Cranes Software International: Down the Unbeaten Path

Geography and culture apart, one of the key reasons for the lack of success
among Indian product companies is the paucity of financial resources available
for entrepreneurs and companies to try out their ideas.

Surprisingly, even large companies find it difficult to divert resources to
IPR development due to the pressures of their investors. On the other hand,
smaller companies and entrepreneurs rarely find a willing investor or venture
fund to punt on their product ideas. The net result, as we all know, is that
there is hardly a product from India that can be called a resounding success
story.

The lack of success has another fallout. It reinforces the belief that Indian
companies will never make it big in the products arena and few entrepreneurs and
fewer investors have the courage to go against the tide. Should Indian companies
give up their product dreams or is there a way?

Among the companies trying an innovative route to reach their dreams is
Bangalore-based Cranes Software, which has done the unthinkable by acquiring a
US product company and then trying to add bells and whistles to the product,
leveraging the India cost advantages and their past experience in product
distribution.

Cranes Software International, incorporated in 1991 in Bangalore, began
business mainly as a distributor of scientific and mathematical software
products from Matlab. The company’s chairman is Dr Rudra Pratap and the
managing director is Asif Khader.

In the past five years, the total income has grown from Rs 5.3 to Rs 61 crore,
whereas its net profit has risen from Rs 0.7 crore at a CAGR of 83% to Rs 14.1
crore.

The company’s current equity stands at Rs 8.4 crore with promoters holding
41.8%, institutional investors holding 10.3% and the balance 47.9% being held by
the public. The company became a listed company through its amalgamation with
Eider Commercials in the year 2000. CSIL has a fully owned subsidiary Systat
Software, headquartered in California.

Cranes Software, that began as a domestic product distribution and training
company, today has almost 3/4th revenues coming from the sale of its own
products that have been acquired by the company from software major SPSS and
AISN Software. The company continues to distribute products from Mathlab,
Witness, Simba, Nucleus among others. These constituted around 20% of revenues
for FY03. The third line of business of the company, is training on scientific
software products for which it has relationships with Mathworks, Texas
Instruments and Rational Software.

For the fiscal ended March 2003, Cranes software reported excellent results
wherein the revenue grew 81%, amounting to

Rs 61 crore as compared to Rs 33.6 crore in the previous financial year. The net
profit for the same was Rs 14.1 crore, up 42% as against Rs 9.9 crore last year.
Overseas revenues from sale of products and services rendered, contributed
considerably amounting to Rs 46.4 crore, which is 76% of the total revenues
earned during the financial year, whereas sales and services rendered
domestically were Rs 14.6 crore contributing the balance 24%.

Cranes Software recently acquired the Sigma product line from SPSS for $13
million and this will further strengthen its focus on the scientific and
technical markets. The Sigma product line is designed specifically to meet the
requirements of research

scientists and engineers, enabling collection, analysis and presentation of
scientific data and its market includes research professionals in the field of
life and environmental sciences, medical research chemistry and engineering.

CSIL has plans to upgrade these products to more contemporary technologies
and features and hopes that these will enable a better acceptability and prices
in the medium to long term. The company also has committed an investment upto
Rs10 million to another product company Esqube Communication Solutions Private
Limited and will also provide worldwide sales and marketing support to ESQUBE’s
range of products.

CSIL also continues to expand its range of traded products with a recent
tie-up with Texas Instruments to be a product reseller for the latter’s range
of Digital Signal Processing tools in the ASEAN market. The dual business models
of product ownership as well as distribution of products, while in the short
term provides synergies, there are possible conflict areas as well in the longer
term.

Cranes Software declared healthy results for the third quarter ended December
2003. Revenues amounted to Rs 29 crore, up 49% and 126% as compared to Rs 19.4
crore and Rs 12.8 crore earned in the immediate previous quarter and in the same
quarter last year respectively. The net profit for the same period grew 58% and
190%, sequentially and y-o-y respectively amounting to Rs 8.4 crore. Revenues
generated overseas from sale of products and services rendered contributed 85%
amounting to Rs 24.7 crore whereas sales and services rendered domestically were
Rs 4.3 crore, contributing the balance 15%. Employee headcount increased by 13
in the third quarter taking the total staff strength to 228.

Going forward, the company’s recent acquisition of the Sigma line of
products as well growth in business should have a positive impact on sales
growth. Coupled with the cost rationalization measures should further improve
operating margins. While the company has recently deferred its GDR plans,
possible equity dilution through preferential issues in the near term cannot be
ruled out.

The shares of Cranes Software currently trade at Rs 375 discounting its 2004
and 2005 earnings by around 13 times and 10 times respectively. We believe that,
given the high operating profit margins of this business and a growth path
envisaged by the company, valuations will improve in the near term. Long-term
appreciation of the company’s shares largely depends upon the market
acceptance of its product enhancements and ability to raise resources to
increase marketing spends. Outperformer.

Sushanto Mitra is the founder
of Technology Capital Partners

The views reflected here are of the author and not of this publication. No
liability is accepted for losses based on the information presented here