Geometric

Investors with a two-year horizon can consider taking exposure to the stock of Geometric, a software and engineering services provider, considering the improvement in the outsourcing budgets in key client segments such as automotive and Software ISV (Independent Software Vendors).

The company has a reasonably strong order-book and has managed to ramp-up on its key clients, suggesting that after a rather difficult FY-10 there could be better visibility on the revenue front. The company had managed margins well in 2009-10 by cutting manpower costs, reducing selling expenses and increasing the offshore component of revenues.

At Rs 68, the stock trades at 8 times its likely 2010-11 per share earnings. This is at a steep discount to similar players such as Persistent Systems and larger peers such as Infotech Enterprises and KPIT Cummins. Companies such as Geometric that cater to selective clients can take a hard hit in pricing and budget reductions during economic downturns, but the recovery tends to be sharper on the revenue front. Evidence of this is KPIT Cummins and Persistent Systems that operate in many of the segments that Geometric does, guiding for an industry-leading 22-25 per cent revenue growth.

The company saw its revenues fall by 14.5 per cent in FY-10 to Rs 511.5 crore; it posted net profits of Rs 46.6 crore from a loss in the previous fiscal. Forex losses of Rs 48.3 crore hit the company's profits hard in FY-09. Over a four-year period, the company has seen its revenues grow at a compounded annual rate of 31.8 per cent, while net profits grew at 21.8 per cent.

Better macro-environment

Geometric provides offshore product development, product life-cycle management and engineering services to clients. Its offerings are different from traditional IT services companies in the sense that it target audience is only two-three segments. These include software ISVs (47.5 per cent of revenues), automotive (32.5 per cent of revenues) and agricultural and construction machinery manufacturers. It counts GM, Daimler Chrysler, Caterpiller and ABB as its clients. Geometric which would be looking for increased outsourcing and offshoring from auto majors as a part of their cost-cutting measures.

A report from IDC indicates that R&D and product engineering services are set to grow from $40.1 billion in 2010 to $65.7 billion by 2013. The size of the offshore market within that is set to grow at a much faster clip from $8.9 billion in 2010 to $16.1 billion by 2013.

According to a Strategy Analytics Automotive Electronics Service report, the global market for automotive electronics systems is expected to bounce back strongly in 2010, with demand increasing 18 per cent to $147 billion from the 2009 low point. This, the report states, is a result of a forecast increase of 11 per cent in light vehicle production in 2010, alongside a shift back to larger, more electronics-rich vehicles in established markets.

These trends are suggestive of the fact that vendors such as Geometric that have existing relationship with key clients could benefit from the incremental pie.

Operational improvements

The company has a favourable geographic mix with over 63 per cent revenues coming from the US and 26 per cent from Europe. Geometric could capitalise on the revival in IT budgets in the US. . Geometric has an order book of $48.9 million, as of FY-10, to be executed over the next year, compared to just $29.5 million as of FY-09.

Over the last fiscal, the company has managed to add a $10-million-plus annual run-rate client as well as two in the $1-$5 million category. The repeat business level has also increased by 5 percentage points in FY-10 to 89.8 percent. The company's top clients have increased contribution to revenues by 5-7 percentage points.

Geometric's performance in these metrics suggests better traction in client budgets, greater client-mining ability and sound execution capabilities.

The company has also increased its offshore operations by 5 percentage points to 49.5 per cent in FY-10, which provides for low-cost revenues and an optimal cost structure. This level still leaves sufficient room for the company to enhance its offshore component.

Geometric has also indicated that it is getting into fixed-price projects, which would ensure better realisations compared to time and material billing mode.

Risks

Rupee appreciation, although a risk, is largely mitigated by the fact that Geometric has hedged 70 per cent of its inflows for FY-11 at Rs 48-49 levels. A wage hike of 13-14 per cent has been announced by the company for its offshore employees, which would affect margins in the near term. But the company has indicated that the growth in the second half of this fiscal would compensate for this.

via BL