HCL Technologies' acquisition of Geometric to trigger a consolidation wave

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 there 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 companies have a margin mismatch. While Geometric reported margins stood at 15 per cent, HCL's range is between 21-22 per cent. "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 per cent of the overall revenues," said Bhusan.

HCL, which drew around 18 per cent revenues from engineering and R&D services in the last quarter has already announced two small acquisitions - Trygstad Technical Services and Concept to Silicon Systems in the last few months in this space.