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Moser Baer: Good quarter, difficult year

Jun 16, 2006

Performance Summary
Optical storage media major, Moser Baer, announced results for the fourth quarter and FY06. The company recorded strong topline growth during the fiscal, driven by good volume growth and increased capacity. Margins saw a significant decline, due to pricing pressures on the input side and an inadequate rise in selling prices. Due to the margin contraction, higher interest costs and a tax write-back in the previous fiscal, the performance at the PAT level was abysmal.

Financial Performance: A snapshot
(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Net sales 4,013 5,075 26.5% 12,822 16,638 29.8%
Expenditure 3,468 4,146 19.5% 9,534 13,119 37.6%
Operating profit (EBDITA) 545 930 70.6% 3,288 3,519 7.0%
EBDITA margin (%) 13.6% 18.3% 25.6% 21.2%
Other income 106 144 36.1% 608 613 0.8%
Interest 191 237 23.8% 736 918 24.7%
Depreciation 752 802 6.6% 2,864 3,168 10.6%
Profit before tax (293) 35 296 47 -84.2%
Tax (538) 31 (288) (0)
Profit after tax/(loss) before prior period adjustments 245 4 -98.6% 584 47 -92.0%
Prior period adjustments - - - (7)
Profit after tax/(loss) after prior period adjustments 245 4 -98.6% 584 53 -90.9%
Net profit margin (%) 6.1% 0.1% 4.6% 0.3%
No. of shares (m) 111.5 111.5 111.5 111.5
Diluted earnings per share (Rs) 5.2 0.5
Price to earnings ratio (x) 375.9

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. 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. According to Techno Systems and Research (TSR), Moser Baer is the largest manufacturer of CDR/RW and the second-largest manufacturers of DVDR/RW in the world. During the period FY01-FY06, the company's revenues grew at a CAGR of nearly 38%, making it one of the fastest-growing companies in the Indian technology space.

What has driven performance in FY06?
Firm demand drives revenues: During FY06, net revenues saw a strong 29.8% YoY increase. This was a result of continued strength in shipment volumes, as well as extended capacity. Consumer demand continues to remain strong. Moser Baer, given its premier position globally amongst optical media manufacturers, has benefited at the topline level.

As regards 4QFY06, shipments grew by 29% sequentially. In fact, during the quarter, it was a sharp recovery in CDR/RW shipments that contributed to the robust growth in overall shipments. However, over the long-term, Moser Baer expects an increasing contribution of the DVDR/RW format to contribute to better topline growth and operating performance. Better CDR/RW pricing is also expected to contribute to better realisations and hence, topline growth. It should be noted that the average selling price (ASP) would have reduced on a QoQ basis, due to the higher CDR/RW contribution. This is because the prices of CDR/RW are lower than those of DVD-R/RW.

High raw material costs depress margins: In FY06, Moser Baer witnessed a 440 basis points fall in margins. This was primarily due to higher polycarbonate (PC) prices during the fiscal. PC is a crude derivative, and continued firm prices of the commodity led to high PC prices, which is a key input for optical media manufacturers like Moser Baer. Also, the average selling price (ASP) did not increase in a proportionate manner to the increase in PC prices, thus pressurising margins further. However, it should be noted that over the past few quarters, PC prices have softened and Moser Baer expects a further reduction in 1QFY07. The full impact of such a trend will be reflected in its 2QFY07 performance. Thus, in FY07, the company expects better margins on account of these factors, as also continued cost reduction efforts and a greater focus on the DVD format.

Lower margins result in bottomline crash: During FY06, Moser Baer saw a massive 90.9% YoY fall in its net profits. This was a result of the lower margins, higher interest costs, as also a tax write-back in FY05. At the PBT level, profits fell by 84.2% YoY. If we exclude the impact of the tax write-backs, then the PBT fell by 87.5% YoY, and PAT by 85.0% YoY.

Performance in the recent pastů
1QFY06 2QFY06 3QFY06 4QFY06
Sales (%, YoY) 20.2 63.3 19.0 26.5
Operating margins (%) 20.9 23.5 22.7 18.3
Net profits (%, YoY) (123.2) (82.4) (141.1) (98.6)

What to expect?
At the current market price of Rs 180, the stock is trading at a price to earnings multiple of nearly 376 times its FY06 earnings per share (EPS). The company, in FY06, incurred a capex of US$ 87 m (Rs 3.9 bn) in order to expand its capacity from 2.4 bn units to 2.8 bn units. In FY07, the company expects to incur capex of US$ 75 m (Rs 3.4 bn) in order to expand capacity to 3.2 bn units. Of this, 30% will be incurred towards next-generation formats, such as the Blue Disc (BD) and HD-DVD (High Density Digital Video Disc). By 4QFY07, Moser Baer expects to achieve 60% of its revenues from the higher margin DVDR/RW format.

In October 2005, Moser Baer 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 to a market size of US$ 40 bn by 2010. This business is also less capital-intensive than the existing business of Moser Baer, thus, resulting in a possible improvement in return ratios.

However, the major risk that the company faces is that of technology obsolescence. The optical media industry is an industry in which a company has to constantly keep abreast with the latest technologies under development, and be the first to launch these technologies at the lowest cost. Thus, the industry is undoubtedly a high-risk one. Although Moser Baer is amongst the world leader in this field and has constantly been in tune with the technology curve, the high-risk nature of the business has resulted in the company getting lower valuations on the bourses. Nonetheless, the company's foray into the PV business is undoubtedly a positive, and is expected to result in de-risking of revenues and better return ratios going forward.

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