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Moser Baer: Into the green! - Views on News from Equitymaster

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Moser Baer: Into the green!

Sep 15, 2006

Performance summary
Optical storage media major, Moser Baer, announced its results for the first quarter ended June 2006 recently. The company continues to record strong topline growth, driven by strong volumes, normalization of CDR-RW sales and a better product mix. Margins saw a decline, seemingly due to pricing pressures on the input side (polycarbonate). However, despite the margin contraction, higher other income enabled the company to record a profit this quarter, as opposed to a loss in 1QFY06.

Financial Performance: A snapshot
(Rs m) 1QFY06 1QFY07 Change
Net sales 3,499 4,545 29.9%
Expenditure 2,768 3,673 32.7%
Operating profit (EBDITA) 731 873 19.4%
EBDITA margin (%) 20.9% 19.2%  
Other income 119 336 180.9%
Interest 226 289 28.1%
Depreciation 763 852 11.6%
Profit before tax (139) 67  
Tax (27) 2  
Profit after tax/(loss) before prior period adjustments (111) 65  
Prior period adjustments - 0  
Profit after tax/(loss) after prior period adjustments (111) 65  
Net profit margin (%) -3.2% 1.4%  
No. of shares (m) 111.5 111.5  
Diluted earnings per share (Rs)*   2.1  
Price to earnings ratio (x)*   97.1  
* 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 and the second largest in the world (as per Techno System and Research). 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 1QFY07?
Revenues surge ahead: During 1QFY07, Moser Baer recorded a near-30% YoY growth in its net revenues. Consumer demand continues to remain strong. An improved product mix, with a higher proportion of DVDR-RW sales, and a normalization of CDR-RW sales led to this strong performance. The average selling price (ASP) also rose by 3%. Moser Baer has continued to consolidate its position globally, and, as per Techno System and Research (TSR, Japan), is now the second largest optical media manufacturer in the world, reflecting its strength as a low cost manufacturer with a strong track record of leading the industry into next-generation formats.

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, which was seen this quarter, is expected to continue to contribute to better realisations and hence, topline growth.

Higher costs depress margins: Moser Baer witnessed a 168 basis points fall in margins during the quarter. This was again seemingly due to higher polycarbonate (PC) prices. Nonetheless, it should be noted that PC prices continue to soften, which will be a positive for Moser Baer going forward. Moser Baer expects the full impact of this falling price trend to reflect in its 2QFY07 performance. Continued cost reduction efforts and a greater focus on the DVD format are also expected to result in better margins.

It's a turnaround at the bottomline level: During 1QFY07, Moser Baer recorded a profit at the net level, to the tune of Rs 65 m. This was against a loss of Rs 111 m in the corresponding quarter of FY06. Higher other income (up by as much as 180.9% YoY) enabled the company to record this performance, despite the lower margins.

Performance in the recent pastů
  2QFY06 3QFY06 4QFY06 1QFY07
Sales (%, YoY) 63.3 19.0 26.5 29.9
Operating margins (%) 23.5 22.7 18.3 19.2
Net profits (%, YoY) (82.4) N.A. (98.6) N.A.

What to expect?
At the current market price of Rs 200, the stock is trading at a price to earnings multiple of 97.1 times its trailing 12-month earnings. During the quarter, Moser Baer commenced shipments of HD DVD-R media, a next-generation format. As per the US-based Strategic Marketing and Decisions (SMD), the demand for these formats is expected to grow to 1.5 bn discs over the next three years, from under 50 m discs currently, a significant rise. With the company's strong track record of being first-to-market in developing and launching next-generation formats, it is expected to benefit from this demand surge.

In October 2005, Moser Baer announced its plans to enter the Photo Voltic (PV) business by manufacturing solar cells and modules. 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 has secured part of its short-term requirements of raw materials and is making progress towards closing medium to long-term strategic sourcing agreements. Moser Baer aims to start commercial production by 4QFY07.

It should be noted that despite its consistent track record in being ahead of the curve in this highly technology-intensive business, the very fact that it is such a fast-changing industry is a big risk that Moser Baer faces. 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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