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Moser Baer: Growth in sight - Views on News from Equitymaster
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  • Aug 27, 2003

    Moser Baer: Growth in sight

    Moser Baer is one of the few Indian companies that have brought global recognition to the ‘Made in India’ tag. It is the world’s third largest and India’s only player in optical data storage products (referred to as ‘media’) – micro floppy disks, recordable compact disks, data media and audio storage products, etc. This article presents some facts about the company.

    Over the past few years, Moser Baer’s performance has been impressive, as the company has grown its revenues at a CAGR of 80%, while its profits have grown at a CAGR of 86%. This is quite commendable considering the fact that Moser Baer faces intense competition in the global markets, mainly from the low-cost Taiwanese manufacturers.

    Apart from being the third largest player in optical data storage products, Moser Baer is also the lowest-cost producer of CD-Recorders (CD-Rs). The company sells its products largely to OE (original equipment) customers such as BASF, Sony as well as other European and Japanese multinationals. The company sells data-storage products to seven of the world’s top 10 CD-R producers. And it produces them so efficiently that, to shield themselves, European competitors had to file an anti-dumping case to stop and penalise its exports to Europe. While the European Commission has terminated this case, a countervailing duty of 7.3% has been imposed on imports of CD-Rs from India. This is somewhat concerning as Moser Baer derives more than 80% of its revenues from export markets, particularly from Europe.

    Recently, Moser Baer had signed a long-term outsourcing deal worth US$ 100 m per annum and formed a joint venture with Imation Corp., a leading US-based data storage company (Imation will hold 51 per cent of equity in this venture). This deal is likely to enhance Moser Baer's global reach and presence by helping it increase its market share in the US, one of the largest markets for optical storage media. Based on the expected growth in demand of various optical media formats, and Imation's share of the global market, the deal could contribute 15%-25% of Moser Baer's revenues by FY05.

    As per Strategic Marketing Decisions (SMD), a US-based marketing consultancy, consumer demand for DVD-R media is expected to rise sharply in 2003 and 2004, as DVDR/RW drive and media prices becomes more affordable. SMD also expects DVD-R media formats to grow to 675 m units in 2003 from 125 m units in 2002, and to 4.4 bn units by 2005. Also, the demand for CD-R/RW media is expected to grow from around 8.4 bn units in 2002 to almost 11 bn units in 2003. With this huge growth expected in the future, the potential to grow for Moser Baer is immense. The company has initiated steps in this direction. At present, the company has a capacity to manufacture 760 m optical media units per annum (150 m units per annum in FY01), which is slated to jump to more than 1.4 bn units by the end of FY04. The graph below shows the trend in global media (CD-Rs and DVD-Rs) shipment during the last two years.

    *Optical storage media

    Despite this positive trend in the optical data storage market, and similar expectations about the future, the challenges for Moser Baer are many. One of them is that the revenues for Moser Baer are susceptible to fluctuations in the realizations due to increased competition or over supply in this market. Despite the huge capacity of 760 m units, Moser Baer’s capacity only accounts for 10% of global capacity with almost 65% of the market share controlled by the Taiwanese manufacturers. In such a scenario, Moser Baer needs to scale up fast and invest in additional capacities.

    For FY04, the company’s management expects net earnings to grow by 25%-30% with unit sales are expected at around 1.2-1.3 bn. At the current market price of Rs 282, the stock is trading at a P/E multiple of 4x its expected earnings. This low valuation may be primarily due to concerns regarding Moser Baer’s ability to scale up capacities and manage its product lifecycle (the ability to graduate to high technology products or improve upon the existing ones) well in the wake of increasing global competition. To counter this challenge, the imperative for Moser Baer is to increase its R&D initiatives and focus on improving its product line to cater to a wider and fast growing market for optical storage media.



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