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.