Geometric Deal to Strengthen HCL Metrics Perfect with HCL
Experts say acquisition will trigger wave of consolidation in engineering sector
Surabhi Agarwal &
New Delhi: HCL Technologies’ acquisition of Mumbai-headquartered firm Geometric on Friday is not only expected to strengthen the HCL’s already strong engineering practice, but also trigger a wave of consolidation in a segment, which is considered to be the fastest growing area for the Indian IT services in the last two years.
The acquisition of Geometric for around $200 million will mark the company’s third and largest acquisition in the engineering sector so far. Despite the fact that Geometric had been struggling with slower revenues growth in a fast-growing industry and the deal also doesn’t include almost one-fourth of the business which was exclusive to one client – Dassault Systems, market experts are positive about the deal. HCL has shelled out around $190 million for part of the Geometric business which is estimated to have revenues of $140 million.
Shashi Bhusan, senior vice-president at IDFC Securities, said that HCL may have slightly overpaid for it, as the price is a little higher than the recent deals. “But, the decision seems to be driven by HCL’s ability to grow the revenues and mine Geometric’s clients through cross-selling,” said Bhusan, adding that HCL was anyway a “formidable player” in this segment and the deal will further strengthen it.
However, the two firms have a margin mismatch. While Geometric’s margins stood at 15%, HCL’s range is between 21- 22%. “I don’t think there will be too much of an impact, HCL is a $6-billion company and Geometric’s business is not even $150 million which is not even 10% of the overall revenues,” said Bhusan. HCL, which drew around 18% revenues from engineering and R&D services in the last quar- ter, has already announced two small acquisitions — Trygstad Technical Services and Concept and Silicon Systems in the last few months in this space.
Some experts are more skeptical of the deal. Sagar Rastogi of Ambit Capital wrote in a note that while Geometric’s service lines — product lifecycle management implementation, outsourced product development and mechanical engineering outsourcing services — are slow-growth and low-margin businesses compared to embedded systems engineering or regular IT services, the company has some marquee clients such as Siemens, Caterpillar, GM, Ford, Chrysler, Volvo, Goodyear, Trumpf, John Deere, Aerolia (subsidiary of Airbus) etc.
“This deal would have an insignificant impact on the financials, but acquiring a legacy, India-based business sends a bad signal in our view. HCL Tech could have easily acquired these capabilities organically at a much lower-cost in 3-6 months.” said Rastogi, adding that their view on the stock remains positive, because of its good portfolio mix — high exposure to fastgrowing service lines such as IMS and Engineering services — and cheap valuations. ambiguous areas, there will be opportunities . I have no reason to believe otherwise and HCL has made it clear that they value the talent.
What are your plans? They don’t need another CEO, do they? (laughs) We will see about what I do, but for the next 6 to 9 months, I have to deliver and ensure that our teams deliver, stay focused after that I will be supporting the transition at HCL. Then I will see. I have no particular ambition to start something or do something. The first thing that is called for is relaxation.
Timeline for the transition? The deal is estimated to take between 6 to 9 months since it requires regulatory approvals. Then after that I guess that internal transition will take another six month. How is the deal working out for the shareholders? Geometric’s main business is demerged from Geometric, and acquired by HCL. Geometric shareholders receive for every 43 shares of Geometric, 10 shares of Geometric. And if you work out the math it comes to about .₹ 190 per Geometric share. In addition, Geometric shareholders will get a preference share worth .₹ 68 which are redeemable and listed.