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Geometric: Growth pangs - Views on News from Equitymaster
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  • Nov 28, 2000

    Geometric: Growth pangs

    Geometric Software has many firsts. It is the first company in India in the area of software solutions for computer aided design /computer aided manufacturing/ computer aided engineering. A business model that is very niche. This area requires highly skilled manpower. The best thing is that the entry barrier into this segment is high due to the level of skills required. Therefore, there is hardly any competition for Geometric in the country.

    The strength of Geometric as a company is its philosophy of 'people building partnership'. Geometric as a company works with its customers, solves their problems that is quite essential considering the nature of the engineering industry.

    But there is another first that the company would rather forget. Geometric was the first Indian company to issue warnings on its earnings in line with trends in the US and UK. The management announced that they were not able to meet sales targets.

    Immediate corrective action was taken. The management reorganised its sales and marketing functions. Dick Miller, CEO of Geometricís US subsidiary resigned with effect from September 30, and Manu Parpia, MD of Geometric Software, took over.

    The company recently tapped the capital market with an initial public offering of 0.3 m shares at a premium of Rs 290 per share. The issue got an overwhelming response and subsequently it was listed at Rs 900 on the Bombay Stock Exchange. Since then it has been falling sharply. Presently the stock trades at Rs 163, a significant 44% discount to its issue price.

    The second quarter results were quite disappointing. There has been a fall in the top line in 2QFY01 compared to 1QFY01. The operating margins for the first quarter were excellent but the second quarter was quite a horror story. In 2QFY01, a large component of other expenses (Rs 27 m) depressed the bottomline and resulted in losses.

    (Rs m) 1QFY01 2QFY01 % Change
    Sales 88 86 -1%
    Other Income 5 5 -
    Expenditure 67 99 33%
    Operating Profit (EBDIT) 20 (13) -
    Operating Profit Margin (%) 23.4% -14.9%
    Interest 0 0 -
    Depreciation 10 6 -72%
    Profit before Tax 15 -13 -
    Tax 0 0 -
    Profit after Tax/(Loss) 15 (13) -
    Net profit margin (%) 17.1% -15.0%
    Diluted number of shares 5.2 5.2 -
    Diluted Earnings per share* 3 - -

    The stock is trading at a P/e multiple of 87 times its annualised half yearly earnings. The main concern for the company is revenue generation, which is alarming considering that the company is in the software business. Its top 10 clients account for about 70% of the business. Perhaps, the company is too technology oriented. Nothing against that but in the present circumstances the ability to market is as critical.



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