The Hindu Business Line : Cranes Software: Buy (High Risk)

INVESTORS may consider taking exposure in small lots to participate in the growth story of Cranes Software International (Cranes Software). Considering the focussed nature of products and services offered by the company to the scientific and engineering community, this stock may be suitable only for investors with a penchant for high risk. It trades at a price-earnings multiple of 15 times its trailing twelve month per share earnings for 2003-04. Concentrated stock ownership and low trading volumes are also notable risks.

Performance contours

For the quarter ended September 30, the key highlights of its performance are:

On a standalone basis, the revenues grew 54 per cent to Rs 17.4 crore on a sequential (quarter-on-quarter) basis. On a consolidated basis, the revenues were up 43 per cent to Rs. 19.4 crore.

The operating profit margin at 56.8 per cent continued to remain quite strong, though marginally down from 59.7 per cent in the first quarter ended June 30, 2003.

The post-tax earnings (on a standalone basis) also rose 54 per cent to Rs 5.6 crore on a sequential basis. The consolidated earnings rose 46 per cent to Rs 5.3 crore.

Business segments

Products and training are the two business segments contributing to the revenue streams of the company.

In the latest quarter, the products segment dominated with a contribution of 86 per cent to total revenues and stable profit before interest and tax margin of 50.6 per cent. The balance 14 per cent was contributed by training revenues and profit before interest and tax margins of 46.6 per cent. At present, Cranes is working on three main lines of activity:

Products/consulting: In the products portfolio, it deals with both owned and distributed products. In the product ownership arena, it started by acquiring AISN Software, US and then extended it in 2002-03 by acquiring SYSTAT from SPSS Science, US. Both the acquisitions offer a range of scientific software products for technical professionals.

In distribution, it is working on three differentiated categories: Mathematical modelling and simulation tools relating to the Matlab product, alliances in the Embedded Systems space with Nucleus, dSpace and Metaware and the partnership for Business Intelligence Products, Witness and Simba with the UK-based Lanner group.

Training: It offers training in digital signal processing, real-time operating system, embedded systems and mathematical modelling and simulation.

This addresses the corporate training requirements of Indian and MNC companies in specific products and applications. It has positioned itself at the higher end of the training value chain.

Research and development: It is involved in R&D work in the areas of wireless networks and MEMS (Micro-Electro-Mechanical-Systems), which are expected to provide a gateway to another promising field of nanotechnology in the future.

The company aims to create commercially exploitable products in the long term.

Investment risks

The company has attempted to broadbase its revenues streams by expanding across product, training and consulting services catering to the scientific and engineering community. But the possibility of fluctuations in quarterly performance cannot be ruled out.

Starting from a relatively small base, Cranes managed strong growth in revenues and post-tax earnings for the last six quarters. But given the low tolerance for earnings disappointment, any decline in quarterly post-tax earnings may have pronounced impact on stock prices.

It remains exposed to the vagaries in spending patterns in the specialised market segments. It is also likely that its margins in the products and training business may start to decline as some of these focus segments begin to mature.

To reduce this impact, Cranes is already investing in research and evelopment in leading edge areas such as MEMS and wireless initiatives. The success in commercialising products in this space may provide the cushion for lower margins from the products and training segment.

The distribution of shareholding, as of March 31, 2003, shows that over 96 per cent of the shareholders hold more than 10,001 shares in the company.

Another 1.28 per cent is held by shareholders with holdings in the 5001-10000 category. Secondly, private corporate bodies as a class have the second largest holding in the company, after the promoters.

Any exit by this class of shareholders may contribute to a sharp downward pressure in the stock price. Investors may have to factor in this risk element in valuation.

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