Geodesic

Investments with a two-year horizon can be made in the stock of Geodesic considering its niche business focussed on instant messaging, and the stock’s attractive valuation. At Rs 64, the stock trades at a throwaway valuation of two-three times its likely 2008-09 earnings.

With a net profit margin of over 45 per cent, much higher compared to most other listed, products-focussed technology companies, Geodesic operates in the high-growth areas of instant messaging and VoIP. The company has a large roster of well-established clients.

In a possible trigger to valuations, Geodesic has announced a buyback of up to 25 per cent of the paid-up equity share capital (maximum of Rs 109.8 crore) from the open market, at a maximum price of Rs 75. This is expected to be executed over the next few months.

The company has managed a compounded annual revenue growth of 67 per cent and profit growth of 68 per cent over the past three years. For the nine months of the current fiscal, Geodesic has managed a 119.4 per cent growth in its revenues and 106.5 per cent expansion in its net profits compared to the same period in FY08.

Geodesic derives most of its revenues from developing instant messaging platforms/services and licensing them to enterprises as well as retail users (directly or indirectly) under the ‘Mundu’ brand. The company’s products (Mundu ICE stack) cater to clients ranging from portals and publishers to telecom operators, mobile handset manufacturers, system integrators and even retail consumers. Geodesic also licenses its instant messaging platform to mobile handset manufacturers and telecom operators, thus providing it with sustainable revenue streams, with scope for expanding margins.

Instant messaging is a rapidly expanding mode of real-time communication across the world. The global messaging market, which was $65 billion in 2007, is predicted to touch $117 billion by 2012 according to Portio Research. A more recent report also states that Mobile Instant Messaging, which generated $2.5 billion in 2008, is expected to increase to $12.4 billion by 2013.
Sustainable revenue-mix

For its enterprise and portals and publishing clients, Geodesic charges a licence fee, a customisation fee, annuity based service charges and charges for upgrades and updates. For retail customers, it charges a fee based on subscription. This model clearly provides a sustainable revenue stream.

Recently, Geodesic won a deal from Idea Cellular in India, for Internet radio services on a revenue sharing basis. This makes for better risk-sharing as downloads or logins to access Internet radio on the mobile would be clearly measurable.

The company has also launched its messaging services in Nokia and Sony Ericsson smartphone handsets and has an agreement with players such as BenQ. Mio Digi-walker, a key player in the mobile GPS navigation space, is another client. The company also recently joined the Blackberry ISV alliance to offer its services on smartphones. This should provide further revenue opportunities.

The client base for Geodesic also includes portals such as Naukri, bigadda.com, Edelweiss Capital Ltd, First Global Stock Broking, Business Standard and Dialog Telekom. As players constantly upgrade their Web sites and offer more cutting edge-services, this client base offers long-term revenue visibility for Geodesic.

The company has launched an instant messaging platform for the iPhone and may be well-placed to capture a share as and when Apple allows third-party software platforms on its phones.
Key developments

This apart, the company has also developed voice over Internet protocol (VoIP) products to work mobile phones and desktops, for PC-to-PC calls. VoIP is also an ever expanding market providing for cheap communications. It already averages 60,000 minutes a day.

Agreement with ITI Ltd to promote Geodesic’s products (such as its Amada 10k Simputer) to cater to various State Government E-Governance projects in India and with Glodyne Technoserve as part of Glodyne’s solution for Public Distribution System for various States in India have also been recently signed. The Simputer has an integrated Smartcard reader/writer which can be used for identification, sharing and security.

The company has also forayed into publishing by acquiring the Chandamama children’s magazine brand. The subscriptions have doubled in the last two years after the acquisition.

With its Telugu, Hindi and Tamil versions available online, this may help capture regional audience as well. An increased subscription may lead to increased ad revenues. Plans are also afoot to launch a full length animation film.

Key risks to this recommendation are technological obsolescence and competition from entrenched platforms such as IBM’s Lotus Sametime.