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Geometric: Winter betrothal - Views on News from Equitymaster

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Geometric: Winter betrothal

Nov 27, 2001

All of a sudden there seems to be a flurry of partnerships in the technology sector, after things being rather dull for a considerable period of time. Recently, CSC entered into an alliance with Satyam and now, Wipro has announced a tie up with Geometric Software. The companies have entered into a strategic alliance for providing end-to-end IT solutions to industrial markets in US, Europe and Japan. Geometricís forte traditionally has been geometry. However, with the CAD/CAM markets seemingly consolidating around four companies Dassualt Systems, PTC, UGS and SDRC, Geometric was faced with the challenge of exploring new growth opportunities as it already was doing business with three out of aforesaid four. The one left out is PTC. The company then saw growth opportunities from areas like PDM (product data management) and collaborative engineering. The objective was to focus on industrial customers directly. The need to manage information about products or parts, like approvals for drawings, version control and proper co-coordination so that the proper version goes for manufacturing has given rise to the area of product data management (PDM).

As information needs become more and more real time there will be an increasing need to use geometry by departments that have never done so in the past, like procurement. According to Mr. Manu Parpia, MD, Geometric Software, viewing objects in solid form, and manipulating them would become more of an everyday affair rather than being the domain of a select few. This translates to the fact that that geometry must be integrated to the enterprise software. For example, those in the supply chain (take procurement for example) need to see the part. There might be a need make some change to the part or need to do some referencing with the part. Therefore, access to the geometry of the part is critical. This is dealt under a field known as collaborative engineering. Collaborative engineering makes collaborative commerce, towards which organisations are increasingly moving, possible.

Read more on the CAD/CAM sector in India

This is where the alliance makes sense. Wipro is the traditional software services company with strong expertise in application development, maintenance and integration. While Geometric will provide the solutions related to geometry, Wipro will help integrate these solutions with the enterprise systems. There is another aspect involved in the partnership, i.e. logistics. Geometric can now reach clients through Wiproís presence in geographies like Europe where it does not have much of a presence.

(Rs m) FY01 FY02E FY02E
Sales 449 580 650
Growth 40.7% 29.2% 44.8%
Profit after tax 82 100 110
Growth -56.8% 22.0% 34.1%
Net profit margin 18.3% 17.2% 16.9%
No of shares 5.2 5.2 5.2
EPS 15.8 19.2 21.2
P/E 9.0 7.4 6.7
Please Note: 1. FY01 profits includes extra-ordinary item.
2. Net profit figure for FY00 had an extra-ordinary income of Rs 213 m.

Geometricís management for FY02 has given a guidance of 30% to 44% growth in revenues and the net profit figure is expected to rise by 22% to 34%. Considering this, the P/E multiple at the current market price of Rs 142, works out to be in the range of 7.4x to 6.7x based on FY02 estimated earnings.

Considering the companyís management and its strong technology focus valuations seem to be on the lower side. Geometricís low valuations were due to its performance in FY00 when it had posted a loss. The company since then has got its act together and posted strong numbers. Geometricís valuations in fact have run up significantly in the past two months. The price has shot up from mid fifties on September 15 to Rs 142 currently. The company could continue to see improvement in valuations till the P/E multiple aligns with the others in software sector. This current partnership is likely to add some pace to the improvement in valuations.

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