A scientific way to success

Products are going to be the kicker for Cranes Software

Cranes Software International (CSIL) was among those unlikely scrips in the technology segment that blazed to glory during the past 12 months.

The scrip, which was languishing at Rs 103 levels a year ago, has gained nearly 210 per cent during the period, backed up by an impressive financial performance.

The perception about CSIL as a high-end scientific and engineering solutions company on the growth path has been the main reason behind the surge in the share price, say analysts. They are also impressed by the company's focus on acquisitions and product development which has worked well so far.

CSIL offers products, solutions and training in the scientific and engineering field. The company's areas of operations can be classified into product development, consulting, distribution and training.

CSIL started its business in 1991, distributing leading third-party products in numerical software and later branched into niche scientific software industry by undertaking sales of US-based Mathworks' mathematical modelling, simulation and analysis product, Matlab.

"Matlab was the foundation of our distribution business in India," says Richard Gall, president, CSIL. "We had a product focus right from the beginning. We have extended that from being a third party product distributor in India to being a global distributor of products that we own," explains Gall.

Growth through acquisitions

As a part of its plans to expand its product line, the company acquired the Sigma product line from SPSS Inc for $13 million in January 2004. Now CSIL's subsidiary Systat Software Inc owns the worldwide license to distribute Sigma products.

According to Gall, "it is another step in the process," which started with the acquisition of the Systat product line. Gall explains that the decision to take over Systat was aimed at going global with CSIL's own products.

"The Systat product line has done very well. So after establishing a development team and having put in place a global marketing structure, we turned our attention to the Sigma product line," says Gall.

CSIL has committed an investment of Rs 1 crore to communication technology innovator Esqube Communication Solutions (Esqube). The company has also extended its association with Texas Instruments (TI) to cater to ASEAN regions wherein it will offer sales and services support to TI's digital signal processing (DSP) tools.

Analysts view the company's ability to acquire and develop products as the key to its growth strategy. "It is one of a few true product companies in India. CSIL's proficiency in buying products and scaling them upwards has stood it in good stead," notes Sandeep Shenoy, strategist at domestic research firm Pioneer Intermediaries.

Shenoy feels that "products are going to be the kicker for CSIL's business."

Financials take a quantum leap...

A look at CSIL's financials confirms the story. Though the company's business is broadly divided into products and training, it is the former that is garnering the lion's share of revenues at almost 92 per cent.

Shenoy feels that "CSIL's products are scaleable. Each of them has the potential to generate $10 million revenues on an annual basis."

That certainly doesn't seem out of place when you consider that the company's product division recorded revenues of Rs 50.95 crore for the nine-month period ended December 31, 2003, a near 110 per cent jump, compared to the same period in the previous fiscal.

Revenue growth was also cheerful for the period, with the company posting a 118 per cent jump in sales to Rs 55.22 crore, while net profit rose to Rs 16.53 crore from Rs 7.12 crore, an increase of 132 per cent.

 

Financials
(Rs Cr)	Q3 FY04	Q3 FY03	% change	9 mths ended Dec 03
Total income	26.50	11.03	140.25	55.24
Total expenditure	12.58	5.64	123.05	24.58
Operating profit	13.92	5.39	17.20	30.66
OPM (%)	52.53	48.87	-	55.50
Net profit	7.22	3.26	121.47	16.53
Net margin	27.25	29.56	-	29.92
EPS (Rs)	8.57	3.87	121.45	19.63

Gall notes that CSIL's traditional business, Matlab and domestic distribution, have continued to grow well. But that is only a part of the story.

"The major part of our revenue growth has come from Systat products. We launched the Japanese and 10.2 versions. Both contributed to our revenue growth," says Gall.

Overseas business accounted for almost 72 per cent of the company's revenues for the nine-month period, amounting to Rs 39.75 crore. To further its interest in the overseas markets, CSIL has incorporated a fully-owned subsidiary in Singapore apart from another one in Germany, its second direct presence in Europe after London.

Gall attributes the overseas markets for the big chunk of revenue growth. "We have captured markets like Europe, Australia, Middle-East and Japan," says he.

The company's overseas client list includes Aventis, Bausch & Lomb Inc, Bayer AG, BMW Rolls Royce, British American Tobacco, Diamler Chrysler, Exxon, Glaxo SmithKline and Johnson & Johnson. "We hope to maintain an average growth rate of 50 per cent in both topline and bottomline in the near-term," says Gall.

Shenoy is equally bullish on the company. "It is launching Systat 11 in the next few months and the success of that product should ensure further growth." Its costs are also unlikely to be much of a concern.

"CSIL doesn't have any capex risks apart from routine costs including that for acquiring and developing new products, and accompanied sales, marketing and distribution costs. It expects Rs 98-105 crore topline and above Rs 27 crore bottomline for FY04. Margins, too, are likely to be healthy," says Shenoy.

The company recently closed its GDR issue, netting over Rs 50 crore in the process.

...and the future looks bright

While Gall sees tremendous opportunity from the current products, he is not averse to exploring other verticals. "Mathematical modelling and simulation can address many fields. We feel that its application in other vertical areas where it is not used so much today represents a huge opportunity.

For instance, in financial services. Financial analysis is getting more sophisticated and yet the number of tools available for it is rather limited. Areas like bio-infomatics, biology and ecology are also growing. We see opportunities in these fields as well," says he.

But Shenoy is not without apprehensions about the future. There is a risk factor involved when the company buys a product. "It all depends on whether it will be able to assimilate the product and ramp up it further," says he.

The concentrated stock ownership and low trading volumes of the scrip are also risks to watch out for, say analysts. At an EPS of Rs 20.60 for the quarter ended December 31, 2003, the scrip is trading at a P/E of 15x at Rs 320 levels.

"If it continues to grow by 50 per cent, even a 20-25 P/E is not excessive for the scrip," says Shenoy.