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Moser Baer: At the receiving end!

Nov 2, 2004

Performance Summary
Moser Baer, the largest Indian player in the global optical media industry (CDs, floppy discs), had recently announced its results for the quarter and half-year ending September 2004. The company has reported yet another quarter of poor performance where it has faced pressure on both the topline and the bottomline.

Financial performance: A snapshot
(Rs m)2QFY042QFY05Change1HFY041HFY05Change
Sales 3,546 2,359 -33.5% 6,652 5,270 -20.8%
Expenditure 2,061 1,394 -32.4% 3,965 3,069 -22.6%
Operating profit (EBDIT) 1,484 964 -35.0% 2,687 2,201 -18.1%
Operating profit margin (%)41.9%40.9% 40.4%41.8% 
Interest - -   - -  
Other income 88 205 134.5% 109 349 219.8%
Interest 169 178 5.3% 334 355 6.0%
Depreciation 551 713 29.5% 992 1,382 39.3%
Profit before tax853279-67.3%1,469813-44.7%
Extraordinary items - -   - -  
Tax 30 104 246.6% 30 157 424.2%
Profit after tax/(loss) 823 175 -78.7% 1,439 656 -54.4%
Net profit margin (%)23.2%7.4% 21.6%12.4% 
No. of shares 48.4 111.5   48.4 111.5  
Diluted earnings per share* (Rs)29.56.3 25.811.8 
P/E ratio (x)     16.5  
(* annualised)      

What is the company’s business?
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 2QFY05?
All round pressure subdues growth: Continued pressure on pricing and volumes due to temporary build-up of inventory in trade channels (wholesalers and retailers) and among the OEMs (original equipment manufacturers) has led to the decline in 2QFY05 sales for Moser Baer. Oversupply caused by large capacity additions by manufacturers during the fourth quarter of FY04 also continues to affect the DVD-R segment, which has emerged as a major revenue generator for the company. However, the company expects the demand-supply scenario to balance out in 3QFY05 and expects the DVD-R segment to grow strongly by 200% YoY in FY05.

Despite these poor results, one could take solace from the fact that Moser Baer’s production and shipments grew QoQ on a faster note (5.2% and 14.2% respectively) in 2QFY05 than in 1QFY05 (4.8% and 6.7% respectively). However, the 30% sequential decline in average selling price has played spoilsport for the company in this quarter.

Stock-in-trade pares margin decline: Apart from the decline in topline, rise in raw material expenses and staff costs has led to the marginal contraction in Moser Baer’s 2QFY05 margins. However, decline in margins could have been larger but for benefits arising from a higher stock in trade.

Depreciation and taxes deepen woes: Pressure on operating profits combined with higher depreciation and tax expenses has led to a greater pressure on Moser Baer’s net profits in this quarter. This rise in depreciation is a result of the company’s continued expansion of its capacity. The management plans to spend nearly US$ 135 m in FY05 to expand its optical media capacity to 2.4 bn units per annum. A large part of the incremental capacity addition is likely to go towards the DVD segment, where the company expects huge demand in the future. As a matter of fact, SMD, the leading agency for research on the optical media industry, has projected DVD-R demand to reach 2.1 bn units at the end of this year (200% YoY growth) and 4.1 units at the end of calender year 2005.

What to expect?
At the current price of Rs 194, the stock is trading at a price to earnings multiple of 16.5 times annualised 1HFY05 earnings. The management has maintained its earlier guidance of 25% to 35% CAGR growth in revenues over the next three years, with the DVD segment being the major growth driver. While the company has been witnessing tough times since the past three quarters (for all the reasons mentioned above), the management expects situation to improve in the near term as OEMs are carrying out inventory correction, the results of which are likely to be seen beginning 3QFY05. While this might benefit the company in coming out of tough times, investors should take note of high valuations and the fact that the company’s business is prone to high risks on account of rapid obsolescence in the optical media industry.

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