The other challenge Geometric is facing is related to the change in demand from the customers who are now looking at a complete support solution across disciplines: between software, mechanical engineering and embedded systems. For example, if a Geometric’s customer says it wants to hook up its production, not only does it want Geometric to do a plant layout, but it also wants the company to work out a scheme to hook up a machine with monitoring feedback on the plant layout, so that, over time, the customer knows which machine is having problems and it can then better monitor the plant. In this case, Geometric needs to integrate plant layout (an engineering service) with monitoring feedback (embedded systems), and add software to the dashboard to monitor it. “In the past execution, efficiency and (cost) savings was the key,” says Parpia. “Now, it’s more about solving a problem and creating an opportunity that will give the company a competitive advantage.” Towards this, Geometric has adopted a plan, whereby client partners and sales work together to understand the customer’s needs and create solutions.
Being in the engineering services business, it also faces the challenge of skill gap and employability of young graduates. Geometric hires a lot of young graduates and trains them. Employees with less than three years of experience constitute about 60 per cent of its 4,886 employees. Its attrition rate has come down from 14.8 per cent in the Q2 to 12.2 per cent in Q3. The industry attrition rate is 12 per cent.
To address these challenges, Parpia is trying to break the silos within Geometric to enable its employees to create a solution cutting across disciplines, as demanded by customers by working together in teams and combining the different skill sets. But that’s only one aspect. Parpia has identified the areas that need to be worked upon: There’s a need to upgrade the sales force; change the go-to-market strategy; and understand customers better. Also, profit & loss responsibility has been shifted to individual verticals, to make verticals accountable. In the last two years, it has doubled its spend in sales & marketing and client-facing activities to ?75 crore.
As Parpia is changing gears, he doesn’t blame the previous two CEOs for the challenges the company is facing. “I’m not sure if the issues that I’m dealing with came into being during the tenure of the previous two CEOs,” he says. “The roots of the issue lie in the much earlier period.” The issue in this case is Geometric’s culture. According to Parpia, Geometric’s culture is too much person focused and too little focussed on demanding performance. And this, he feels, has been an issue since the earliest time.
It’s time, Geometric focusses on demanding performance from its employees. Because, as Parpia admits, Geometric has been an inconsistent performer in the last five years (see table: Financials). Although, its net income has more than doubled in the last five years its profit after tax hasn’t kept pace, coming down as it did to ?63.11 crore last year, from ?86.76 crore a year earlier, after growing steadily for previous four years. Its cash flow from operations, return on equity and earnings per share follow the same trend of inconsistency. Also, the growth in revenue is misleading, as it manifests only when it is looked at in rupee terms, because of the rupee’s depreciation against dollar. In dollar terms, the revenue has declined to $181.39 million in 2013-14, from $187.57 million in 2012-13.
It has cut down the number of accounts it has been working with from 140 to 70 in 2014, to focus more on existing customers. As of Q3 of 2014-15, it is working with 63 customers. “”We work with large companies, where we haven’t tapped the full potential of our customers.” But, the key risk to growth remains high client concentration – the Top Five customers contribute 52 per cent of revenues – which exposes the company to sudden adverse decisions at the clients’ end.
Parpia says these are long relationships and claims it’s part of Geo- metric’s strategy to work and build relationships with our customers. Geometric’s tagline is ‘People build relationships’. He declined to reveal the names of the Top Five customers but admitted that too much concentration on few clients is a risk. And Geometric has experienced that risk in the recent past. One of its single largest customers went through a difficult period two years ago and therefore, cut business. Over the last two years, on an annualised basis, the revenue fall from this one large customer was $20 million.
Geographically, a majority of its revenues have come from North America. The US, as a region, contributes 58.42 per cent of total revenues, while Europe contributes 28.68 per cent,
Mehta: industry is growing
APAC 6.34 per cent and India, 6.55 per cent. Parpia feels there is a big opportunity, especially because of shortage of engineering skills in Europe. Geometric has a good geographic spread with more than 13 delivery locations in the US, Canada, the UK, France, Germany, Sweden, Romania, China, Japan and India. But, the largest centre is in Pune, followed by Bangalore and then Troy, Michigan.
Despite working hard to change gears, Parpia regrets that the impact of his efforts has not yet’ come through. He admits it is taking more effort than what he had anticipated and likens the effort to changing the direction of the ship. “The company is now more ready for change,” says Parpia. “Now, we need to accelerate and implement the process.”
Some impact of Parpia’s efforts can be seen. Geometric’s new deal- signings during Q3 of 2014-15 was at a multi-quarter high of $13 million. It is now participating in larger deals and the average deal size won is increasing. Geometric’s large deal closure rate was 30 per cent in Q3 of 2014-15 – up from 21 per cent in Q3 of 2013-14. Also, its overall deal win rate has improved to one out of two deals, as compared to one of three a year ago. Currently, the deal funnel is 25-30 per cent higher than last year, which provides visibility for better growth in 2015-16.
Geometric’s stock price has also moved up – from ?66 on 8 August 2011 (when Parpia was reappointed as MD & CEO), to ?207 on 24 March 2015 (which was when the news reports of the promoter group’s stake sale appeared in the media), with 1.17 million shares changing hands on that day. The stock is now trading at ?180- 190. Its liquidity is also high, with an average trading volume of several lakh shares daily. “Price movement and rising volumes indicate that traders and participants are riding this wave,” says an analyst. “Some fundamental changes are taking place in the company, which is taking it to a higher level.” But, because of the inconsistent performance of Geometric, not many broking and research firms are tracking the company.
But, there’s good news for Geometric as engineering services industry is in the growth stage. Engineering services is often compared with BFSI. While revenue opportunity in absolute numbers is higher in BFSI, which has a much bigger base, but, in terms of growth potential, there is more opportunity in engineering services space, the base of which is relatively much smaller. According to NASSCOM, Enterprise outsourced R&D market in 2013-14 was around $75 billion globally. Of this, India’s share in the engineering services outsourcing (ESO) industry was estimated to be 16-17 per cent in 2013-14, which is expected to go to 35-40 per cent of the global market by 2020. “Engineering services industry is growing at 15-16 per cent,” says Harish Mehta, chairman & MD, Onward Technologies.
Parpia wants to make the most of this opportunity and feels that he needs at least 6-12 months to put Geometric in top gear. He is confident that there’s scope for it to become a billion dollar company. Meanwhile, Parpia’s contract with Geometric, which was expiring on 8 April 2015, has been renewed and he has been re-appointed MD & CEO for two more years. But, will Godrej group and Parpia family move out of Geometric, proving rumours true? It should be clear in the next six months.
♦ ROHIT PANCHAL email@example.com