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Moser Baer: Pricing pressure!

Aug 5, 2004

Introduction to results
Moser Baer, the largest Indian player in the global optical media industry (CDs, floppy discs), recently reported poor YoY performance for the first quarter of FY05. Inventory build-up and subdued realisations were the leading force behind these poor results from the company during the quarter.

Financial performance: A snapshot
(Rs m) 1QFY04 1QFY05 Change
Sales 3,106 2,911 -6.3%
Other income 22 144 565.9%
Expenditure 1,904 1,675 -12.0%
Operating profit (EBDIT) 1,202 1,236 2.8%
Operating profit margin (%) 38.7% 42.5%
Interest - -
Interest 166 177 6.7%
Depreciation 442 669 51.5%
Profit before tax 617 534 -13.4%
Extraordinary items - -  
Tax - 53  
Profit after tax/(loss) 617 481 -22.0%
Net profit margin (%) 19.8% 16.5%  
No. of shares 96.8 111.5  
Diluted earnings per share* (Rs) 22.1 17.2  
P/E ratio (x)   10.8  
(* annualised)      

Background
With a share of 11%, Moser Baer is the largest player in India and third largest in the world in the optical media market. 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 rewritable digital versatile disks (DVD-RW). In the magnetic data storage segment, Moser Baer manufactures compact cassettes, micro floppy disks and digital audio tapes. During the period FY99-FY04, the company’s revenues and profits have grown at CAGR of 72% and 77% respectively.

What has driven performance in 1QFY05?
Pricing pressure subdues growth: Decline in sales in 1QFY05 was result of a combination of two key factors – pricing pressure that continued from the previous quarter (4QFY04). The decline in sales is also on account of lower shipment of 6.7% in 1QFY05 despite a 4.8% rise in production. The inventory has piled up and as the year pans out, shipments are likely to increase. Also, strong capacity increase during 4QFY04 in the DVD-R segment led to oversupply in this segment, which forms a large part of Moser Baer’s revenue. On the pricing front, the average selling price for optical media fell by 16% sequentially.

Stock-in-trade benefit in margins: Despite the decline in topline, a relatively greater drop on the expenditure front led to the company reporting a rise in its operating margins during 1QFY05.While most of the cost heads have risen as a percentage of sales in 1QFY05, in light of the higher inventory, the company has got some benefit.

Capacity expansion reflects in depreciation: Despite a strong growth in other income, the fall in Moser Baer’s 1QFY05 profits was a result of a strong rise on the depreciation front. This rise in depreciation is a result of the company’s continued expansion of its capacity. By the end of FY05, Moser Baer plans to expand its optical media capacity to 2.4 bn units per annum, with a majority of the incremental capacity addition going towards the DVD segment. This is likely to increase the company’s depreciation costs even further, thus affecting profitability in the near term.

Performance in recent times
2QFY04 3QFY04 4QFY04 1QFY05
Sales growth (YoY, %) 60.8 62.5 5.4 (6.3)
OPM(%) 41.9 41.3 47.4 42.5
Profits(YoY, %) 104.9 65.0 19.9 22.0

What to expect?
At the current price of Rs 186, the stock is trading at a P/E multiple of 10.8x annualised 1QFY05 earnings. The management expects the company’s revenues to grow at a CAGR of 25% to 35% over the next three years, with a major part of this growth likely to come from the DVD segment. Moser Baer is continuously spending towards expanding its capacity and this is likely to help it meet increased demand for optical media in the future. However, considering the risky nature of business on account of high obsolescence, investors need to practice caution. Perhaps this is one of the reasons why the stock has always traded at a discounted valuation in the past, despite being an exciting story.

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