Geometric - Mid-sized IT vendor specialising in engineering solutions::Macquarie Research,

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Geometric
Mid-sized IT vendor specialising in engineering solutions  
 We met with the management of Geometric (GEO IN) to understand the
outlook for the Indian mid-sized IT services players and the business drivers
for the company and their positioning vs the offerings of the larger Indian IT
vendors.
 Geometric is a mid-cap company that offers engineering solutions, services
and technologies. Its portfolio of offerings addresses the needs of top Product
Lifecycle Management (PLM) vendors across the world including Microsoft,
Oracle Siemens and PLM, etc.
 It has a 70:30 partnership with Dassault Systèmes named 3DPLM which
operates with a team of 800 people. The partnership contributes 23% to the
company’s revenues.
Margins to remain under pressure in FY12
 Operating margins declined to 7.8% in FY11 (vs 11.6% in FY10). Based on
our meetings with management, margin pressure appears likely to persist due
to wage inflation as a result of a 12-14% salary increase in April 2011 and the
tax rate shooting up to ~29% this year from 3% in FY11.
 We note that the company has appointed Mr. Manu Parpia as MD and CEO
after the departure of its previous CEO in April. Mr Parpia is the founder and
promoter of Geometric and in the current scenario his challenge remains to
achieve healthy growth and manage the margin headwinds.
Superior client mix but high concentration poses risk
 According to management, its niche focus and client list is a key differentiating
factor vs. other mid-sized IT companies. The company has mined its existing
client relationships well, with the result that the top 10 clients now contribute
70% to revenues and the top 5 clients comprise 55% of revenues. However,
this revenue concentration among select clients poses some risk if the clients
were to reduce their pricing or shelve their IT budgets.
Traction in industrial sector to boost revenues
 The direct industrial sector contributes 61% to revenues for Geometric. In
addition, software vendors and products contribute 31% and 8%, respectively.
Macquarie US economist Rebecca Hiscock-Croft’s US GDP growth forecast
of 3.1% for FY12 augurs well for the company’s demand pipeline.
Time for cherry picking mid caps
 We have a positive view on the Indian IT services sector.  Our preference is
for mid cap companies that are seeing strong demand conditions and
increasing margin profiles, resulting in better earnings in FY12-13E.
 Among mid caps, we prefer Hexaware and Mindtree on the back of their
better valuations and earnings growth in FY12E. Among large caps, we like
Infosys and TCS.