As a result of these developments, Geometric's senior management has indicated that it is revising the revenue and profit guidance downwards to 32-40 per cent and 37-45 per cent for 2005-06, from 40-45 per cent growth in revenues and 45-50 per cent in post-tax earnings forecast at the start of the year.

Even at the start of the first quarter, the company's senior management had stated that that the first quarter will be weak on account of adjustment in "resource requirements" by one of the major customers, Powerway.

Keep the faith

Despite this downward revision in guidance, investors with a penchant for risk can hold the stock at the current price levels as Geometric's business model continues to remain sound. As a niche player in the PLM (product life cycle management) space, the company is expected to leverage its relationships with software OEMs and industrial customers to scale up rapidly.

Coupled with acquisitions made towards the end of the year, foray into engineering services and expanding user base for PLM software, the company is likely to sustain its earnings momentum. The Board has also recently approved a stock split to Rs 2 from Rs 10 per share.

Our last recommendation on the stock was in end-November 2004 at Rs 369. Investors who entered the stock at those levels may, however, consider booking profits on part of their exposures, especially on every uptrend linked to the broad markets. This becomes important as the sector has low tolerance for earnings disappointments.

Broadening focus

Geometric has been deriving a chunk of its revenues from two principal sources: Software OEMs and industrial customers. The company is consciously focussing on building long-term relationships with its industrial customers over the past couple of years.

Industrial partners that accounted for 35 per cent of revenues in FY 2005 is expected to be scaled-up to 50-55 per cent (including engineering services) by 2007.

From the increase in onsite revenues in FY-2005, it is clear that the company has initiated a few contracts that can translate into offshore relationships in future.

Since the company has expanded its range of offer to include design centres, technology-based solutions and support; these partnerships have good scale-up potential and yield higher margins in the long run.

Besides this, the company's foray into engineering services can open up opportunities to offer complementary services to its existing partners. As more design centres are set up in India by multinational automobile or engineering companies, the potential for this segment will grow. It now accounts for about 4 per cent of revenues.

The principal risk to our recommendation is on the employee/resource front and its impact on maintaining margins. In the past, Geometric was hamstrung on account of availability and attrition of employees for PLM project deployment.

To address this problem, it has set up a PLM Institute with the objective of training programming talent in various PLM disciplines.

In addition, a sustained rise in manpower and training cost can keep the operating margins under pressure.

Over the past eight quarters, the operating margins have remained locked in the 15-20 per cent bracket.

While there is a scope for improving margins by inducting more freshers into the employee stream or by exercising greater control over SG&A (Selling, General and Administrative) expenses, the biggest stimulus will be come from its products portfolio.

The products portfolio that accounted for 9 per cent of its revenues for FY-2005 may start looking up through its acquisition of Teksoft and addition of product lines during the course of the year.

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