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Moser Baer: The improvement continues...

Mar 7, 2006

Performance Summary
Optical storage media major, Moser Baer, recently announced results for the third quarter ending December 2005. The company recorded a decent growth in revenues, driven by strong growth in optical media shipments. A fall in key raw material prices and cost control measures led to an impressive rise in operating margins. Due to the strong margin expansion, aided also by a tax write-back, the company managed to record a profit during the quarter, as opposed to a loss in the corresponding quarter of FY05. Due to this improved performance, Moser Baer has managed to record a profit in the fiscal-to-date, after a difficult first half of FY06.

Financial Performance: A snapshot
(Rs m) 3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
Net sales 3,540 4,213 19.0% 8,809 11,563 31.3%
Expenditure 2,997 3,258 8.7% 6,066 8,973 47.9%
Operating profit (EBDITA) 543 955 76.0% 2,743 2,590 -5.6%
EBDITA margin (%) 15.3% 22.7%   31.1% 22.4%  
Other income 154 152 -0.8% 503 469 -6.6%
Interest 190 231 21.3% 545 681 25.0%
Depreciation 730 810 10.9% 2,112 2,366 12.0%
Profit before tax (224) 67   589 12 -98.0%
Tax 93 (64)   250 (31)  
Profit after tax/(loss) before prior period adjustments (317) 130   339 43 -87.2%
Prior period adjustments - -   - (7)  
Profit after tax/(loss) after prior period adjustments (317) 130   339 50 -85.3%
Net profit margin (%) -9.0% 3.1%   3.8% 0.4%  
No. of shares (m) 111.5 111.5   111.5 111.5  
Diluted earnings per share (Rs)*         2.6  
Price to earnings ratio (x)*         84.0  
* On a trailing 12-month basis.            

What is the company's business?
Moser Baer is India's largest player in the optical storage media industry, the third-largest and the lowest-cost manufacturer in the world, with a global market share of over 16% in FY05. Products manufactured by the company include optical and magnetic storage media. In the optical media segment, the company manufactures recordable compact disks (CD-R), pre-recorded CD/DVD and re-writable digital versatile disks (DVD-RW). In the magnetic data storage segment, Moser Baer manufactures compact cassettes, micro floppy disks and digital audiotapes. During the period FY00-FY05, the company's revenues grew at a CAGR of 53%, making it one of the fastest-growing companies in the Indian technology space.

What has driven performance in 3QFY06?
Continued firmness in demand drives revenues: During 3QFY06, net revenues saw a 19.0% YoY increase. This was a result of continued strength in shipment volumes. There was a surge in sales volumes of the CD-R/RW format, which grew by 24% on a sequential basis. The DVD-R/RW format also grew by 17% sequentially. As per the latest update by Techno Systems and Research, Japan, Moser Baer is now the largest and second-largest player in the CD-R/RW and DVD-R/RW market spaces respectively.

However, the average selling price (ASP) witnessed a 9.3% sequential fall, mainly due to a strong increase in the sales of CD-R/RW, prices of which are lower than those of DVD-R/RW. Going forward, given continued strength in DVD-R/RW sales and stabilisation of CD-R/RW volumes, Moser Baer is expected to continue to witness strong volume growth. While CD-R/RW pricing is expected to remain firm in the medium term, DVD-R/RW prices are expected to soften as costs fall.

Softening raw material costs aid margin expansion: Undoubtedly, the biggest positive this quarter for Moser Baer has been the softening of polycarbonate (PC) prices. PC, which is a crude derivative, is the key raw material used by optical media manufacturers, and the 87% rise in PC prices over the last year has adversely impacted the company. PC prices have fallen by 10% over the past few months and the full impact of this is expected to be felt over the next few quarters. This quarter, Moser Baer saw an impressive 7.3% expansion in margins. The company has also undertaken some cost reduction measures to keep the same under control. In fact, over 200 projects are currently under way, targeting substantial cost reductions and the benefits of this are expected to filter in over the next quarter. This is expected to aid operating margins going forward.

Big improvement in the bottomline: Moser Baer recorded a profit during the quarter, as opposed to a loss in the corresponding quarter in the previous fiscal. This was a result of the impressive margin expansion witnessed, as also a tax write-back of Rs 80.9 m.

Moser Baer has improved its performance with each passing quarter in FY06. After a loss in 1QFY06, the company has managed to post profits in the next 2 quarters, albeit relatively small. Going forward, the demand environment continues to be robust and pricing is also expected to remain firm. With the softening of PC prices, this is expected to result in a possible further improvement in margins.

Performance in the recent past…
  4QFY05 1QFY06 2QFY06 3QFY06
Sales (%, YoY) 9.5 20.2 63.3 19.0
Operating margins (%) 13.6 20.9 23.5 22.7
Net profits (%, YoY) (66.6) (123.2) (82.4) (141.1)

What to expect?
At the current market price of Rs 222, the stock is trading at a price to earnings multiple of 84.0 times its trailing 12-month earnings. The company's plans to increase its annual capacities from 2.4 bn units to 2.8 bn units are on schedule. Moser Baer is at an advanced stage of readying the launch of the ‘next generation' Blu Ray (blue laser-based) and HD DVD (High Density) media. The company will soon be launching India's first high density UV mastering system.

In October 2005, Moser Baer had announced its plans to enter the Photo Voltic (PV) business by manufacturing solar cells and modules. The company is targeting a capacity of 80 megawatts (MW) by the year 2007 with an initial project cost of Rs 2.6 bn (US$ 58 m). Moser Baer will be conducting this business through a company called Moser Baer Photo Voltic Limited, which has already been established and capitalised. The company's strategy is to leverage on core competencies for manufacture of solar cells and modules and to establish a first-mover advantage in this business, which is expected to grow five-fold to a market size of Rs 1,350 bn by the year 2010. This business is also less capital-intensive than the existing business of Moser Baer, thus, resulting in a possible improvement in return ratios.

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