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Geometricís acquisition: Our view - Views on News from Equitymaster
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Geometricís acquisition: Our view
Dec 16, 2004

In an announcement yesterday, the board of Geometric Software (GSS) will be buying out 100% shareholding each in Teksoft and Cimtronics, the subsidiaries of the US based OnCourse Technologies (OT). While details of the deal are yet to be finalised, the move forms part of the broader objective for Geometric of meeting its target of US$ 100 m of revenues by FY07. Before going any further, let us find out what OnCourse Technologies does and where do Teksoft and Cimtronics specialise. OnCourse Technologies is a US based technology company and is a prominent player in the areas of CAD/CAM/CAE (computer aided designing/manufacturing/engineering). The company has a strong track record of 20 years in this business and has around 28,000 manufacturers in the US using its software solutions. The latest revenue figure for the company is available for the year 2001 Ė US$ 4.9 m. The company has stated in its website that its revenues have been mainly driven by its acquisitions of companies like Teksoft and Cimtronics (which it now intends to sell to Geometric) and Micro Estimating Systems. While Teksoft is a leading player in the CAD/CAM software development space, Cimtronics is a value added reseller and distributor of such products.

Whatís in it for GSS?

In recent times, GSS had been eyeing acquisitions in the products space. In fact, in a meeting with us, the companyís management had indicated that it would be buying out a European or a US company in the products space, as there was no PLM product company in India. This will form part of the companyís strategy to build a solid products base, an area that has been lagging momentum in the past. GSS expects revenues from this segment to reach US$ 15 m by FY07, or 15% of its consolidated revenue target of US$ 100 m. The management believes that it would require around four main products with revenues of around US$ 3 m each and some smaller products with combined sales of US$ 3 m to fulfill this requirement. Out of the four major products, the company expects to acquire one through the inorganic route. And the acquisition of Teksoft seems to go in that very direction.

Apart from this, GSS is also looking to acquire an Indian company in the engineering services space to help it reach a targeted revenue figure of around US$ 20 m by FY07. While in our view, at the current momentum, it would be difficult for Geometric to reach that target (considering the required CAGR of 63% between FY04 and FY07), the company is definitely making serious efforts to close in the gap. And this is a positive.

In February 2004, we had recommended a HOLD on the stock at Rs 251 with a target price of Rs 320. The stock, currently at Rs 395, has crossed the same and is up almost 58% since our recommendation. Considering the strong growth momentum that the company is likely to attain through both its organic and inorganic initiatives, we continue to remain positive on the company.

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