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Geometric Software: Tough times never last!

Aug 19, 2004

In the highly competitive Indian technology space, the top layer is generally occupied of large companies (like Infosys and Wipro) that have a highly efficient delivery model in place and provide end-to-end services that are usually across the entire spectrum of the value chain. While it is possible only for a few players to imitate these behemoths, the others are well off concentrating on a niche areas or particular domains like banking and finance (i-flex), telecom (Hughes Software) and engineering and manufacturing (Geometric Software). Over the past year, as large players are feeling the heat on account of rapidly increasing competition from global MNCs who are trying to replicate the Indian offshoring model, Geometric Software (GSS) has actually come out of the tough times that it was facing during the years of slowdown. What's more, the company has outperformed the benchmark Sensex in providing returns to shareholders during this period. In this write-up, we will discuss as to what has marked the success of this company.

GSS is a focused player in the Product Lifecycle Management (PLM) business where it providers software services and products to the global auto and engineering industries. The company has benefited from the 4% growth in the PLM market in FY04 that was otherwise witnessing tough times in the preceding years. Going forward, as more and more industrial companies and OEMs (original equipment manufacturers) vie to become competitive, it is likely to provide GSS with a huge potential to grow through low-cost outsourcing of geometry services to these players.

One important advantage that has helped GSS in its growth pursuits is the nature of services it provides. 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 the PLM space, apart from products, the company provides development and implementation services. Now, while major companies like Infosys, Wipro and Satyam provide tough competition to GSS in the implementation space, the higher-end PLM development space has almost no competition for the company. What more, GSS is projecting high growth from the engineering space and expects revenue from the same to cross US$ 1.5 m in FY05, around 5% of our expected consolidated sales in the fiscal.

Now, apart from strong growth in the services division, the products division has been an Achilles heel for the company, revenues from which actually witnessed a decline of 9% YoY in FY04. The company expects revenues from this segment to reach around US$ 15 m by FY07. However, be believe that this would be an arduous task considering that to reach this target, product revenues have to grow at a CAGR of over 57% over the period FY04 to FY07. In recent times, the company has also witnessed pressure on its operating margins. However, we believe that this is an eventuality of the company's initiatives on investing aggressive for the future and investors need not read much into the same, at least in the medium term.

At the current price of Rs 278, GSS is trading at a P/E multiple of 14.7x FY04 earnings. The small size of the company, and the consequent volatility in quarterly earnings growth, has affected its valuations in the past. However, investors should not read much into the same as the GSS' management has shown the ability to weather bad times in the past.

Read our research report on Geometric Software to delve deeper into its prospects going forward.


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