Moser Baer Building on Storage

Rapid changes in technology has led to software companies making massive investment not only in research and development but

also in infrastructure. But few hardware companies have invested in the latest

advancements because of large capital expenditure. And any change in future

advancement may render the existing manufacturing facilities redundant. The

storage device is one such industry, which is witnessing significant change due

to the information explosion. The demand for high storage devices has led to the

emergence of compact disks as ideal storage devices and consequently a number of

players have made substantial investments in this segment.

Delhi-based Moser Baer, which dominated the floppy diskette

industry for some time, has entered the recordable compacts disks

sector with the aim of setting up global scale capacity. Moser Baer has moved

fast to set up a massive recordable compact disk capacity to become a top player

in the market.

Modest start

Moser Baer India was formed as a private limited company in

1983 and was converted into a public limited company after three years. It was

founded by Deepak Puri who is the managing director of the company. Puri, a

technocrat, is a mechanical engineer from Imperial College of Science and

Technology, London. In April 1987, Moser Baer came out with a public issue of

972,000 shares at par in April 1987 to part finance a facility to manufacture

5¼-inch floppy diskettes and reverse osmosis water purification systems.

With the advent of 3½-inch floppy drives, Moser Baer too

expanded its capacity and came out with a Rs 12 crore rights-cum-public issue in

July 1994 to part finance its project to manufacture 12 million 3½-inch floppy

diskettes. The capacity of 3½-inch floppy diskettes has since increased to 140

million units. Keeping pace with technology, Moser Baer has setting up a plant

to manufacture optical media, which includes recordable compact disks (CDRs) and

recordable digital versatile disks (DVDs). The company had a capacity of 43.5

million CDRs at the end of March 2000, which has further increased to 150

million units in the current fiscal. The company continues to sell time

recorders and clocks, and audio and video tapes. Along with the increase in

capacity, the company’s equity has also grown from Rs 1 crore at the time of

the public issue to the present level of Rs 46.8 crore.

Floppies to CDRs

Moser Baer manufactures magnetic floppy diskettes (MFDs) and

optical media, which includes CDRs, but currently earns most of its revenue from

MFDs. However, the share of revenues from sale of CDRs is improving at a rapid

pace following the company’s expansion of the CDR unit. Moser Baer reported a

revenue of Rs 154.8 crore in the fiscal ended March 2000, which was 53% higher

than the previous fiscal. Out of the total turnover, revenue from MFDs stood at

Rs 115 crore, 14% higher than fiscal 1998-99. The company has sold 118.4 million

pieces in fiscal 1999-00. MFDs contributed 74% to the total revenues in 1999-00

compared to 95% in 1998-99.

In the exports market, Moser Baer earns 80% of revenues

catering to clients such as BASF, Sony, Mmore and other European and Japanese

multinationals. In the domestic market, the company sells floppy diskettes under

the "BASF" and "Xydan" brands. It has a 20% share of the

domestic market.

Improving the share in the total revenues is the optical

media division, which formed 21% of the total revenues. Moser Baer earned

revenues of Rs 31.5 crore from the CDR division. The capacity of optical media

has been increased to 150 million in June 2000 with an investment of Rs 324

crore, financed by internal accruals and equity placement to IFC and Electra

partners.

The optical media facility has been set up to meet the

growing global demand of CDRs, which stood at 2.5 billion units in March 2000.

Moser Baer has a commitment of 70% of the current installed capacity from OEMs

in Europe and Mmore BV International.

Expanding fast

Moser Baer has successfully increased the capacity of CDRs

from 12 million to 150 million in the first quarter of 2000-01. This now has

been planned to increase to 760 million in two phases by March 2002. The

expansion is being carried out at an estimated cost of Rs 1,000 crore to be

financed by a mix of debt, equity and internal accruals. Moser plans to raise

about Rs 572 crore through debt, Rs 319 crore through equity placement and the

balance through internal accruals.

Moser Baer plans to set up own offices abroad. The company

already has offices in Rotterdam and New Jersey. It recently acquired Capco,

which will help it make inroads in the European market and plans to acquire more

companies to expand its reach globally. The company expects to sell significant

quantities of optical media during the current fiscal and this would result in

substantial increase in both its top line and bottom line. More acquisitions

would give Moser Baer a competitive edge over major Taiwanese players. The

company also plans to introduce new media for emerging technology products such

as personal digital assistants, digital cameras and MP3 players to cash in on

the growing demand for these products.

Financials: Slated to jump

After a slowdown in the floppy diskette business, the company

took a timely decision to venture into the high-margin CDR manufacturing

business. The division performed well, evident from the financial performance of

Moser Baer in the last three quarters. The company reported a turnover of Rs

154.8 crore in 1999-00 compared to Rs 101.3 crore in 1998-99. Net profit jumped

116% to Rs 44.1 crore. Lower raw material costs and better efficiency led to an

improvement in the operating margins, which went up from 32% to 38% by March

2000. The company’s average returns on capital employed (ROCE) has declined

from 24% to 20% due to the investment made in the last quarter of 1999-00.

The increase in capacity in the next two years would result

in an impressive jump in the company’s revenues. Moser Baer is expected to

clock revenues of Rs 386 crore in the current fiscal and more than double it in

fiscal 2002. While we expect the operating margins to improve, the growth in

profitability would be slightly lower as the company would face interest outgo

and depreciation provisions. However, the ROCE would increase as the investments

in fixed assets yield results in the coming years.

Investment potential: Attractive

Moser Baer was traded at 320 (October 31) discounting its projected March

2001 EPS by 11 times and March 2002 EPS by five times. Compared to the slump in

IT stocks and the BSE Sensex in the past few months, Moser Baer has seen the

least decline in market capitalization and has outperformed the Sensex. We

believe that the company has good potential when the market improves. In the

current market scenario, Moser is a safe bet. Buy.

Sushanto Mitra



is the founder of Technology Capital Partners

The views reflected here are of the author and not of this

publication. No liability is accepted for losses based on the information

presented here.