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Capturing the digital sunrise

Ratul Puri invested Rs 850 crore on setting up his solar photo-voltaic (SPV) business between 2006-07 and 2008-09.

delhi Updated: Aug 27, 2009 00:28 IST
Gaurav Choudhary

Ratul Puri invested Rs 850 crore on setting up his solar photo-voltaic (SPV) business between 2006-07 and 2008-09.

The expectation: this sector would emerge as the next big thing. And that the early bird advantage would help Puri, 35, executive director of the Delhi-based Moser Baer, the world’s second-largest manufacturer of data storage devices like CDs and DVDs, dominate this industry.

The company had planned to invest about $1.5 billion (Rs 7,200 crore) in its manufacturing facility in Chennai and was hoping to generate 1 giga watt (1,000 MW, or one fourth the power Delhi needs) of electricity at its Greater Noida and Chennai facilities by the end of calendar year 2010.

Then the downturn struck home in the middle of 2008.

Buffeted by falling global demand and a peaking of commodity prices in August last year, the demand for SPVs fell sharply.

Says Puri: “We will continue with our expansion plans but will bring these in line with the current and emerging global scenario in which the sector is experiencing a temporary slowdown.”

The Rs 2,288-crore Moser Baer clocked a net loss of Rs 25.7 crore for the quarter ended December 2008, up from a net loss of Rs 20.5 crore in the previous corresponding quarter. This was mainly because raw material costs across its data storage and SPV lines jumped 30 per cent, which it could not pass on to its customers.

Its operating profit margins (not taking into account overheads) fell consistently from a high of 29.1 per cent for the quarter ended March 31, 2007 to 10.8 per cent over the next five consecutive quarters.

Credit rating agency CRISIL believes Moser Baer’s “credit profile will continue to be under pressure over the near to medium term due to the sluggish environment for its SPV business, notwithstanding the improvement in profitability envisaged in its optical storage business”.

“The lack of credit in the market was largely responsible for the sharp drop in SPV sales,” says Yogesh Mathur, group chief financial officer (CFO), Moser Baer.

Consumers deferred purchases as the ripple effect of the credit crisis spread across the world. This affected the company’s expected cash flows.

But downturns, typically, give companies the chance to think-out-of-the-box and look beyond the obvious. For Moser Baer, this could not have been truer.

“The sun supplies 10,000 times the amount of energy needed every year on earth. Technological breakthroughs are fast lowering the cost of harnessing and distributing this energy. It is eco-friendly and clearly the energy of tomorrow,” says Puri, a B.Tech in computer engineering from Carnegie Mellon University, US.

This is a very capital-intensive business and will need large infusions of capital over the next few years. “The SPV business will need about Rs 1,000-1,200 crore, most likely as debt, over the next 12-18 months,” says Mathur.

It will help that Moser Baer has near-zero long-term debt and a strong balance sheet. Then, its bread and butter storage wasn’t impacted so much by the downturn.

“Our positive bottom line in the first quarter of this year reflects the profitability of our core optical storage business. Prospects for the optical media business are bright and we hope to maintain and strengthen our market leadership position and serve our customers better,” says Puri, who has an uncanny ability to remember statistics, facts and figures.

Integrating forward, Moser Baer had, in 2006, entered the content distribution (home entertainment) market. It bought the rights to more than 10,000 Bollywood and regional language films in 2008 and is selling them on CDs/DVDs at Rs 28-34, less than half the market price charged by rivals. This business, too, is doing well.

“The initiative represented an excellent opportunity to leverage our patented and proprietary technology in optical media (CDs and DVDs) and offer consumers high quality prints at very attractive prices,” says Mathur.

And there’s huge potential for growth.

Data storage requirements are doubling every 18 months especially for faster, bigger storage systems. According to a report by BCC Research, a Washington-based research firm, the market for optical storage systems is expected to touch $30.6 billion (Rs 1.48 crore) by 2010, compared to less than $20 billion (Rs 96,000crore) now. And as the world’s second-largest company in this sector — after the Taiwan-based CMC Magnetics — Moser Baer is likely to reap massive benefits from this.

Despite this, investors were not convinced. Spooked by the high capital expenditure on its SPV business, they hammered down the company’s stock, from Rs 139.90 on September 22, 2008 to Rs 41.10 March 9, 2009. It has since recovered to Rs 90.60.

Mathur says the worst is over and scattered green shoots of recovery are becoming visible.

“And falling global commodity prices have brought the cost of SPV systems down 25-30 per cent,” says Mathur.

“This business is synergistic with our existing ones and allows us to leverage our core competencies in the areas of precision high technology mass manufacturing. The SPV space is expected to grow five-fold to Rs 135,000 crore globally by 2010. As one of the early entrants in this space, we are well-positioned to ride this growth curve,” says Puri.

Analysts, however, believe that Moser Baer’s performance in the optical storage device space will continue to determine its fortunes in the foreseeable future.

But Puri is confident that the sun, literally, will drive away the dark clouds that had gathered overhead.