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START-UP Can Moser Baer Rewrite A Profitable Program? With low production cost and rising demand, Deepak and Ratul Puri expect to make a killing on CD recordable discs. By Jaideep Lahiri
If you expected this infotech company's headquarters to be paperless, efficient, and squeaky clean, forget it. It's certainly not the kind of office you would expect of a wannabe blue chip. But then, today's businesses are driven not by the shape of the offices that house them, but by the Big Idea. The innovative thinking, the promoters' risk-taking ability, their yen for adventure. Moser Baer's promoters seem to have all that-and more. The
father-son duo of Deepak and Ratul Puri have been forced to exit their businesses not
once, not twice-but thrice. Like Uderzo and Goscinny's indomitable Gauls, however, their
spirits have never been dampened. Even as they get ready for the third reincarnation of
their business, the Puris are thinking of the fourth. Since it is not possible to rewrite these discs, technology will force customers to opt for either rewritable discs or Digital Video Discs (DVDs) over the next 5 years. At that stage, the Puris will have no option but to change tracks once again. That hasn't bothered Moser Baer, as it matches each technological jump with a change in its strategy. Explains Deepak Puri, 58: ''There is a misconceived notion that technology itself is unstable. Actually, in our business, it is the product-categories that are unstable, and it should be the endeavour of all manufacturers to keep pace at the lowest possible cost.'' Still, it becomes difficult to evaluate a company whose business categories, as per the Boston Consulting Group's renowned matrix, includes a dog (5.25-inch discs), a cash cow (3.50-inch discs)-and a question mark (recordable discs). Clearly, Moser Baer's future depends on its ability to convert the question mark into a star since the cash cow will turn into a dog in the next 5 years. Agrees Prakash Karnik, 45, Head of Private Equity (India), jf Elektra, the Mauritius-based private equity venture between Jardine Fleming (Hongkong) and Elektra Investments (UK), which is investing Rs 11.30 crore in Moser Baer: ''We are making a wager because we expect an explosive growth in the recordable discs market.'' What a wager! The global demand for recordable discs was 1.10 billion units in 1998, and is witnessing annual growth-rates of 250 per cent. In that situation, Moser Baer, with an annual capacity of 1.50 million units-its investment in the plant, which is expected to go on-stream in May, 2000: Rs 340 crore-should not find it difficult to sell its output internationally. In fact, Moser Baer primarily operates in the exports market, and its 3 manufacturing units are located in the Noida Export Processing Zone. In addition, the company believes that its unit production-cost will work out to a mere 40 cents compared to the global average of 70 cents. Therefore, the Puris expect to make a killing since the current selling-price hovers around $2 per disc. Combating Competition concurs an optimistic Gopal Handa, 60, Senior Technical Specialist, International Finance Corporation, which has decided to pump in Rs 6 crore into Moser Baer and, together with JF Elektra, will hold nearly 49 per cent of the company's equity: ''We expect returns to jump sharply in the near future.'' Especially since CDs are becoming the ideal storage-device for both Net surfers and creators of software masters. In addition, the prices of CD-drives have come down from $500 per unit 2 years ago to $200 today, and are expected to fall by 30 per cent each year. Adds Harish Motwani, 27, Senior Marketing Manager, PC Zone, a Delhi-based on-line computer-retailer: ''Once prices come down, we should see these drives becoming an integral part of the personal computer.'' There is a downside too. For one, the prices of recordable discs have crashed from $6.30 per disc in 1996 to around $2 today. And they are expected to fall further to 90 cents a disc in the next 3 years. Logically, net margins, which have already slumped from $3.20 per disc to a mere 20 cents, are likely to go down. Add to that a global glut since the number of manufacturers has risen from 40 to 70 in the past 3 years. So, dumping is a real possibility, and that could force prices down below 90 cents over the next 12 months. Moreover, Moser Baer is highly dependent on 2 OEM customers-the German chemicals company, BASF, and Ireland's Dataright-which together accounted for 50 per cent of its sales in 1998-99. That is not perceived to be a problem area, says Ratul Puri, 28, adding: ''As long as we remain a low-cost producer, our OEM business is secure.'' After all, in the last 5 years, his company's manufacturing-costs have come down by 30 per cent. However, Moser Baer has failed to build its brand, Xydan, whose sales are restricted to the domestic market, and accounted for 10 per cent of its turnover last year. Once competition intensifies, the Puris could face the prospect of unviable selling-prices because of their lack of attention to brand-building. For instance, Moser Baer's Taiwan-based rival, CMC Magnetic, sells its own brand of floppy diskettes. The result: while CMC Magnetic manages to secure a higher selling-price of 22 cents per diskette, Moser Baer has to remain content with a unit selling-price of 17 cents. Justifies Puri Sr: ''Since prices keep falling in this business, we have to become a volumes player. That is why we focus on manufacturing rather than marketing.'' What will give Moser Baer breathing-space is the fact that its cash cow, the 3.50-inch floppy business, will continue recording profits for another 5 years. According to a research report by Investmart-the research and broking arm of ILFS-the diskette operation is expected to generate annual average cash-flows of Rs 38 crore over the next 3 years without any fresh investments. Therefore, the Puris can milk the cash cow even while stabilising their diversification into CD discs. Milking The Cash Cow In fact, the profitability of the floppy business can be gauged from the fact that, in the last 4 years, Moser Baer's sales have jumped 3 times to Rs 102 crore while its net profits have zoomed 4 times to Rs 21.20 crore. Despite a crash in the global prices of 3.50-inch floppies-from $1 in 1995 to between 17 and 22 cents today-its operating-margins have increased from 14 per cent in 1995-96 to 32 per cent in 1998-99. Explains G. Vijay Kumar, 33, Equity Analyst, Investmart: ''The company was able to grow both its topline and bottomline due to higher sales volumes, which grew from 30 million units in 1995-96 to 110 million units in 1998-99.'' Some of these projections are, however, debatable. For one, the use of floppy diskettes is coming down; already, the number used per PC globally has fallen from 15 to 11 over the last 2 years. In addition, global demand, at 4.50 billion units in 1998, is stagnating even as prices are expected to tumble. Agrees Mukesh Batra, 31, Manager (Business Development), Allied Electronics and Magnetics, which has the franchise to sell the Amkette brand in India, and controls 30 per cent of the Rs 100-crore Indian diskette market: ''Globally, this business is cut-throat, and India is no exception.'' Not surprisingly, he has already decided to opt out of this competitive sector over the next 12 months. Indeed, the business category itself is no exception to the rule that it will need to be changed every few years. For example, even before Moser Baer has ventured into the manufacture of recordable discs, the competition from technologically-better substitutes is increasing. For customers, rewritable discs-as opposed to recordable ones-are, obviously, a better alternative. In fact, the only obstacle to the growth in demand for that product is the 600 per cent price difference between the CD recordable drive ($200 per drive) and the CD rewritable one ($800 per drive). However, that is expected to fall to a mere 100 per cent over the next 24 months. Once that happens, sales of CD rewritable drives-and, axiomatically, CD rewritable discs-will shoot up from the current 12 million units a year compared to 670 million CD recordable drives. Then, Moser Baer will have to upgrade its factory to enable it to manufacture CD-rewritable discs apart from milking its cash-cows. And the Puris will have to go back to rebooting their strategy in a bid to grow their businesses a little more compactly than before.
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It's a nondescript corporate headquarters, situated in the residential area
of Delhi's Lajpat Nagar. A dirty staircase leads you into the 3-storeyed office-building.
Inside, pieces of paper and empty cardboard cartons are strewn about. There isn't even a
reception-area worth the name. Everything about the office seems disorganised and chaotic.