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Geometric Software: Way to go!

Oct 23, 2004

Introduction to results
Geometric Software Solutions (GSS) announced robust results for the quarter and half year ending September 2004. Strong growth in topline has more than compensated for rise in employee costs (absolute terms) due to the salary revisions in the quarter. This is seen in the strong improvement in operating margins during 2QFY05.

(Rs m)1QFY052QFY05Change1HFY041HFY05Change
Net sales 349 399 14.1% 478 748 56.4%
Expenditure 268 288 7.5% 350 556 58.6%
Operating profit (EBDIT) 81 111 36.0% 128 192 50.4%
Operating profit margin (%)23.3%27.8% 26.7%25.7% 
Other income 21 10 -52.5% 29 30 3.1%
Interest - 0   0 0  
Depreciation 29 30 3.4% 36 59 63.9%
Profit before tax739024.0%12116335.0%
Tax 13 17 32.2% 11 29 156.1%
Minority interest 9 11 13.0% 15 20 29.2%
Profit after tax/(loss) 51 63 23.9% 94 114 21.3%
Net profit margin (%)14.6%15.9% 19.7%15.3% 
No. of shares 11.1 11.1   11.1 11.1  
Diluted earnings per share (Rs)*18.522.9 17.020.7 
P/E ratio (x)       15.4  
(* 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.

What has driven performance in 2QFY05?
Projects business drives revenues: Growth in GSS’ 2QFY05 topline is a result of strong sequential growth in its projects (services) business, revenue from which has grown by 16%. This segment now contributes to around 93% of GSS’ consolidated revenues and has consistently been the main driver of the company’s growth in the past. Addition of engineering services to this segment has further improved its performance and prospects. The products division (7% of revenues), however, continues to disappoint. In 2QFY05, revenues from this division have declined sequentially by 6%.

While the company expects revenues from this segment to reach US$ 15 m by FY07 (15% of its targeted revenues of US$ 100 m), considering the current performance, we believe that the task seems pretty difficult. Also, the initiatives that the management had spelt out towards improving performance of this segment, are still to be put into actions. In 2QFY05, one notable achievement for the company in the products segment was getting the second patent for its flagship technology of feature recognition.

Lower salary cost saves the day: Despite an absolute increase in employee costs due to salary revisions in the quarter, a decline in these costs as a percent of sales led to a 450 basis points improvement in GSS’ operating margins. As a matter of fact, employee costs have reduced from 59% of sales in 1QFY05 to 55% currently. Margins have also been aided by a decline in travel expenses. Onsite contribution to revenues has increased to 24% (22% in 1QFY05) and this has pared improvement in operating margins.

Forex losses subdue profits: While the growth in net profits has been strong, it has been affected by a decline in other income. Lower other income in 2QFY05 is a result of forex losses of Rs 2.1 m, compared to gains of Rs 12.5 m in 1QFY05. Tax outgo has also increased during the quarter as tax holiday under Section 10A has ceased to exist for some projects of the company.

Performance in the recent past…
 3QFY044QFY041QFY052QFY05
Sales (QoQ growth, %) 8.8 13.3 13.0 14.1
Employee costs (% of sales) 54.8 51.6 58.9 55.4
Onsite revenues (% of sales) 18.0 19.0 22.0 24.0
Profits (QoQ growth, %) 15.1 (8.8) (4.4) 23.9
Operating margins (%) 28.1 27.4 23.3 27.8
Employee base (nos.) 650 710 801 872

What to expect?
At the current price of Rs 319, the stock is trading at a P/E multiple of 15.4 times annualised 1HFY05 earnings. While the company seems in line with meeting its FY05 revenue and profits target of 35% to 40% and 27% to 31% growth respectively, the long-term target of US$ 100 m in revenues by FY07 seems to get farther. This is because, as per our calculations, even if GSS manages to grow its revenues by 40% YoY in FY05, the CAGR required for the next 2 years would be above 75%! However, the company is a leader in its business of delivering PLM solutions to global engineering players and the management has delivered what it has promised in the past. This should call for due consideration.

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