MOSER BAER INDIA : Still Going Strong...

India is known for its strength in software services. In-2003, India’s only
company manufacturing optical media storage on a global scale crossed the Rs
1,000 crore-turnover mark. Delhi-based Moser Baer India will achieve another
record this year when it expands its optical media capacity to 1.10 billion
units per annum. Operating in a highly competitive market and fragile price
structure, Moser is geared up to consolidate its strength in the fast growing CD
and DVD market.

Moser Baer India (Moser), formed in 1983, came out with a public issue in
1997 to part finance a facility to manufacture 5¼ -inch floppy diskettes. The
company then ventured into 3½-inch floppy diskettes, which was financed by a
rights-cum-public issue in 1994. Keeping pace with technology, Moser Baer has
set up a plant to manufacture optical media storage devices, which includes
recordable and re-writable compact disks CDs and DVDs. The company currently has
a capacity to manufacture 760 million optical media units per annum at the end
of March 2002, which would be increased to 1.45 billion units per annum by
fiscal 2004.

Founded by Deepak Puri, Moser Baer India traditionally manufactured magnetic
floppy diskettes (MFDs) and has, over the past few years diversified into
optical media, which includes CDRs and DVDs. The share of revenues from sale of
optical media has improved considerably following the company’s massive
expansion of the CDR unit over the past couple of years and foray into DVDs.
Despite the falling prices of CDRs due to huge capacities of the major players,
Moser has managed to improve its performance due to timely expansions funded by
large venture funds and banks. In the year ended March 2003, Moser achieved
revenues of Rs 1,069.60 crore and net profit of Rs 245.30 crore, up by 57% and
14% respectively. The company sold 890 million units during the year with 15% of
it being sold in India.

Moser is the only optical media manufacturer in the country that has
operations on a global scale. The 3,300-person company has an excellent
manufacturing facility at New Delhi with marketing offices in India, the US and
Europe. The company has a capacity to manufacture 760 million optical media
units per annum, which is slated to jump to more than 1.45 billion units by the
end of fiscal 2004. The company increased the capacity of CDRs from 150 million
units per annum in 2001 to 760 million units per annum by 2003 by a mix of
equity and loan at a total cost of $ 233 million or approximately Rs 1,100 crore.

Warburg
Pincus and International Finance Corporation (IFC) invested $ 71 million, $ 27
million came via debt financing, while the balance $ 35 million was met through
internal accruals. Moser achieves more than 80% of its revenues from export
markets and sells its products largely to OE customers such as BASF, Sony as
well as other European and Japanese multinationals.

In the fourth quarter ended March 2003, Moser reported revenues of Rs 352.45
crore, up 80% y-o-y and 18% q-o-q. Its net profit in the same period stood at Rs
84.99 crore, up 38% y-o-y and 31% q-o-q. Moser changed its accounting policy in
the fourth quarter due to which its revenues were higher by Rs 17 crore and the
net profit was higher by Rs 4 crore. The company sold 285 million discs during
the year. Revenues from optical media formed 91.30% in the fourth quarter
compared to 90.30% in the third quarter.

Raw material costs during the quarter were down 4% sequentially and formed
30% of the total revenues compared to 37.52% in the previous quarter. The major
raw materials used by the company are general purpose polyStyrene (GPPS) and
high impact polyStyrene (HIPS) used for packaging. Besides, polycarbonate is
used to manufacture the CDs, dye used for the recording layer, furnace oil for
power generation and freight. The company witnessed an increase in the prices of
packaging products during the year whereas the prices of polycarbonate increased
marginally. The company expects the polycarbonate prices to plateau and that of
dyes to remains stable. Moser’s average selling price was 23.6 cents per unit,
up 5% q-o-q.

Considering the excellent growth in the fourth quarter, Moser has
re-negotiated the prices and expects 10% increase from the current quarter.

Although the prices of CDRs were stable in the fourth quarter, the company is
susceptible to fluctuations in the selling price due to increased competition or
over supply. Despite the huge capacity of 760 million units, Moser’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, the size is
crucial and Moser has been consistently investing in additional capacities over
the past couple of years.

Moreover, the company estimates that 10% increase in the raw material prices
affects its margins by 5%.

The European Union (EU) has proposed a 7.3% countervailing duty on CDRs
originating from India. Exports of CDRs by Moser’s to the EU forms 40% of its
total revenues and sanction of the same would impact Moser’s revenues in the
medium term. Incidentally, EU had earlier imposed such duties on Taiwan-based
CDR manufacturing companies.

Moser entered into a long term supply agreement with Imation Corp, US to
create a joint venture company focused on R&D and marketing. Imation would
hold 51% stake in the joint venture and it will have the potential to contribute
incremental revenues of $100 million (Rs 475 crore) per annum for Moser Baer.
The company expects this deal to help it in increasing its global presence and
market share in the fast growing DVD markets.

Moser plans to increase its capacity of optical media from 760 million
optical media units to 1.10 billion by the end of first quarter of current
fiscal and further to 1.45 billion by fiscal 2004. The company expects to invest
$ 100-120 million for the expansion out of which $ 40 million would be met
through internal accruals and the balance through debts. With the joint

venture with Imation, the company is confident of utilizing the increased
capacity and spread its operations in the American market. Moser currently has
outstanding debts of Rs 1,100 crore and free cash of Rs 250 crore.

Going ahead, Moser expects 25%-30% jump in revenues with unit sales expected
at around 1.20-1.25 billion based on stable selling prices and negative impact,
if any, of the EU’s decision to impose countervailing duty on the products
exported by Moser. Moser is confident of the growth in the optical media storage
market with demand for both CDRs and DVDs expected to grow impressively. The
demand for optical media storage linked to the growth of CD-R drives and DVD
drives.

There is little doubt that the fall in the cost of CDs and their storage
capacity has made traditional floppy diskettes obsolete.

Compared to CDs, DVDs are still expensive and are only expected to become
affordable by 2005 as the prices of the DVD drives decline and DVDs
manufacturing capacities goes on stream. Research company SMD estimates the CDR
media to grow from 8.4 billion units in CY2002 to 10.8 billion in CY 2003
whereas the DVD-R/RWs expected to grow from 125 million in 2002 to 675 million
in 2003 and further to 4.4 billion by 2005.

Moser currently trades at Rs 296 discounting our estimated March 2004 EPS by
5.4 times and March 2005 EPS by 4.7 times. After a fall in the share price to Rs
150 in January 2003, Moser has recovered impressively in the past three months.

There were concerns of the decline in the unit prices last year and poor
demand on the company’s profitability early this year.

However, the company has managed to increase its volumes and expects these to
improve further as new capacities are put in place. Considering the recent spurt
in the share price, we believe that any negative news from the EU may lead to
some offloading in the shares but over the next few months, as the first quarter
results are announced, the share price could certainly move northwards.

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.