As an investor you will hear the 'rags-to-riches'story of a number of tech firms that started in a garage. Google, Microsoft, Apple, HP, Amazon and Dell have been there. In India, Infosys'humble beginnings or Azim Premji's vegetable oil roots are part of our own tech folk lore. But for every Infosys and Wipro, there are so many tech firms that get caught in the headwinds of managing a global business. Geometric is one such company.
Top client dependency, higher cost of onsite, falling margins have taken their toll. The June 2013 quarter saw revenue growth flat. PAT was down 25.5 per cent (y-o-y). Margins are down too - from 16.6 per cent to 14.3 per cent (y-o-y) on account of higher cost of sales.
FIIs have drastically reduced their holding in Geometric from 9.5 per cent levels a year ago to 1.96 per cent in June this year.
Should you follow the FII route?
Geometric has not acquired enough scale to reduce dependency on individual clients. When its clients face problems, Geometric takes a hard knock. According to HDFC Research, it has already lost potential revenues of $16 million over the last 12 months. The company is now estimating further write-downs to the tune of $30 million by the end of December 2013. Margins could take a further hit in the current quarter as the company executes salary hikes put on hold in the previous quarter.
Geometric has instituted internal restructuring. It now has six verticals in place each with its own profit accountability. How effective these measures are remains to be seen. The company needs to gain enough scale to mitigate the dependency on a single client. That is not happening and there is no knowing when the company can deliver on this. More restructuring will be required to shore up revenue traction and arrest margin decline. No short-term deliverance here. Sell.
This article was originally published on October 08, 2013.
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