MBIL is pricey, but profitable in the long term

Moser Baer India Ltd (MBIL), a leading manufacturer of optical media disc, has transformed itself from a single business venture to a multi-technology organisation. Apart from being in the optical media business, MBIL has also forayed into the photovoltaic business and replication and distribution of entertainment content. 

The company’s topline in the first quarter of the fiscal year 2007 (FY-07) has seen a tepid growth of 3.5% but its PAT has surged above 80% in the backdrop of efficiencies in production and cost reduction. The recent initiatives are expected to bear fruits from financial year 2008 onwards.
The valuations currently seem to be expensive and investors should lookout for the turn of events and only then make long-term buying decisions.

Business: MBIL operates in three business segments-optical media, photovoltaic and entertainment. Ranked as one of the world’s largest low-cost optical media manufacturer, it became the first company in the world to ship out the next generation HD DVD.

With the recent acquisition of OM&T BV, an erstwhile subsidiary of Philips, MBIL has obtained the manufacturing capabilities of Blue-ray discs. Apart from a manufacturing capacity of 3 billion discs per annum and a presence in 82 countries, MBIL also possesses the technological prowess to manufacture optical media ranging from 700 MB CDs to 50 GB blue laser based discs. saw the revival of the optical business.

However, in the first quarter of financial year 2008, volumes were affected owing to traditional seasonality. Production and sales saw a decline of 4.8% and 12.8% respectively. This lead to inventory built up and consequent impact on margins.

MBIL expects the volume and margins to improve in the second quarter of fiscal year 2008. As per guidance provided by the company, optical business is expected to grow at a CAGR of 25-35% over the next three years and expects the margins to be sustainable at 30-35%. The margins are expected to improve on the contribution arising on the next generation formats.

Photovoltaic business: The photovoltaic business is carried on through its wholly-owned subsidiary Moser Baer Photo Voltaic (MBVP) for manufacturing solar cells and modules in India’s first renewable energy SEZ. The first phase of 40 MW of the envisaged 80 MW crystalline silicon cell commenced commercial shipments during the first quarter.

The additional 40MW is also expected to be on schedule. MBVP also secured firm orders or executed memorandum of understandings exceeding $100 million and is expecting certifications from various agencies by August 2007. As part of its long-term sourcing strategy, the company recently signed a contract with REC of Norway world’s largest silicon wafer manufacturer for supply of high-quality, multi-crystalline silicon wafers over eight years beginning 2008.

The sourcing deal is valued at $880 million. Earlier, MBVP entered into a strategic sourcing tie-up with Deutsche Solar a leading silicon wafer manufacturer and also acquired a 40% strategic equity stake in the Slovenia-based Solarvalue Proizvodnja, which will set up a 4,400 tonne solar grade silicon by 2008.

On the ongoing projects front, the thin film facility is expected to be completed by November 2007 and the concentrators project is on track and is expected to contribute by the end of fiscal year 2008. As per company guidance, it expects to clock revenues of $80-100 million in the fiscal year 2008 and contribute to the profitability in the third quarter of 2008 fiscal.

Entertainment: MBIL claims to be the largest content owner in the home entertainment business and the only company with a pan-India presence. The content business is expected to generate revenues in the range of $50-60 million in FY08.

Capex: Yogesh Mathur, group CFO of the company had recently announced that the company’s capex will be in the range of $350 million. Out of this, $40 million has been earmarked for the optical media business, $130 million for photovoltaic business and $180 million for entertainment. Earlier, MBIL had issued FCCBs worth $150 million.

The conversion of $75 million is to be done at Rs 545.94 and the balance $75 million is to be converted at Rs 611.45 per share. The dollar rate is fixed at Rs 40.27.

Opportunities and concerns: Although there exists huge opportunities in terms of global optical media shipment, which is expected to grow by 60% during 2006-2007, the key driver being the DVD/RW and blue laser formats, the raw material prices are a concern.

Further, the technology obsolescence involves capex for upgrading at regular intervals thereby inflating the fixed costs. In the recent past, the company has been impacted by the volatility of the raw material prices and falling realisations, which can recur in future, said Sameer Ranade, senior analyst at PINC Research. The diversification into the high return on capital business of photovoltaic and entertainment is a good step in the direction of de-risking the business, Sameer added.

Valuations: At the current CMP of Rs 292.46 (the price being ex-bonus of 1:2 recently announced), the stock is available at 37.49x its FY08 earnings and at 15.62x its FY09 earnings. The valuations seem to be on the higher side and investors can buy at declines with a long-term option.

Disclaimer: The author does not hold any shares in the company