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Geometric: Revised estimates - Views on News from Equitymaster
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Geometric: Revised estimates
Nov 22, 2007

We had last recommended Geometric in October 2006 at Rs 121 with a March 2009 target price of Rs 175. Post this recommendation, while the stock moved up to a high of Rs 145, industry growth issues and increased concerns with respect to the currency appreciation have taken a toll on the same, with the stock consequently touching a low of Rs 70. In the meanwhile, considering the factors mentioned down, we have lowered our forward estimates for the company. Here is a reasoning for the same. Reasons for downgrading the forward estimates

  1. Modernís losses extended: Modern Engineering made a net loss of US$ 570,000 in 2QFY08. This was actually a greater loss than what they recorded in 1QFY08 (US$ 321,000). We believe that this is a worrying factor considering that Modern accounted for almost 42% of Geometricís consolidated FY07 revenues. While the company in the past has extensively talked about what it is doing to turn around the operations at Modern, the fact that it (Geometric) has not been able to substantiate it in actual figures makes us feel more cautious about the performance of the company (Modern) going forward. The management has attributed the negative performance of Modern to a significant flux in the Detroit automobile market and change in ownership of one of the big Detroit companies. Now what has happened is that this company was also a major customer of Modern, and as a result of this change in ownership, there has been an impact in terms of the business coming from the company.

  2. Success will depend on level of offshoring at Modern: When we last met Geometricís management, they said that the success of Modernís acquisition will depend on how much work they will be able to offshore to India. At the time of acquisition, the level of offshoring at Modern was just 3%. The company was targeting to take this to 15% by FY08 and 65% by FY10. On the positive side, the company has in fact achieved the offshoring target of 15% by FY08 (in 2QFY08) and in past has mentioned about touching 35% offshoring by 4QFY08.

    As of now, this level of 35% by 4QFY08 seems difficult to achieve, as the management has indicated. The main reason is that due to the slowdown in the US automobile market, several car programs have been delayed and this has happened not only in Detroit (where Modern has maximum operations), but also in some of Geometricís European operations, where product launch programs have been delayed. In case of Geometricís business, the crux is that the early stages of the programme always require a high degree of interaction between the service provider and the customer, and as the program moves into its later stages, higher offshoring can be done. Now, because programs have been delayed, many of the early stage work has been stuck in that level and new programme have not started coming in.

  3. Product business not gaining traction: Another area where Geometric is suffering a setback is its product business. The company has incurred fixed cost for product development and marketing expenses for this segment. In 1HFY08, revenues from enterprise products as well as the desktop products were short of expectations and the company also expects a continued shortfall in the business in the near term. Geometricís enterprise product division will start earning revenues from FY09 and onwards. Overall, considering the current situation and the managementís outlook, we have revised downwards our estimates for the companyís products division.

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