Geometric MD’s Letter to the Shareholders

Dear Shareholders,

Last year, we began a journey to Transform Geometric. I would like to spend most of this note talking about what this means for the Company and its shareholders,especially how this will play out in the current fiscal.

When I was asked to take up the responsibility of leading Geometric again on the 8th of April,2011, I spent a considerable amount of time meeting customers to understand their needs and expectations, while assessing how Geometric met these needs.

What became apparent is that our Company is blessed with a growing market. The engineering space has traditionally been a laggard when it came to outsourcing. Much of engineering was considered ‘core’ to any manufacturing company, and hence, not open to ‘outsiders’. This is changing slowly but surely. Companies are being driven to consider newer approaches by macro factors such as demographics, demands of markets in emerging economies, competition and technology. Indeed, the major PLM technology providers themselves, barring calendar 2009, have had stellar years with growth in double digits. So the addressable market is doing well and growing.

The question therefore is why has Geometric been unable to grasp this opportunity in its entirety. My analysis is that as a Company, we were unprepared to meet these growing needs. Our approach was based on “tell us what to do and we will do it.” Our cost structure was not competitive enough and we were too internally focused in terms of our organisation structure. Finally, our approach did not take into account the growing demand by customers for vendors to support them globally and not just in one country. 

We therefore sought the services of a leading management consultant to help us benchmark ourselves with respect to competition and global needs, at the same time helping us prepare a focused action plan. The exercise began in earnest in Oct’ 2011 and will continue throughout this year. The initial part of the exercise focused on costs, a necessary element to build momentum for change, while creating a pool of savings, which we could invest to fund our future growth.

In FY12, we sought to better integrate our software services and engineering services businesses with a view to enabling greater collaboration within the organisation and offer end-to-end services to our customers. I’m glad to say, this has led to an increase in cross-selling. While we saw continued growth in our key verticals, viz: automotive and industrial; last year also witnessed increased traction in other industries like aerospace,ship-building and oil and gas.

So what should shareholders expect at the end of FY13? I thought it important to laydown certain specific expectations for Geometric excluding our joint venture so that you can better judge how we, the management have performed in the next twelve months.

  1. Cost of Revenue (%) : In constant currency terms, we need to see that cost of revenue continues to see an improvement,despite increases in salary. This will signify continued improvement in pyramid management and more importantly, improvement in quality/productivity.
  2. G & A Costs: As a % of revenue these should decline by atleast 2% points, despite increase in space occupied due to an expansion in manpower.
  3. Scalable growth: We must see atleast 15% growth YoY on an average from our existing top-10 clients (excluding 3DPLM). By our fourth quarter, the run rate on the growth YoY for the comparable quarter should have exceeded the average signifying we have improved our traction.
  4. Target accounts: While we may not be able to share the names of new or very recent accounts, we have targeted for growth, ten key accounts from which we will generate dollar revenues of several million in the current fiscal. 
  5. Attrition: We have been losing talent at a rate slightly above that of the industry. By the last quarter, the attrition should be atleast 1-2% lower than the industry average as widely circulated.

There is however one caveat. Today, the uncertainty caused by the economic environment continues. For example, the Euro Zone remains a cause for concern and it is very clear that any upheavel in Europe will have global consequences. While, in my view, such a calamity will not affect the long term trend, it certainly will affect our performance in the current year. Nevertheless, the approach we follow will help us build a scalable enterprise, and will, therefore, be important over the longer term.

Sincerely,

Manu M. Parpia

Managing Director & CEO

My view: If the management delivers on the above, then I think earnings should grow by atleast 25% in the current year which means at around 6.2x with 40% ROCE (in FY12) and improving payout ratio, the stock looks cheap. 

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