The Hindu Business Line : Cranes Software: Hold

SHAREHOLDERS can consider retaining their exposures in the Cranes Software International stock. Despite the sharp rise in the stock price over the past week since the announcement of the earnings performance, it holds potential for further capital appreciation in the medium term.

At the current price levels, the stock trades at a price-earnings multiple of 15 times its 2004-05 consolidated per share earnings.

Since our last recommendation in December 2003 at Rs 355, the stock has nearly doubled in value. Shareholders sitting on those gains may use every uptrend to book profits on part of their exposures.

Cranes Software has a wide portfolio of products catering to the scientific and engineering software community that have good growth potential. Using its products basket and complemented by product alliances for software distribution, the company's revenues and post-tax earnings have grown nearly three-fold in the past three years.

It recently announced a 1:1 bonus offer, stock split into five shares of Rs 2 each and dividends (including one-time special dividends) of Rs 5 per share. This is expected to infuse greater liquidity and make the stock more affordable to investors.

On the flip side, since competitive pressure for its niche products will remain fairly high, its ability to sustain the pace of revenue growth and retain operating margins holds the key to valuation. Second, as a products company dependent on spending patterns in the scientific and engineering community, fluctuations in quarterly performance also present a significant risk to valuation. Software stocks have low tolerance for earnings disappointment.

Financial highlights

For the year-ended March 31, 2005, the key features of its performance are:

On a consolidated basis, Cranes recorded a 44 per cent growth in revenues to Rs 163.4 crore in FY-05 over FY-04. On a large revenue base, the growth rate has, however, slowed down from 86 per cent in FY 2003.

Operating profit margin improved sharply by nearly 3.5 per cent to 49 per cent over the previous year. The company has two business segments: Products and training. The products division consisting of proprietary products and product alliances contributed 96 per cent of revenues.

The margin improvement in this division is attributed largely to the enhanced contribution from the US and European customers during the course of the year.

The margin from the training division has remained steady. This division caters to the training requirements of Indian and multinationals in the areas of mathematical modelling, embedded systems and other scientific software. Post-tax earnings grew 41 per cent to Rs 45.3 crore over the previous year. The company has maintained its net profit margin at 28 per cent over the past two years.

Strong products portfolio

Cranes Software has built a broad portfolio of proprietary products that have good growth potential. Through a series of acquisitions, the company has managed to buyout the entire product range of SPSS Science, a division of the US-based SPSS over the past few years.

As a part of the "acquire, enhance and expand" strategy articulated by Cranes, these products have given them a strong foothold in the analytics/visualisation market aimed at the scientific community.

For instance, its two flagship products — Systat (for analytics) and Sigmaplot (for visualisation) — were bought from SPSS Science, and the R&D team of Cranes at Bangalore added several features in successive versions of these products.

To strengthen its products portfolio, the company recently acquired Engineering Mechanics Research Corporation in India for $1.5 million. This will help Cranes Software expand its product and service range within the engineering services market.

These proprietary products contributed 81 per cent of revenues in FY-05, with the rest 15 per cent coming from product alliances. To complement its products portfolio, Cranes Software had entered into alliances with Matlab, Nucleus and dSpace, among others, that address different segments of the scientific and engineering community. Besides this, for the long term, the company has also invested in R&D work in the areas of wireless networks, encryption and MEMS (Micro-Electro-Mechanical Systems, expected to be a gateway to the promising field of nanotechnology).

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