Ramesh Damani is the stock picker with the golden touch as far as we are concerned. Not only is he generous with his stock recommendations, his ratio of hits to misses is very high. Ramesh Damani has had an extraordinary stroke of luck with his stock selections. His recent picks VIP Industries, Aegis Logistics, GIC Housing have touched 52 week highs.
What’s more they have even attracted other heavy-weight stock pickers like Rakesh Jhunjhunwala (VIP Industries: Rakesh Jhunjhunwala is buying these shares! Should We?) to increase their holdings. Ramesh Damani‘s other picks like Hawkins Cooker, Banco Products, Precision Wires have soared like rocket stocks. Even beleaguered OMCs like BPCL, IOCL and IOC have soared like he always predicted. Even small caps like Linc Pens have touched their 52 week highs. Of course, how much of this is the result of market manipulation by Ramesh Damani and his cahoots and how much is the result of genuine investor interest remains to be seen.
Ramesh Damani’s latest stock pick is a nondescript company called Geometric Ltd.
At first glance, Geometric looks like a mediocre company. So, lets find what it is about Geometric that has caught this stock picker’s eye.
Geometric’s Financial Results
|Geometric’s Key Financials
|Adjusted Net Profit
Geometric reported mediocre results in the Quarter ended March 2010.
Geometric’s Consolidated operating revenues increased by 2.6% sequentially in US Dollar terms but remained flat in Rupee terms due to strengthening of Rupee against US Dollar;
Geometric’s Operating profit in Q4 10 was lower at INR 116.15MM as compared to INR 146.83MM in Q3 10;
Geometric’s PAT before extra-ordinary and prior period items for the quarter was INR 119.94 MM (9.1% of revenue). This is a positive factor given the loss of INR 195.74MM in Q4 09;
Geometric’s EPS dropped from INR 2.61 in Q3 10 to INR 1.91 in Q4 10. However, Geometric’s EPS for the year increased from INR 0.55 per share in FY 09 to INR 7.51 per share in FY 10
Geometric’s subsidiary named Geometric Engineering (erstwhile Modern Engineering) incurred an operating loss of USD 1.3MM in FY 10 Vs USD 4.2MM in FY 09
So what’s the story? What did Ramesh Damani see in Geometric that the others missed. Well, here is the answer.
There are a couple of things that must have caught Ramesh Damani’s attention.
The first is that Geometric is owned by the Godrej family. It is no secret that Ramesh Damani is a great fan of the Godrej family and rightly so. It is rare to find a business family as professional and honest as the Godrej family. Also, Adi Godrej and Tanya Dubash have great vision from a business perspective. The Godrej family is well known for its integrity. So one can rest well in the confidence that one’s hard earned money will not be squandered away.
Geometric’s Research Reports
The second, and more important, reason, is that Geometric is engaged in the Engineering Technology and Services segment. It offers Product Lifecycle Management (PLM), Software Product Development and Global Engineering Services. Their products and services are provided to the Product Lifecycle Management (PLM) market, Computer Aided Design and Computer Aided Manufacturing markets worldwide.
The problem with Geometric is that it operates in a niche area with a high exposure to the manufacturing segment. Geometric provides high-end product engineering and manufacturing engineering expertise and solutions. When there was global recession, Geometric suffered. However, that niche area of practice will prove to be a boon as the economy recovers and Geometric makes up for lost ground.
This is reflected in the fact that Geometric won new orders worth USD 13.38 MM in Q4 10 compared to USD 7.19 MM in Q3 10. Ramesh Damani also adverted to this when he said that Geometric was getting new orders from the Godrej‘s as well from other global majors including french conglomerate Dassault.
The next thing that would have caught Ramesh Damani’s attention are the valuations of Geometric. Ramesh Damani is a well known value investor and he is not one to pay more for a share than it deserves and is always looking for a bargain.
So, do we have a bargain in Geometric? Lets see. Geometric’s EPS for FY 2010 was Rs. 7.51 per share. At the CMP of Rs. 71, the PE ratio is 9.45. This is not cheap for a small-cap company though it is at a slight discount to other comparables like Infotech Enterprises (PE 12.32) and Mindtree (PE 10.38).
What the PE ratio, however, does not tell you is the increasing orders that Geometric may be expecting from Godrej and Dassault. If, Geometric’s performance improves in FY11 (as Ramesh Damani most certainly expects), one can be sure of Geometric zooming up.
Geometric’s Downside Risk
Then the other factor that master stock pickers like Ramesh Damani always like to ask is: What is the worst-case scenario?
Even on this front, one can be comfortable with Geometric. First, the management is of impeccable integrity (Godrej) so there is nothing to worry about. The day-to-day management is handled by G Ravishankar, MD & CEO and Priya Jadhav, VP Finance, both of whom are first class professionals.
Geometric book value is about Rs. 30 per share (Rs. 185 crores over 6.21 crore shares). Geometric is virtually debt-free (only Rs. 18.50 crores compared to shareholder funds of Rs. 185 crores). Geometric has a reasonable good business model. So, the downside risk is not severe.
Geometric’s future prospects:
Ramesh Damani is not one to look only into the past. He became a master stock picker because of his ability to read the future and he can see gold where others see dust!!
Geometric is promising from that perspective because Geometric expects growth from Engineering services & Products. Geometric intends to focus more on the Engineering services and the product offerings in the future. Geometric’s US arm doing engineering services business is expected to break even in FY 11.
Geometric is also actively trying to reduce risk by diversifying its’ Business & Geographic areas of operation.
From the business segments point of view, Geometric is today heavily reliant on Manufacturing and Automotive sectors. In order to decrease its reliance on these sectors, Geometric has forayed into metrology, medical imaging and machine tools sectors and has entered into partnerships with product OEM’s in these verticals to diversify its service and product vertical offerings.
From the geographical point of view, Geometric relies heavily on the US markets though the revenue contribution from the US has decreased from 70.8% to 63.3%. The dip is made up by increased contribution from the APAC and domestic regions.