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Moser Baer: Undervalued?

Feb 1, 2001

Removable data storage industry manufactures magnetic and optical media, which are used to store data. The products include floppy drives, CD's, and DVD's. One of the prominent features of this industry is that while the storage capacity of the media has gone up considerably, the costs have come down quite swiftly. Globally, the prices of CD's have come down from US$ 1 in December 1999 to about 30 cents currently. The industry that is estimated to be at US$ 13 bn in 2000 is set to grow to US$ 25 bn by 2003, a CAGR of about 25%. A major player in the industry is a company from India, Moser Baer. Presently it has the distinction of being the 5th largest manufacturer of floppy disks and optical media with 5% worldwide market share in each segment.

The surprising element about Moser Baer is it's operating margins. The figure is in the range of 50-55%, which is fairly high considering its main business of manufacturing. The company claims, it has been able to achieve such economies of operation due to its state of the art processes. Moser Baer spends about 2.5% of its sales on research and development. This activity is primarily focused at improving processes, which in turn helps cut production costs. When the media industry saw rapid decline in prices, Moser Baer was able to maintain its operating margins by drastically cutting production costs. As the company graduates from one manufacturing process to another it plans to license out older processes that are now obsolete for Moser Baer. The company now claims to have the advantage of lowest cost of production in the industry.

(Rs m) 3QFY00 3QFY01 Change 9mFY00 9mFY01 Change
Sales 405 867 114.3% 981.5 2,296 133.9%
Other Income 6 58 863.8% 13 132 911.8%
Expenditure 263 414 57.4% 644 1,045 62.2%
Operating Profit (EBDIT) 142 453 220.1% 338 1,251 270.6%
Operating Profit Margin (%) 35.0% 52.3%   34.4% 54.5%  
Interest 18 63 256.2% 41 177 334.3%
Depreciation 23 78 233.0% 55 206 273.4%
Profit before Tax 107 370 247.5% 255 999 292.6%
Tax 0 0   0 0  
Profit after Tax/(Loss) 107 370 247.5% 255 999 292.6%
Net profit margin (%) 26.4% 42.7%   25.9% 43.5%  
No. of Shares (eoy) (m) 20.2 31.8   20.2 31.8  
Diluted number of shares 31.8 31.8   31.8 31.8  
Diluted Earnings per share* 13 46.6   16.8 41.8  
*(annualised)            
P/E (at current price) 18.5 5.3   14.8 5.9  

The company's margins have gone up due to economies of scale and according to the company it's innovation.

Regarding the concerns, the primary one is regarding the fall in price of CDs. What happens if the price goes below 30 cents? If such a scenario prevails, the margins will obviously take a hit. Other concern is regarding the future of the removal storage industry itself. The counter argument by the company is that it is not feasible to sell below a price of 30 cents as other companies simply won't make any profits. Therefore, the chances of the price coming down below 30 cents are quite low.

With bandwidth availability burgeoning, more and more people are moving to storing data on the Internet. The advantages are that firstly data storage on the Internet is available free of cost. Secondly, and most importantly that data is accessible anywhere in the world (where there is access to the Internet) without physically carrying the data. This could cut volumes for the mobile storage industry. If this happens there will be an over capacity and again this may lead to price cuts.

But the central to the whole debate is the availability of bandwidth. It will definitely take a fair amount of time when we can look forward uploading or download an MB of data to the Internet in the same time as it takes on a local drive. Moreover, the drivers in favour of Moser Baer are the low installed base of CD drives. Currently the figure is about 1 bn units and this is expected to go up to 1.4 bn by 2003. New uses of CDs like Internet download, digital cameras, PDA (personal digital assistants) and replication market will also sustain growth. Also, another growth driver is the fact that slowly more and more software are now available on CDs and DVDs. This might be the preferred product delivery mechanism compared to the Internet.

In the future the company is looking at building brands. It has already acquired 3 international brands for a consideration of Rs 250 m. The other strategy it is looking at is differentiation by introducing non-standard products like 12x write media. Moser Baer aims to be the market leader in removable data storage devices with a 5 to 10% of the global market share.

The stock is trading at a P/E multiple of 5.9 times its 9 months FY01 annualised earnings. This low valuation may be primarily due to the concerns regarding the future of the removable data storage industry. The concerns are genuine, but the future of removable data storage is not under threat for the next couple of years at least.

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