 11 21 83.5%
Expenditure 224 268 19.4%
Operating profit (EBDIT) 85 81 -4.0%
Operating profit margin (%) 27.4% 23.3%
Depreciation 24 29 20.6%
Profit before tax 72 73 1.4%
Tax 9 13 43.7%
Minority interest 10 9 -4.6%
Profit after tax/(loss) 53 51 -4.4%
Net profit margin (%) 17.3% 14.6%
No. of shares 6.0 6.0
Diluted earnings per share (Rs)* 35.6 34.0
P/E ratio (x) 15.1
(* annualised)

Leading PLM solutions provider
Geometric specializes in providing product lifecycle management (PLM) technologies and solutions to the global mechanical design, manufacturing and industrial markets. The company's presence in the domain of geometry provides it with a competitive advantage in the form of high entry barriers on account of high-levels of technical skill-set requirements. In FY03, the company had initiated it engineering services division, which can be a potential source of growth going forward.

What has driven performance in 1QFY05?
Sales: Growth in 1QFY05 topline is a result of growth in both divisions of the company projects (services) and products. However, a relatively stronger QoQ growth in the projects division (91% of revenues) has led to an overall robust growth in the topline. It is important to note that this division has been a consistent contributor to Geometric's revenue growth in the past and the addition of engineering services to the same has further bolstered prospects. As a matter of fact, the company has estimated revenues from the engineering services division to cross US$ 1.5 m in FY05, which is around 5% of the management's estimated FY05 revenues.

Operating margins:Decline in operating margins continue for Geometric and, in 1QFY05, this has mainly been a result of stronger rise in expenditure in the company's projects division. For instance, in this division, PBIT margins have declined from 45% in 4QFY04 to 42% in 1QFY05. Overall, a strong rise in employee costs as a result of manpower additions and first quarter salary revisions has resulted in this decline in operating margins. Another reason for falling margins has been a rise in contribution of onsite revenues, which while having higher billing rates than offshore services, have lower margins.

Net profits:Apart from the decline in operating profits, a 43% rise in taxation liabilities has resulted into sequential net profit decline for Geometric in 1QFY05. Even a strong rise on the other income front due to foreign exchange translation gains has not been able to reverse this decline in net profits.

Performance in the recent past...
2QFY04 3QFY04 4QFY04 1QFY05
Sales (QoQ growth, %) 10.3 8.8 13.3 13.0
Employee costs (% of sales) 53.0 54.8 51.6 58.9
Onsite revenues (% of sales) 15.0 18.0 19.0 22.0
Profits (QoQ growth, %) 22.0 15.1 (8.8) (4.4)
Operating margins (%) 27.5 28.1 27.4 23.3
Employee base (nos.) 601 650 710 801

What to expect?
At the current price of Rs 515, the stock is trading at a P/E multiple of 15.1x annualised FY05 earnings.During announcement of its FY04 results, the management had projected FY05 revenues and profits to grow by 35%-40% and 27%-31% respectively. While 1QFY05 results indicate that the company is in line with meeting its revenue target, achieving profits growth target might not be easy.

However, since Geometric is a very small player and the fact that it derives its revenues from the highly volatile global manufacturing and engineering industry, we believe that investors should not read much into quarterly growth performances. This is because due to its small size, delays in project implementation have a sizeable impact on quarterly numbers. Since we have a positive view on the company's management and the fact that it will be at pains to deliver short-term projected performance, investors need to look over the long-term.

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