Here comes the sun

POUND WISE

Moser Baer's foray in the photo voltaic cells business has got investors interested in the company once again.

The Moser Baer stock is still at about the same levels as it was three years ago, while the Sensex is up a huge 150 per cent in the same period. Its performance over the past three financial years has only deteriorated as the operating environment in its core business "� storage media "� has seen pricing pressure in a commodity business. 
 

BAD SECTOR
(Rs crore)	FY06	FY05	FY04	FY03
Net sales	1663.66	1280.30	1519.55	1092.55
Y-O-Y growth (%)	29.94	-15.74	39.08	56.21
Operating profit	342.74	315.27	628.41	374.66
Y-O-Y growth (%)	8.71	-49.83	67.73	22.29
OPM (%)	20.60	24.62	41.36	34.29
Net profit	-10.09	56.80	318.74	232.92
Y-O-Y growth (%)	-117.76	-82.18	36.85	10.04
NPM (%)	-0.61	4.44	20.98	21.32

This is in spite of the fact that Moser Baer, is the world's leader in CD R/RW and the second largest manufacturer of DVD R/RW.

However, the stock has seen renewed investor interest in the past two months, rising 30 per cent against the Sensex gaining 13 per cent.

This is because the company, known for being innovative, has rejuvenated itself, not only with higher end products, but also by diversifying into a new area "� manufacturing of photo voltaic cells. A revival in the media business has also helped the rise in its stock price.

Moser Baer announced its plans to enter the photo voltaic business in October last year. This business would be conducted through a wholly owned subsidiary called Moser Baer Photo Voltaic (MBPV).

The subsidiary would generate solar power by manufacturing solar cells and modules. MBPV has targeted an annual capacity of 80 MW in Phase I. The initial project cost is estimated to be Rs 260 crore.

Ever-increasing energy requirements, unstable oil prices and the rising realisation for clean and green energy sources will aid the growth of this business.

"As per industry estimates, at current levels, the industry will grow from $8 billion (Rs 35,640 crore) in 2005 to over $40 billion (Rs 1,78,200 crore) in 2010. However, if the cost of solar energy per unit is brought down in the region of grid power, the global solar photo voltaic market would expand to over $200 billion annually," says Yogesh Mathur, Group CFO, Moser Baer India.

The cost of generating power from solar cells is significantly higher as compared to that of grid power. The cost of generating power through solar cells is Rs 10-12 with subsidies and around Rs 25-30 without subsidies, while that of grid power is Rs 3-6. To lower this cost, MBPV has made investments in two Concentration Photovoltaic technology companies "� Solaria and SolFocus Inc.

The investment in SolFocus will enable the company to lay its hand on the cheaper non-silicon based photo voltaic concentration technology.

The business is expected to start contributing to revenues from the fourth quarter of this fiscal. On a steady state and for the first 12 months of 80 MW silicon vertical capacity, the company expects revenues of about Rs 900-1,100 crore.

"EBITDA margins in the photo voltaic business are around 28-29 per cent. However, sharply lower capital intensity leads to more than 20 per cent EBIT margins and hence healthy return on capital employed," says Mathur.

The company's core business too is on an ascent after going through a rough patch for around two years. The company has posted good numbers for the September quarter.

The company's sales saw a y-o-y growth of 30.1 per cent to Rs 500.86 crore. This growth was aided by higher volumes coupled with an increase in the average selling price.

While media shipment volumes continued to be strong, CD-R demand has been on an upswing thus enabling the company to negotiate better pricing with its vendors.

"DVD-R shipments grew 47 per cent y-o-y as pricing remained firm. Next generation high density (HD) DVD-R media started contributing in the quarter in small numbers," says Mathur. "Consequently, the overall average selling price for optical media business rose 9.8 per cent," he adds.

This, along with falling prices of a key raw material "� polycarbonate, has led to an improvement in margins. Polycarbonate is a derivative of crude oil and thus its prices mirror the trend in crude prices.

The operating margin was 306 basis points higher at 26.57 per cent. The net profit was up 742.4 per cent y-o-y to Rs 25.97 crore.

This trend can be expected to continue for the rest of FY07 as the second half of the fiscal is traditionally better than the first half, as there is a strong demand for media in the Christmas season.

"The fact that it has happened in a traditionally weak summer season indicates the buoyancy in the industry," says Mathur.

According to Strategic Marketing & Decisions (SMD) estimates, global demand for CDR-RW formats is around 1,300 crore units in 2006, almost static over 2005 level.

While demand is on the decline in the US and Europe, strong demand from Asian, Latin American and Middle Eastern markets will offset the fall in demand in the other markets.

To move away from the commodity price curve, the company has also created certain niches like the HD-DVDR media.

Also, one of the company's proprietary and patented technology has been considered as one of the four standard media to be included in the Blu-ray disc specifications by the Blu-ray Disc Association.

SMD expects shifting consumer preferences, increasing drive penetration and improving price-value proposition so that the demand for DVDR-RW media will grow from 6 billion discs a year in 2006 to 11 billion disks by 2008.

The blue laser based discs (HD DVD and Blu-ray) are on a fast growth curve and SMD expects 2007 as the first big year for blue laser based technology with demand estimated at 400 million discs in 2007 to 1.4 billion in 2008. The company feels that even its Low-to-High (L2H) recording technology will help it gain an edge.

Today, Moser Baer is more of a turnaround play, as valuations are quite expensive due to its loss in FY06. But, the company has staged a smart recovery in the second quarter, posting a net profit of Rs 26 crore.

If this growth momentum continues, it will not be surprising to see the company post an EPS of around Rs 10 for FY07, thanks to the brighter prospects of the media business. If the photo voltaic business takes off, things could get better next year.