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Cranes Software: What lies ahead?
Aug 30, 2007

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's main focus areas are data visualisation and presentation, statistical and analytical software and engineering. Cranes’ core success lies in its unique ‘Acquire-Enhance-Expand’ business model. This model has enabled the company to create a significant intellectual property (IP) driven technology business within the focus area of scientific and engineering software. Due to this, the company stands-out from the usual process-driven and labour arbitrage focussed IT companies, which allows Cranes to successfully compete in the global markets. Through this model, the company has managed to grow its revenues and PAT at compounded annual rates of 53% and 61% respectively during the period FY02 to FY07. This is generally the case with good product companies as the business model is much more scalable than the traditional IT services model.

How the company generates revenue?
Cranes has three lines of business - proprietary products, product alliances, and training. Les us briefly discuss each of these business.

Total Revenue share FY03 FY04 FY05 FY06 FY07
Proprietary products 76.2% 81.0% 81.7% 78.8% 79.4%
Product alliances 20.3% 14.4% 15.2% 18.5% 17.3%
Training 3.4% 4.6% 3.0% 2.7% 3.3%
Total 100.0% 100.0% 100.0% 100.0% 100.0%

Proprietary Products
Cranes offers a very wide range of products for which it has domain knowledge, product development capability and global presence. Its current products portfolio includes products like Systat (Statistical), SigmaPlot (Technical graphing for life sciences and medical researchers), TableCurve (Automated curve fitting process for engineers and scientists), PeakFit (Non linear modelling for statisticians) and NISA (Engineering analysis suite). All these products are used in scientific and engineering community and have wide acceptance in their respective spaces. The share of proprietary products in overall revenue stands at 80% and the company has maintained this ratio over the last five years.

The products of Cranes are used in aerospace, medical, chemistry, physics, material and psychology industries. It has developed this wide range of products suite after acquiring Systat Inc. in 2002 for US$ 2.3 m. At that time, Systat has annual revenues of US$ 2 m and its revenue today stands at almost US$ 10 m. The proprietary products business is the flagship segment of the company and Cranes now generates almost US$ 52 m from this business (Nil in FY02).

Cranes’ acquisitions
Software Year of
acquisition
Acquisition cost
(US$ m)
Revenues when
acquired (US$ m)
FY06 revenues
(US$ m)
AISN data visualization software suite 2001 1.8 1.0 2.3
SYSTAT 2002 2.3 2.0 8.5
Sigma products suite 2003 15.0 6.8 23.0
NISA 2005 1.5 Negligible 1.5

Product alliances
Cranes, besides offering its proprietary products, also enters into strategic alliances to serve clients in a much better way. It has agreement with Engineering Technology Associates (ETA) to distribute and support their products. Such alliances enable the company to enhance its proprietary product portfolio. The company generates 17% of its revenues from product alliances and this ratio has declined marginally over the last five years.

Conclusion
Besides proprietary products and alliances the company generates around 3% of its revenues through training, where it provides training to professionals in this field. While the company has been consistent in its performance over the last five years, the medium term concern for it will be the currency appreciation as it generates 80% of its revenues from exports.

We had recommended a ‘Hold’ on Cranes in March 2006 at Rs 105 with a 2-year target of Rs 140, which the company has already breached. At the current price of Rs 119, the stock is trading at a multiple of 14.7 times its trailing 12-months earnings. We shall soon update our subscribers with our latest view on the stock.

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