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Wednesday, October 15, 2008

MOSER BAER INDIA LIMITED (MBIL) - Multibagger Long term investment

MOSER BAER INDIA LIMITED (MBIL) is a global technology company with presence in over 82 countries, and services through six marketing offices in India, the US and Europe. Incorporated in 1983, today it is India's largest and the world's 2nd largest Optical Storage Media (OSM) manufacturer and enjoys strong tie-ups with all major global technology brands.


It is also India's largest home entertainment Company. It releases video content in the DVD and VCD formats using proprietary and patented technology that ensures the highest quality standards at affordable prices. It is also the first storage media Company in the world to make commercial shipments of HD (high density) DVDs. Moser Baer has also established itself as a major player in the USB drives and memory cards. Its foray into PC peripherals in the form of ODDs (Optical Disk Drives) will further help it strengthen its position in the industry. Currently the IT vertical industry (PCs and Notebooks) is pegged at Rs 20000 Crores and the PC Peripheral industry is worth Rs 12000 Crores. Moser Baer with its entry into the ODD Market in the form of Combo Drives and DVD Writers plans to capture 20% market share of present Indian market size of five lakh units per month. Recently, the company has transformed itself from a single business into a multi-technology organisation, diversifying into exciting areas of Solar Energy, Home Entertainment and IT Peripherals & Consumer Electronics.

Investment Rationale
FY 2008 AND Q1 FY 2009 PERFORMANCE OVERVIEW:
The Consolidated Net Sales of the Company increased from Rs. 1984.04 Cr to Rs 2070.01 Cr during FY 2008, an increase of 4.33% YoY. The Consolidated Core EBITDA stood at Rs. 223.96 Cr in FY 2008 as against Rs. 433.83 Cr during FY 2007, down 48.34% YoY. The Consolidated Net Loss for the year stood at Rs 431.85 Cr against Rs 60.88 Cr in FY 2007, an increase of 609% YoY. The Standalone Net Sales stood at Rs. 1892.59 Cr. during FY 2008 as against Rs. 1981.91 during FY 2007, down 4.5% YoY. The Standalone Core EBITDA stood at Rs. 302.37 Cr. during 2008 as against Rs. 460.25 Cr. during 2007, down 34.3% YoY. The Standalone Net Loss of the Company is Rs. 310.52 Cr. for FY 2008 as against Rs. 32.18 Cr. during 2007. The Standalone Net Sales of the Company increased to Rs. 478.93 Cr in Q1 FY 2009 as against Rs. 469.30 Cr during Q1 FY 2008, a growth of 2.05% YoY. The Standalone EBITDA for the quarter stood at Rs. 53.46 Cr. as against the Standalone EBITDA for the same quarter last year of 152.08 Cr down by 64.85%. The Standalone Net loss for the same period increased to Rs. 103.98 Cr as against Rs. 71.72 Cr in the last quarter of 2007-08 an increase of 45%. The net loss includes a loss of Rs. 28.27 Cr on account of the adverse movement of foreign exchange.

INNOVATIVE PRODUCTS TO CATER GROWTH: Moser Baer recently acclaimed fame of being the first non-Japanese Company to innovate its own OSM blu-ray disc technology. The demand for these blue laser based formats is expected to exceed over 12 Crore discs by 2009 from less than a crore units at present. The concept works on blue laser, which used to read and write this type of disc. Because of its shorter wavelength (405 nm), substantially more data can be stored than on the DVD or CD formats (which uses 650 nm and 780 nm wavelength respectively). A dual layer Blu-ray Disc can store upto 50 GB; almost six times the capacity of a double dual layer DVD. The company has an advantage of being "first-to-market" and is well positioned to capture a significant share of this emerging opportunity. The intellectually strong position in the development of this next generation product provides a significant competitive edge.

HUGE MARKET SIZE; POISED TO GROW EVEN FURTHER: The size of the blank optical media market in India is over one billion discs per annum. CDR (Compact Disc-Recordable) is the predominant format accounting for about 80% of the OSM market in India. DVDR (Digital Video Disc-Recordable) has grown exponentially over the last year. The overall Indian market for OSM is growing at 15% with DVD growing at a pace faster than the industry (it grew at around 100% YoY in FY 2008 and is expected to continue growing at even higher rates in future).

EMBEDDED VALUE IN SUBSIDIARIES: Moser Baer Photovoltaic Limited, a WOS of Moser Baer India, is in the business of photovoltaic (PV) cells and modules. MBPV is expected to emerge as a technology-driven PV equipment manufacturer in the world by implementing a capacity of 500 MW by FY 2010; through a mix of multiple technologies including crystalline silicon, concentration and thin films. The manufacturing facilities are housed in a SEZ dedicated for renewable energy at Greater Noida. MBPV is in the process of setting up India's largest grid connected solar farm in Rajasthan with an investment of around Rs 100 Crore. Driven by recent significant technological advancements, it is estimated that the solar market will have a 43% CAGR over FY 2008 - 2012 and is poised to achieve grid parity in the short to medium term. Current demand projections translate to a value of US$ 50-70 billion by 2010. Another subsidiary, PV Technologies India Limited (PVTIL) has successfully completed deposition trials for Gen 8.5 a-Si (Amorphous Silicon) thin film modules at its new 40 MW facility in Greater Noida in FY 2008 and thus achieved a global landmark. The company is setting up a thin film PV plant near Chennai with a proposed 500MW annualised capacity. The Chennai and the Greater Noida plants will be manufacturing Gen 8.5 thin film panels measuring 5.72 square metres. The utility of using thin films includes savings of material, monolithic device design, use of inexpensive substrates, and manufacturing processes that need low temperature and are possible over large areas. Photo Voltaic Technologies India recently signed a MoU with a global equipment supplier to secure supply of critical equipment for an additional 565 MW phased expansion of its Thin Film photovoltaic modules manufacturing capacity, which together with the current project capacity of 40 MW will take the total manufacturing capacity to over 600 MW by 2010.

INTEGRATING OPERATIONS THROUGH ACQUISITIONS: Moser Baer's acquisition of an 81% stake in OM&T B.V., a highly specialized technology Company based in The Netherlands, has started bearing fruits in terms of exploiting cutting edge technologies in both the optical and solar photovoltaic (PV) segments. This acquisition is a major milestone for Moser Baer as it will facilitate strategic implementation and ensure the presence in both the optical and solar photovoltaic (PV) segments. This acquisition will complement the existing research being done at R&D facility based in India and help the company to further consolidate its leadership position. According to the agreement, all innovations by OM&T will be transferred to Moser Baer. The Joint venture will also focus on development of photovoltaic technologies to support Company's existing PV business.

GOVERNMENT ASSISTANCE: Indian government would provide financial assistance amounting to Rs.12 (30 cents) per kWh in case of solar photovoltaic and Rs.10 per kWh in case of solar thermal power fed to the electricity grid. The scheme will be run by the Indian Renewable Energy Development Agency (IREDA), and solar farm developers will be able to access the subsidy by selling their energy to state-run utilities under the new tariff. The incentives are scheduled to run for 10 years and will be paid in addition to any subsidies offered by state governments. Some of the Indian states have also announced independent programmes to support large size solar PV installations. However, the ministry has imposed a limit for the incentives of 50 megawatts in total, a cap of 10 megawatts (MW) within any one state and a maximum of five megawatts per developer.

Conclusion
The company is incurring losses since last three quarters on high operating expenses due to foray in new business areas. However, we believe that solar division will add significantly to the top-line of the company. Recently, the company sold 6.5% of its Photovoltaic Divison in a private equity deal to a group of foreign and domestic investors for Rs 411 crore, valuing the division at Rs 6,350 crore. This is significantly higher than the total market capitalization of the company i.e. Rs 1620 crore. The stock currently trades at Rs. 96.25. We expect that the stock could be a multi-bagger. We recommend a BUY on the stock with a time horizon of 24 months and a price target of Rs. 173, offering a return potential of 80% from the current levels.
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