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Geometric: Trouble times? - Views on News from Equitymaster
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Geometric: Trouble times?
Oct 22, 2007

Performance summary
  • Topline grows by 9% QoQ during 2QFY08 in rupee terms – growth led by higher billing rates and productivity improvement. Dollar terms growth at 9.5% QoQ.
  • Operating margins expands by 4.4% during the quarter, largely due to costs rationalisation.

  • Bottomline declines by 22% QoQ mainly due to lower other income (down 61% QoQ)

  • Adds 8 new customers in 2QFY08 – total number of active customers now stands at 109.

  • Modern Engineering recorded a net loss of US$ 0.57 m during 2QFY08. Breakeven deferred from 3QFY08 to 1QFY09.

Consolidated financial performance: A snapshot…
(Rs m) 1QFY08 2QFY08 Change 1HFY07 1HFY08 Change
Sales 1,129 1,225 8.5% 1,521 2,354 54.8%
Expenditure 1,063 1,098 3.4% 1,207 2,161 79.1%
Operating profit (EBITDA) 66 127 90.6% 314 193 -38.5%
Operating profit margin (%) 5.9% 10.3%   20.6% 8.2%  
Other income 135 53 -60.9% (0) 188  
Depreciation 47 48 2.0% 99 95 -4.3%
Interest 16 16 1.6% - 32  
Profit before tax 139 116 -16.8% 214 254 18.7%
Tax 3 10 303.5% 24 13 -45.8%
Minority interest 20 15 -26.8% 26 34 30.7%
Profit after tax/(loss) 117 91 -22.2% 164 207 26.1%
Net profit margin (%) 10.3% 7.4%   10.8% 8.8%  
No. of shares (m)         62.0  
Diluted earnings per share (Rs)*         6.7  
P/E ratio (x)*         12.9  

Leading PLM solutions provider
Geometric (GSS) operates in the highly niche area of providing product lifecycle management (PLM) technologies and solutions to the global mechanical design, manufacturing, hi-tech 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. The company has acquired Modern Engineering, which has a predominant position in the engineering space to cater to the widely unpenetrated engineering market. The company has bought back the remaining stake in Modern Engineering and now the latter is a 100% subsidiary.

What has driven performance in 2QFY08?
Service led growth: In rupee terms, Geometric recorded a 9% QoQ growth in topline in rupee terms aided by strong growth in the services segment. The services segment recorded 10% QoQ growth aided by 28% QoQ growth in offshore and 3% QoQ growth in onsite revenues. The revenue growth in the engineering segment (after consolidating Modern Engineering) remained flat on QoQ terms. The products segment fell short of its target. Although product revenues increased by 7% QoQ in 2QFY08, they actually declined by 7% in YoY terms. Another major area of concern is the sustained negative profitability made by Modern Engineering. In 2QFY08, Modern made a net loss of US$ 573,000 (US$ 321,000 in 1QFY08). While the management has attributed this to major business flux in the Detroit automobile market and consequent delay in projects due for meaningful offshore content, the fact that Modern has been making losses since its acquisition by Geometric will be a worrying factor for the management. While the management reiterated its guidance of 50% YoY growth in dollar terms in topline and 30% to 35% PAT growth in rupee terms in bottomline in 1QFY08, it now believes that due to high level of currency volatility, negative profitability of Modern and shortfall in the products segment could make it difficult for the company to achieve those targets. However, the management has refrained from revising its guidance at this point in time.

Revenue by customer profile Over the past quarters
Customer segment Q2FY08 Q1FY08 Q4FY07 Q3FY07 Q4FY06
Software Product 32.5% 33.6% 29.7% 34.0% 50.0%
Business Partners 20.9% 16.9% 15.9% 22.0% 26.0%
Direct Industrial 46.6% 49.5% 54.4% 44.0% 24.0%

In terms of revenues distribution by geography, US which contributes to 70% of the topline grew at 6% QoQ, whereas Europe and Asia Pacific region grew at 12% QoQ and 33% QoQ respectively. Revenues from India saw a 22% QoQ decline in 2QFY08. In terms of revenues by customer profile, business partners recorded a strong 34% QoQ growth whereas the product customers and Direct Industrial customers grew at 5% QoQ and 2% QoQ respectively.

Revenue by service line Over the past quarters
Service line Q2FY08 Q1FY08 Q4FY07 Q3FY07 Q4FY06
Software 56.5% 52.8% 52.7% 59.0% 77.0%
Engineering 36.6% 40.1% 39.3% 31.0% 8.0%
Product 6.9% 7.1% 8.0% 10.0% 15.0%

The company added 8 new clients in 2QFY08 and the total number of active clients now stands at 109. While there has been a drop in utilisation of 3% including trainees, the company managed to increase its utilisation levels by 2% excluding them. The company added a net of 192 employees (gross 348) in the current quarter and the annualised attrition stood at 17.6% for 2QFY08. The company also booked new orders worth US$ 8.8 m in 2QFY08.

Costs rationalisation help expand EBITDA margins: Geometric recorded a 91% QoQ growth in operating profits during 2QFY08. The operating margins of the company expanded from 5.9% in 1QFY08 to 10.3% in 2QFY08. This was due to improvement in pricing of new deals and also from productivity gains from better offshore mix. This also helped the company to not only mitigate the impact of appreciation in rupee against the US dollar but also reduce the incremental losses of Modern. At the organic level, the operating profits increased from 3.4% in 1QFY08 to 10.6% in 2QFY08. Also, the total cost of revenues increased by just 3% QoQ whereas the manpower costs increased by just 0.4% QoQ which helped it expand the operating margins.

Lower other income dents bottomline: Geometric recorded 22% QoQ decline in net profits mainly due to lower other income. Other income recorded a 61% QoQ decline in 2QFY08 due to implementation of hedge accounting, which resulted in Rs 14.4 m of exchange gains being accounted in balance sheet. Had this change not being done, the decline in bottomline would have been 10% QoQ.

What to expect?
At the current price of Rs 87, the stock is trading at 6.5 times our estimated FY09 consolidated earnings. While the performance of the company has been quite volatile for sometime now we do see some concerns going forward. First, the management has confirmed shortfall in the product segment (enterprise and desktop product) in the near term and this will definitely impact profitability of the company. Also, the product segment will not be a growth driver for the company in FY08. Second, Modern has been making losses for some time now and the company has also deferred Modern turning profitable from 3QFY08 to 1QFY09. Also, Modern’s topline in 2QFY08 has been lower than that of 1QFY08 further aggravating the concerns that cyclical automobile industry of Detroit could take some more time to turn profitable. Lastly, although the company has not revised its guidance the fact that the topline growth of 50% YoY in dollar terms has been mentioned as one of the risk factor makes the company vulnerable to not meeting its guidance. We shall soon put up our updated view on the stock.

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