It's All About Money, Honey!
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Cranes Software International Ltd Ready to take off! We initiate coverage on Cranes Software International with a BUY recommendation. The company provides tools and solutions addressing the needs of its focused domain- the scientific and engineering community. Apart from these, the company has also established itself in consulting and training in this domain. It is furthering its position by making research investments in MEMS and wireless technology. We expect the company to post a CAGR of 45% in revenues over the next two years At current market price of Rs 363, stock is currently available at an attractive valuation of 7.6xFY05E and 5.6xFY06E .We recommend a BUY with a two-year target price of Rs 618. Analyst Vinod Chari+(91 22) 5675 4480 May 2004 ([email protected]) Dealing (+91 22)2685 0505 Sandeepa Arora 5540 9033 Biren Patel 5540 8601 It’s all about money, honey! Cranes Software International Ltd: Ready to take off! Recommendation Buy Highlights • CMP Rs 363.5 The company addresses a niche domain of scientific and engineering community, 52 Wk H/L Rs 449/118 providing multi industry application of mathematics, statistics, data analysis, visualization Mkt Cap Rs 3.7bn and presentation. • It has proven ability of developing products in-house and using its own sales and marketing team to sell the product. Launch of SYSTAT 11.0 will contribute to revenue Share Holding Pattern % growth. Promoters 34.62 Institutional Investors 7.91 • Company has simultaneously established itself in areas of tool training, not specifically Other Investors 41.77 addressed by academic curricula, through Cranes Varsity, thus complementing its General Public 15.71 product business. • It has initiated investments in R&D in the sunrise areas of MEMS and wireless technology. • It has raised capital recently through a GDR issue with an objective of acquiring more IPs and funding focused acquisitions. Share Price Chart • The company is using its domain expertise to create consulting opportunities in modeling and simulation products. It is also helping it to develop customization skills around its product range. Management CSIL’s Board of has considerable experience in technology innovation, general management, consulting and in leading diverse businesses. The founder Mr Asif Khader, Chairman Mr. Rudra Pratap of the Indian Institute of Science and the President Mr. Richard Gall, who was earlier with Texas Instruments lead the company. Compelling valuations At current market price of Rs 363, stock is currently available at an attractive valuation of 7.6xFY05E and 5.6xFY06E in comparison to such peer product companies like I-Flex and Subex Systems. At FY06E, the potential stock price of the company works out to Rs 618. The present value of the stock at a discounted rate of 14% works out to be Rs 476. This gives the stock a 31% upside from current levels. We recommend a strong BUY on the company Comparison summary of product companies: Company CMP(Rs) Net Sales Operating Profits OPM% PAT EPS(Rs) P/E Recomm Rs mn FY04 FY05E FY04 FY05E FY04 FY05E FY04 FY05E FY04 FY05E FY04 FY05E I-Flex Solutions 544 7881 10209 2227 2785.8 28.3 27.3 1788 2133 24.0 28.6 22.7 19.0 Hold Subex Systems 276 879 1013 233 323 26.5 30.8 178 250 24.1 27.1 11.5 10.2 Buy Cranes Software 363 1137 1649 517 721 45.4 43.7 325 489 38.3 48.1 9.5 7.6 Buy May 26, 2004 2 Cranes Software International Ltd: Ready to take off! Investment Rationale Focus on a niche segment Cranes is present in the tools and utilities segment, which has a limited number of players globally. The company has been providing tools and solutions in scientific and engineering domain for over a decade. Starting with the domestic markets, the company has also successfully forayed into the global markets. Creating strong revenue streams using proprietary products. The company has created strong revenue streams through products created in-house as well as existing products acquired from others. The company first acquired products like AISN’s TableCurve 2D, TableCurve 3D, and PeakFit and followed it up with SYSTAT. The most recent acquisition has been the Sigma Product Line from SPSS. These products have given Cranes very good brands and have helped them create strong revenue streams through the proprietary product. The proprietary products contribute to nearly 81% of total revenues Proven ability of developing products in-house The company has a proven ability to develop products in-house. It has been able to leverage on its offshore development capabilities to create regular upgrades and product enhancements. Since their acquisition, there have been version enhancements such as SYSTAT 10.2, the Japanese version of SYSTAT 10.2 and TableCurve 3D 4.0. The company is in the process of launching its most important upgrade, SYSTAT 11.0, which will move the SYSTAT product from a FORTRAN platform to C. This is expected to create strong revenue streams through user migration. The company has been able to leverage on its sales and marketing network to successfully establish these products. Training complements existing business The company has established itself in tool training, not specifically addressed by academic curricula, through Cranes Varsity. This has acted as a very good complement to the product business of the company. It is also the authorized training partner for players like Texas Instruments in niche technology areas such as DSP. Revenues to grow at 45% All the above factors indicate that the company is poised on the cusp of high growth. Revenues are expected to grow at a CAGR of 45% over the next two years. This growth will be across all segments of the business, viz.- third party products, proprietary products and Cranes Varsity. May 26, 2004 3 Cranes Software International Ltd: Ready to take off! R&D investments in sunrise areas The company has made initial investments in high growth, emerging areas like MEMS and nanotechnology, towards development of IPs. Once the company is able to create successful IPs, the commercialization of the IPs will aid revenue growth. Creating consulting opportunities The company is using its domain expertise in scientific and engineering tools to create consulting opportunities in modeling and simulation products. The company has developed customization skills around its proprietary products. It is also offering consulting in its third party products. These are value-added services that bring higher revenues than merely selling shrink-wrapped products. Concerns Continuous investment in product required There has to be an ongoing investment in products during its entire life cycle. Products call for high investment in initial phase of research and development. Once the product is developed, it calls for high sales and marketing costs to establish a brand and rvice the product. Product failures could affect earnings The product business calls for huge investments. The returns on these investments hinge on the success of the product. The company may find it difficult to recoup its investments in case of product failure. This will affect earnings and can dampen future valuations. May 26, 2004 4 Cranes Software International Ltd: Ready to take off! Industry Background The software product industry Software products are patented software processes sold through licenses to users. These products usually address wide scale usage across the user segments. The software product industry is a high risk- high return industry. The costs involved in this business are also high. This industry calls for investment in initial R&D costs. Once the product is developed, it calls for high sales and marketing costs to establish a brand and sustain the product. R&D and sales investment is continuous, as companies have to constantly upgrade products to stay ahead of competition. The software product market is highly inelastic with branding and user comfort playing an important role. User comfort with the product translates into long-term product usage patterns. Segments of the industry The software product market can be divided into three segments, System Level software: This is the generic software level, where a few players like Microsoft, Oracle, SAP, Adobe etc dominate with significant market shares in their respective domains. Application software: These are niche application areas. Some of the major players in this segment are SAS, Cognos, Amdocs etc. Tools and utilities: This segment is the market for application tools and miscellaneous utilities. Major players in this segment are SPSS and Mathworks Consolidation trend in the industry Due to the inelastic nature of the market with emphasis on brand and long term usage patterns, the product industry witnesses consolidation. Consolidation helps users to acquire not only product IPs but also brands and a ready user base. This helps companies to upgrade or complement existing products at lower incremental costs leveraging the existing brands and the ready user base. May 26, 2004 5 Cranes Software International Ltd: Ready to take off! This kind of consolidation is witnessed a lot in the tools and utilities segment, where it is easier for the user to switch products. Growth of the product industry The global software products market is estimated at US$180bn.While IT services have showed a worldwide growth of just 3.5% in 2003, following the downturn in the last couple of years, the global packaged software has bucked the trend growing over 8%. Software products account for an estimated 20% of the global IT spending. According to IDC estimates, the software product industry is expected to grow at a CAGR of 13% over the next five years. Statistical product industry At last year’s estimates, the worldwide market for statistical and data analysis products was estimated at $372mn.