Annual Report Analysis

Cranes International Ltd Powerful Take-Off

BSE Code 512093 Background Bloomberg Code EDC@IN Cranes Software International Ltd (CSIL) is a scientific and engineering products Face Value Rs 10 and solutions provider. The company promoted by Mr Asif Khader and Mr Mukarram CMP Rs 430 Jan commenced operations in 1991. The company’s software products, both owned Market Cap Rs 4,369mn and distributed, are used by more than 200,000 scientists and engineers globally. It also provides consulting and training of these products. It has a presence in 37 countries Share Holding Pattern with subsidiaries in US, UK, Germany, Singapore and India. The clientele includes GE, Texas Instruments (TI), Intel, Motorola, Phillips, Siemens, Tektronix, Eli Lily, Shareholding Pattern Pfizer, Exxon, Infosys, Wipro, Satyam, Tata Elxsi, etc. It is recognized as No 1 Indian 15% 35% Technology Company by Deloitte Touche Tohmatsu Asia Pacific fast 500 survey. The company is in the process of implementing CMM Level 5 and plans to achieve

33% People CMM (PCMM) and BS7799 certification during the current financial year. 17%

Promoters Institutional Investors Business Other Investors General Public • Product Distribution CSIL made its entry into the scientific products with the acquisition of distribution Share Price Chart rights of MATLAB, the world’s leading technical computing software. This product has a current base of 500,000 technical users worldwide. Subsequently, the company entered into new alliances such as dSpace (DSP development tool), nucleus RTOS (Real Time Operating System) software for embedded solutions, WITNESS simulation software, Adventnet infrastructure software for IT and Telecom, etc. In FY04 the company entered into distribution agreement with TI for distribution of its digital signal processing (DSP) software tools in the ASEAN region. It was also appointed as a sole distributor for System Architect, a Popkin software product.

• Propriety products The company started its own product business with the acquisition of AISN software’s portfolio of visualisation software products in FY01, which are TableCurve 2D, Table Curve 3D and PeakFit. This range was further extended with the acquisition of SYSTAT range of product in FY03. During the last quarter of FY04, it acquired the Sigma Product Line (SPL) from SPSS Inc for a total sum of US$13mn. The Sigma product range consists of products like SigmaPlot, SigmaStat, and SigmaScan. The company is using its own offshore R&D facilities to create regular updates for its range of products. Since acquiring products, the company has launched upgrades such as SYSTAT Version 10.2 and TableCurve 3D Version 4.0. The company has also launched a Japanese version of SYSTAT 10.2. In the current year, the company has already come out with SYSTAT 11.0 in June and is expected to come out with the next version of SigmaPlot in coming few months.

September 07, 2004 1 Annual Report Analysis

• Training The company entered training in 1998 and the activity is carried out under the name ‘Cranes Varsity’. This was primarily started to train users on the products distributed by the company. It started off as the authorised training partner for MATLAB. Later the company established a partnership with TI to train users of TI’s tools in India. This is done through TI DSP labs established in engineering colleges across India. It has been addressing the demand for qualified professionals in the areas of DSP, real time embedded systems (RTES) and mathematical modeling and simulation (MMS) from its customers, both domestic and global. Recently, the company has entered into a partnership with IBM to introduce its Rational SEED Program to universities in southern India.

• Consulting The company started providing consultancy services under its division ‘Modelware’ in FY00, so as to leverage its long association with global principals. It has created consulting skills in DSP and mathematical modelling and analysis. Modelware has recently entered into an alliance with Lanner Group and Popkin Software with the business modelling and simulation market in mind. The consulting portfolio now includes application development in the CRM, SCM, financial services and embedded solutions space.

Global Presence The company has four subsidiaries and one sub-subsidiary. • SYSTAT Software Inc, USA: Incorporated in FY02 to acquire and maintain SYSTAT products. It also covers the ASIN range of products. • SYSTAT Software Asia Pacific Ltd, India. • SYSTAT Software GmbH, Germany: Created in FY04 to run ongoing operations of Sigma product line. • Cranes Software International Pte Ltd, Singapore: Incorporated in FY04 to look after the ASEAN operations. • SYSTAT Software UK Ltd (sub-subsidiary): Created in FY03 to look after the European operations. Apart from these subsidiaries the company’s global presence is embraced by 5 direct offices (sales & marketing) and 33 distributors, taking the total coverage to 37 countries.

September 07, 2004 2 Annual Report Analysis

R&D initiatives Wireless Applications: The company has leveraged its association with leading technology companies TI, MatheWorks and Tektronix to develop innovative solutions for global wireless technology industry. It has developed IP cores for wireless communication systems and wireless LAN test solutions. Recently, the company was retained by National Instruments, a global leader in virtual implementation, to develop complete wireless LAN test and measurement solutions compatible with their product range.

Micro Electro Mechanical Systems (MEMS): The company has been proactive in the field of MEMS research and has established CranesSci MEMS lab in collaboration with Indian Institute of Science (IISc) in FY03. Located at the IISc campus, Bangalore, this initiative has been headed by Dr Rudra Pratap, the Chairman of the company. The lab is focused on developing MEMS based designs for a range of applications. During the year FY04, it developed its first novel design of a MEMS microphone. Fabricated structures based on this design have been created and a patent application has been made. Other designs are in the pipeline and development activity is expected to intensify in the current year.

September 07, 2004 3 Annual Report Analysis

Balance Sheet Analysis • Exponential revenue growth Revenue Growth 1,200

1,000

800

600

400

Revenue (Rs mn) 200

0 FY02 FY03 FY04 Source: Company Reports, India Infoline Research

The total revenues of the company have increased from Rs232mn in FY02 to Rs1137mn in FY04 representing a CAGR of 122%. The healthy growth in revenues in FY03 can be attributed to pick up in volumes due to acquisition of scientific software product SYSTAT from SPSS Inc and Tablecurve 2D, Tablecurve 3D and Peakfit from AISN Software during the year. The growth momentum was further carried forward in FY04 with SYSTAT 10.2 picking up and the company coming out with other upgraded versions like SYSTAT 10.2 (Japanese version) and Tablecurve 3D version 4.0. The revenues in the last quarter of FY04 spurted due to acquisition of Sigma product line from SPSS Inc during the period.

• Changing business composition The business composition has undergone a significant change over the last 2 years. The company has successfully made a transition from a distributor of software products in India to owning IPRs and selling its own suite of products in domestic as well as international markets.

Period FY02 FY03 FY04 Segments % of Rev EBIT (%) % of Rev EBIT (%) % of Rev EBIT (%) Product 85.5 34.8 96.4 40.8 95.3 38.5 Training 14.5 37.3 3.6 55.9 4.7 44.8 Source: India Infoline Research

September 07, 2004 4 Annual Report Analysis

The percentage share from the product division, which consist of revenue from propriety products and product alliances, have been increasing over the years. The company has expanded its proprietary product stable in last couple of years by acquiring and developing IPs and upgrading existing IPs at its R&D centre at Bangalore. Apart from it, the company has entered in to new product alliances such as one with Texas Instruments and Popkin software. On the other hand, revenue from training segment has increased marginally from Rs49mn in FY02 to Rs52mn in FY04. Period FY02 FY03 FY04 Segments (Rs mn) Actual % of total Actual % of total Actual % of total Exports 87 37.1 464 76.1 916 80.6 Domestic 148 62.9 146 23.9 220 19.4 Source: Company Reports, India Infoline Research The company’s effort to increase its international presence by incorporating global subsidiaries and marketing & distribution offices has paid off. The increased international presence is reflected in the enhanced share of exports in revenues from 37% in FY02 to 81% in FY04. Export revenues have witnessed a CAGR of 225% over the last two years to reach Rs916mn in FY04. The growth in case of domestic business has been quite modest from Rs148mn in FY02 to Rs220mn in FY04 translating into a CAGR of 21.9%.

• Higher margins

Margin Movement 90.0 80.0 70.0 60.0 50.0 40.0

Margins (%) 30.0 20.0 10.0 0.0 FY 02 FY 03 FY 04 Gro ss M argin Operating M argins Net Margin

Source: India Infoline Research

The companies gross margin increased from 68.2% in FY02 to 71.2% in FY04. The margin spurted in the year FY03 to 80% levels on account of higher volumes leading to lower cost in manufacturing own products. The subsequent decrease in FY04 can be attributed to Sigma product line acquisition that led to relatively lower margin in the fourth quarter of the year. The operating margin moved in line with the gross margin. The company has been successful in deriving higher leverage from its staff cost and selling and administrative expense. This led to operating margin of 45.4% in FY04 as compared to 44.2% in FY02. The company earns one of the highest operating margins in the software product industry. September 07, 2004 5 Annual Report Analysis

• Improving Profitability

Net Profit Growth

350 175 300 150 250 125 200 100 150 75 100 50 yoy growth (%)

Net Profit (Rs mn) 50 25 0 0 FY02 FY03 FY04 Net profits yoy grow th Source: Company Reports, India Infoline Research

The company’s net profit increased from Rs75mn in FY02 to Rs325mn in FY04 representing a CAGR of 109%. The net profit margin improved from 23.8% to 28.6% during these two years. This is despite the increase in interest cost and depreciation on the back of higher debt and additions to fixed assets respectively.

Period FY02 FY03 FY04 Net Margin 23.8 22.9 28.6 ROCE 39.9 58.0 28.8 RONW 29.7 35.4 27.4 Source: India Infoline Research

The decline in ROCE in FY04 to 28.8% from 58% in FY03 was due to higher capital employed in fixed assets and working capital. The balance sheet size of the company increased from Rs700mn in FY03 to Rs2167mn in FY04. The RONW has declined to 27% in FY04. However, this has to be seen in the light of significant increase in shareholders fund from Rs270mn in FY02 to Rs1187mn in FY04. This implies that the company has retained majority of funds generated to drive future growth. Both ROCE and RONW earned by the company are well above the industry average.

September 07, 2004 6 Annual Report Analysis

• Capital Structure Equity share capital of the company has increased from Rs84.2mn in FY03 to Rs101.6mn in FY04. The successful completion of GDR offering conducted in March 2004 led to increase in share capital. As per the offer 1.74mn shares have been issued at US$6.65 each aggregating to US$11.6mn (Rs503.3mn). Each share issued represents one local equity share of Rs10 each. The GDR will be listed on the Luxembourg Stock Exchange. The company had preference share capital of Rs20mn on its balance sheet, which are due for redemption in FY05. The loan funds have increased from Rs191mn in FY02 to Rs898mn in FY04. Of the Rs685mn net additions in FY04, Rs 405mn were in the form of term loans and the balance Rs280mn were working capital borrowings. This amount was used for the acquisition of sigma product line and to meet other capital expenditure and working capital requirements. As a result, the debt to equity ratio has increased from 0.54 to 0.76 in the last fiscal.

• Working Capital Period FY02 FY03 FY04 Working Capital (WC) 302 298 1551 WC as % of sales 130.2 48.8 136.4 Cash & Bank 133 9 788 Cash as a % of WC 44 3 51 Cash per share 15.8 1.1 77.6 Source: India Infoline Research

The total working capital of the company has increased almost five times between FY03 and FY04. The working capital stood at Rs1551mn at the end of FY04. Another factor, apart from cash, contributing to increase in working capital was loans & advances, which spurted from Rs56mn at the end of FY03 to Rs464mn for the fiscal FY04. Despite this significant increase, the company enjoyed a comfortable liquidity position. The cash balance constituted almost 51% of the working capital. The huge cash of Rs788.2mn at the end of FY04 included Rs503.3 raised through the GDR issue. This translated into cash per share of Rs78. The company might not be able to maintain such high liquidity in FY05, as it would utilize these proceeds throughout the year.

September 07, 2004 7 Annual Report Analysis

Period FY02 FY03 FY04 Inventory Days 25 44 9 Debtor Days 202 165 165 Creditor Days 64 41 46 Source: India Infoline Research

On the other hand, the company worked well on sustainable factors of improving liquidity. The prudent management of inventory and debtors has led to both inventory and debtor days coming down over last couple of years. It should be noted that the company has higher debtor days compared to the industry average on account of couple of reasons. First, around 45% of the yearly sales takes place in the last quarter. Second, export sales takes place through its global distribution network where the collection cycles are typically longer.

• Fixed Assets & Investments The fixed assets of the company have increased from Rs191mn in FY02 to Rs604mn in FY04. This has been in line with the business operations of the company. Further, better utilization of assets is reflected in fixed assets turnover ratio improving to 1.88 in FY04 as compared to 1.54 in FY03 and 1.76 in FY02. On a stand-alone basis the company’s investments in its subsidiaries has been increasing. The company’s investment increased from Rs18.4mn at the end of FY02 to Rs140mn at the end of FY03 as it made additional equity investments of Rs121mn in its US subsidiary and initial equity investment of Rs0.5mn in the Asia Pacific subsidiary. In FY04 the total investments increased by Rs50mn. Additional investments of Rs45.5mn and Rs3.3mn were made in its US and Asia Pacific subsidiaries respectively during the year. The company also made initial investment of Rs1.4mn in German subsidiary incorporated during the year.

September 07, 2004 8 Annual Report Analysis

Future Outlook The management of the company is confident of maintaining the strong growth rate and higher margin (~ 45% levels), given the multiple growth drivers now in place.

• Sigma product line: The revenues from this product line will be included for the entire twelve months of FY05 as compared to three months of FY04. Further, the launch of SigmaPlot version 9.0 in the coming few months will be a strong revenue generator. Its target segments include 1.5mn engineers, 0.2mn science technicians, 0.2mn mathematicians and 20,000 physicists in the US alone.

• Launch of SYSTAT 11.0: The company has successfully launched SYSTAT 11.0 in June 2004, which takes the product from FORTRAN to C platform. It has not only targeted on the existing user base for upgradations but also aims at creating new opportunities in the unexplored target segments.

• Cross-selling opportunities: The company is confident of capitalizing on the cross selling opportunities across usage segments with its expanded range of software products.

• Extensive reach: The company expects to benefit from its global sales and marketing network that now spread across 37 countries. The network enables strong reach and cross-leveraged access to key markets.

• Payoff from R&D efforts: The management expects its investments in MEMS and wireless technologies to generate returns in the current year. Considering that these initiatives are at the end of pre-revenue stage, they would start generating returns in the near future.

September 07, 2004 9 Annual Report Analysis

Income Statement Period to FY02 FY03 FY04 (Rs mn) (12) (12) (12) Net Sales 336 610 1137 Operating expenses (188) (313) (620) Operating profit 149 298 517 Other income 3 5 4 PBIDT 152 303 520 Interest (Net) (10) (33) (77) Depreciation (32) (50) (80) Miscll exp written off 0 0 0 Profit before tax (PBT) 110 219 363 Tax (30) (79) (38) Profit after tax (PAT) 80 140 325 Extraordinary / prior period items 0 0 0 Adjusted profit after tax (APAT) 80 140 325

Balance Sheet Period FY02 FY03 FY04 (Rs mn) (12) (12) (12) Sources Share Capital 104 104 122 Reserves 165 291 1,065 Net Worth 270 396 1,187 Loan Funds 191 213 898 Def Tax liability 38 91 81 Total 499 700 2,167 Uses Gross Block 237 491 777 Accd Depreciation (49) (99) (179) Net Block 189 392 598 Capital WIP 3 5 6 Total Fixed Assets 191 397 604 Total Current Assets 373 415 1,793 Total Current Liabilities (71) (118) (242) Net Working Capital 302 298 1,551 Miscellaneous expenditure 6 6 11 Def Tax assets 0 0 1 Total 499 700 2,167

September 07, 2004 10 Annual Report Analysis

Cash Flow Statement Period 03/03 03/04 (Rs mn) (12) (12) Cash from operating activities 277 466 Add/less working capital changes (94) (66) Net cash from operating activities 182 401 Net Cash from investing activities (256) (287) Net cash from financing activities (50) 665 Net increase in cash and cash equivalents (123) 779 Cash at start of the year 133 9 Cash at end of the year 9 788

Ratios Period FY02 FY03 FY04 (12) (12) (12) Per share ratios EPS (Rs) 9.2 16.3 31.8 Div per share 0.0 1.2 3.0 Book value per share 32.1 47.0 116.8 Valuation ratios P/E 48.7 27.5 14.2 P/BV 14.0 9.6 3.9 EV/sales 11.4 6.5 4.1 EV/ PBIT 32.1 15.8 10.6 EV/PBIDT 25.3 13.2 9.0 Profitability ratios OPM (%) 44.2 48.8 45.4 PAT % 23.8 22.9 28.6 ROCE 39.9 58.0 28.8 RONW 29.7 35.4 27.4 Liquidity ratios Current ratio 5.3 3.5 7.4 Debtors days 202.2 165.6 164.5 Inventory days 24.6 43.9 9.0 Creditors days 63.6 40.8 45.7 Leverage ratios Debt / Total equity 0.71 0.54 0.76 Component ratios Cost of Goods sold 22.0 19.7 28.8 Staff cost 12.4 13.2 8.2

Published in September 2004. © India Infoline Ltd 2003-4. India Infoline Ltd. All rights reserved.Regd. Off: 24, Nirlon Complex, Off W E Highway, Goregaon(E) Mumbai-400 063. Tel.: +(91 22)5677 5900 Fax: 2685 0585. This report is for information purposes only and does not construe to be any investment, legal or taxation advice. It is not intended as an offer or solicitation for the purchase and sale of any financial instrument. Any action taken by you on the basis of the information contained herein is your responsibility alone and India Infoline Ltd (hereinafter referred as IIL) and its subsidiaries or its employees or directors, associates will not be liable in any manner for the consequences of such action taken by you. We have exercised due diligence in checking the correctness and authenticity of the information contained herein, but do not represent that it is accurate or complete. IIL or any of its subsidiaries or associates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this publication. The recipients of this report should rely on their own investigations. IIL and/or its subsidiaries and/or directors, employees or associates may have interests or positions, financial or otherwise in the securities mentioned in this report. September 07, 2004 11