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UGS in India: Will Geometric be affected? - Views on News from Equitymaster
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UGS in India: Will Geometric be affected?
Sep 13, 2005

UGS, one of the world’s largest original equipment manufacturers (OEMs) operating in the product lifecycle management (PLM) space, recently announced plans to set up a PLM implementation centre in Pune in order to service its offshore clients. Clearly, this implies the increasing need for companies like UGS to offer a more meaningful and cost-effective PLM solution to their clients. We analyse what this could mean for Geometric Software Solutions (GSS), for whom UGS is a major partner. Starting to face competition from its partners?

As is well known, GSS operates through an indirect model, where it works with its partners, which are mainly PLM OEMs like UGS and Dassault Systemes and also industrial partners (for example, IT departments of manufacturing companies like Ford Motors). The main drivers for the company having to operate through this indirect model are:

  • Small size: Given that GSS’ consolidated revenues in FY05 were to the tune of Rs 1.6 bn (US$ 38 m), clearly, this small size does not allow the company to directly approach end-users like Ford or Airbus. As a result, GSS works with partners like UGS and develops software for them as well as provides implementation services around PLM technologies.

  • Technological expertise: By working through this model, GSS is able to build up competencies in the latest technologies in the PLM industry and as a result, acquire critical and deep domain expertise in a highly technical industry, a big intangible asset that will stand the company in good stead as it grows in size.

  • Extension of S&M arms: GSS’ partners serve as extensions of its sales and marketing (S&M) arms and as a result, the company does not have to spend much on S&M (1% of revenues in FY05). This is important, as large S&M expenses can affect the company’s profitability, given its small size and limited ability to leverage on these expenses.

Geometric: In partnership with the best!
  Product development Implementation/consulting
Dassault Systemes Yes Yes
PTC No Yes
Matrix Yes Yes
MSC Software Yes Yes
Abaqus Yes No

We had a talk with the company in order to get some light on this issue of UGS setting up an offshore PLM implementation centre in India. It is of the opinion that GSS will benefit and it will not be a bad thing for the company. If UGS is planning to set up an offshore centre in India, it will mean more work for GSS. There has been pressure on partners like UGS of late in order to ensure cost-effective PLM solutions to end-users, who themselves are under pressure to cut costs and improve the time-to-market for their products. For example, global auto companies like General Motors (GM) have faced tremendous financial stress of late and given their huge pension bills for ex-employees (GM had a pension bill of US$ 6 bn last year) and uncompetitive cost structures, have to go in for big lay-offs and find other ways and means of reducing costs. This is where PLM comes in and PLM OEMs are also under pressure to offer improved and cost-effective solutions to players like GM.

Therefore, this pressure on partners is working to the advantage of niche players like GSS. It is this pressure on its partners that is making them set up more offshore centres in order to offer best-of-breed solutions to end-users. Given GSS’ success with the partnership model and increasing levels of engagement with its major partners, this move will only help the company garner more work from its partners. The company expects UGS and other partners to continue working with it, given its strong levels of technical expertise and established position in the PLM industry. These factors serve as high entry barriers for any potential new entrant.

What to expect?

At the current market price of Rs 119, the stock trades at a price to earnings multiple of 7.4 times our estimated FY08 earnings. This is at the lower end of the valuation spectrum. Given factors such established position in the PLM industry, high entry barriers on account of technical skill sets required, strong relationships formed with partners, good management quality and strong growth potential in the PLM industry, we are positive on the company’s long-term growth prospects.

However, one must also consider the risks involved and we believe that scalability and the ability to manage risks involved in launching products, a key part of GSS’ strategy, will be the major challenges in the future that the company will have to deal with. Volatility in performances will also be a factor that could affect GSS, given its size and increasing revenues expected from products, which are not linear in nature.

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