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Cranes Software: Powered by IP!
Jun 21, 2006

Introduction to results
Cranes Software recently announced its financial results for the fourth quarter and full-year ended March 2006. Good growth in its major businesses and acquisitions were key growth drivers at the topline level. However, due mainly to higher employee costs, margins were under some pressure. Nonetheless, despite lower margins, the bottomline growth outpaced that of the topline, due to higher other income and lower interest charges.

Financial performance (Consolidated): A snapshot
(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Sales 545 648 18.9% 1,634 2,109 29.1%
Expenditure 107 375 249.2% 704 958 36.1%
Operating profit (EBDITA) 438 273 -37.7% 929 1,150 23.8%
Operating profit margin (%) 80.3% 42.1%   56.9% 54.5%  
Other income (49) (9)   (1) 30  
Interest 32 (5)   109 82 -25.1%
Depreciation 90 78 -12.6% 224 283 26.4%
Profit before tax 267 191 -28.4% 596 815 36.9%
Tax 87 (13)   135 190 40.8%
Profit after tax/(loss) 180 204 12.8% 460 625 35.8%
Net profit margin (%) 33.1% 31.4%   28.2% 29.6%  
No. of shares (m) 50.8 113.7   50.8 113.7  
Diluted earnings per share (Rs)       4.0 5.5  
P/E ratio (x)         18.2  

What is the company’s business?
Cranes Software is a specialised software products company, focussed on providing products and solutions to address the needs of scientists and engineers globally. The company started off in the early 1990s as a distributor of third party products and has since metamorphosed into a company that derives a majority of its revenues from proprietary products. Over the years, Cranes has followed an ‘Acquire, Enhance, Sell’ strategy i.e. acquiring under-valued scientific software products with strong and established user bases, enhancing them by adding more modules, and then expanding the market through deeper vertical penetration and cross-selling opportunities. The company’s main focus areas are data visualisation and presentation, statistical and analytical software and engineering. In FY06, the Proprietary products business constituted nearly 80% of sales. Cranes has a presence in 39 countries and a user base of over 360,000 scientists and engineers.

What has driven performance in FY06?
Proprietary products, third-party business drive topline: In FY06, Cranes witnessed a strong 29.1% YoY growth in its topline. This was a result of a near-25% YoY growth in its key proprietary products business, while the product alliances business (third-party products distribution) grew at over 65% YoY. Cranes has consciously followed a strategy of focussing on proprietary products to drive its topline since 2000. The company follows a strategy of ‘Acquire, Enhance and Expand’ – acquiring under-valued scientific products, enhancing the value of these products for their customers by doing R&D, and expanding the sales through focusses S&M efforts into new geographies and new vertical applications.

In line with the above strategy, Cranes acquired the US operations of Engineering Mechanics Research Corporation (EMRC) in FY06, which gives Cranes access to EMRC’s products and other related engineering services. Cranes also acquired InventX’s ePM, an enterprise project portfolio management solution. The company also launched new versions of some of its products during the year (in India and in global markets).

Cranes completed the issue of five-year unsecured FCCBs carrying a coupon rate of 2.5%, payable semi-annually, which are convertible into ordinary equity shares or GDRs. The funds raised were to the tune of 42 m Euros. Cranes will use these resources to further its business strategy of ‘Acquire, Enhance and Expand’. Cranes has also acquired the IP rights of Capella, for a consideration of US$ 1.6 m. The product competes in the £5 bn marketplace and is currently marketed as an integrated offering with other third-party products. The company is also merging Analytix Systems with itself.

Margins under pressure: In FY06, Cranes saw a 234 basis point fall in operating margins. This was mainly due to higher employee costs as a percentage of sales. The company now employs 517 people, up from 356 people in FY05. Nonetheless, overall operating margins, at over 54%, are amongst the highest in the industry.

For 4QFY06, margins nearly halved, from over 80%, to 42.1%. However, it must be noted here that the nature of Cranes business was the main reason for this. In FY05, the company had made a payment for software in the first and second quarters, whereas this time around (FY06), the company made the payments in the fourth quarter. Therefore, this is the main reason behind the seemingly abnormal decline in operating margins. This proves that, given the nature of Cranes’ business, operating metrics must be looked at from a full-year perspective rather than quarter-to-quarter.

Bottomline soars despite lower margins: Cranes reported an impressive 35.8% YoY growth in its profit after tax. This was despite the lower margins, and was aided by better other income and lower interest costs.

What to expect?
At the current price of Rs 100, the stock is trading at a price to earnings multiple of 18.2 times its FY06 earnings. The board has recommended a regular dividend of Rs 0.4 per share and a special dividend of Rs 0.8 per share, taking the total dividend to Rs 1.2 per share (dividend yield of 1.2%). The company has under-performed our revenue estimates by 9.8%, while on the margins front, the operating margins are 1.5% lower than our estimates. On the profits front, the company has marginally under-performed our estimates by 3.5%.

We are enthused by the company’s strong focus on its core proprietary products business. Its major products, such as SYSTAT and SigmaPlot, have been adjudged as the top software products in their respective fields by the Scientific Computing and Instrumentation (SC&I) journal. The company’s latest acquisitions will also expand the scope of Cranes’ activities to newer verticals and geographies and provide a further fillip to the topline. The company is also in the process of launching its ‘Solutions’ business, which will also drive the topline. Nonetheless, certain risk factors need to be taken into account as well, such as the relatively small size of the company, lower margins due to the people-intensive solutions business and the capital-intensive nature of the business, where constant investments need to be made in order to drive growth. Overall, we remain positive on the company from a longer-term perspective.

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