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Funds go Gung-Ho on Moser Baer

With strong fundamentals, an impressive clientele and low cost of production, the company has caught fund managers' fancy

Fund managers have a different stock on their shopping list apart from the Infosys, Satyams and Wipros. In the past few months, the hitherto non-descript manufacturer of compact discs, Moser Baer has caught the fancy of institutional investors. In May, the company's stock has emerged as one of the top holdings in technology funds like DSPML Technology.com, Birla IT, IL&FS e-COM and Sun F&C Emerging Tech. Despite the bearish sentiment, Moser Baer has gained over 22% or Rs 53 since the beginning of the current calendar.

So, why have funds developed a penchant for this Delhi-based Company?
"It's a fundamentally-strong player and is the second largest manufacturer of CDs in the world. After falling consistently in the recent past, prices of CDs have stabilised and have in fact, moved up a bit,'' says Anup Maheshwari, fund manager, DSPML Asset Management. "The company is expanding capacity and plans a two-fold increase in the current year. It now roughly manufactures 25 million CDs per month, which it plans to hike to 55 million per month by the last quarter of the current fiscal,'' he adds. Maheshwari's technology fund has gradually augmented its exposure in the stock since the beginning of 2001 and currently owns nearly 63,000 shares.

Apart from the expected growth, the company has seen an expansion in its customers' list. This means that its dependence on a single buyer has come down. The company has now added majors like Mitsubishi, Philips, Samsung, Maxcell and LG to its clients' list. "Earlier, just two companies, BASF and MMore accounted for over 50% of the total sales. The new clients mean that no single buyer now accounts for more than 15% of the total volumes,'' says Maheshwari. With exports constituting a bulk of sales, any depreciation in the rupee adds to the revenues and the company's charm.

While Moser Baer may currently price its CDs at lower rates to increase volumes, fund managers expect the company to realise higher prices by the end of the current calendar. The company's cost of manufacturing a CD is roughly around 15 cents while it sells the finished product at around 27 cents. Thus, the company has very high operating margins. "Given the spread, Moser Baer can currently afford to price its CDs at lower rates and later, shift to price-led growth,'' says Maheshwari.

Moser Baer has a clear competitive edge over its Taiwanese rivals, where the cost of manufacture is over 25 cents. The CD market has seen a consolidation recently since a number of marginal players were wiped out due to the drop in prices. Now, the next 2-3 years are likely to see over 80% of the volumes concentrated in the hands of a few players.

Besides DSPML Technology.com, Birla Sun Life and IL&FS AMCs have been bullish on the stock. Birla, in its characteristic style, has taken a large bet on Moser and added 2.6 lakh shares since December 2000 of which Birla IT holding has almost doubled its position from 78,000 shares in December 2000 to 1.69 lakh shares by May 2001. The stock is now next to Infosys with a weight of 11.25%.

In some other funds, Moser Baer has climbed up the ladder due to a rising price even as other stocks in the portfolio have fallen. For example, the stock's weight in Sun F&C Emerging Tech has nudged up even though the fund manager sold 20,000 shares in May. Presumably under redemption pressure, funds have been offloading the stock since it has seen a smart appreciation. Another major seller is ABI AMC's Magnum IT, which has sold over 1 lakh shares since December 2000.

Yet, it is not a flawless story at Moser Baer. This B group scrip suffers from low volumes on account of a low floating stock in the market. Over 80% of the company's equity is held by the company's promoters, International Finance Corporation, JF Electra, a private equity fund of Jardine Fleming and other FIIs.

While a lower floating stock means that price will rise sharply in the event of a demand, a marginal selling pressure could also lead to a sharp fall. Thus, fund managers need to exercise restrain while adding the company to their portfolio. Else, they run the risk of turning a part of their holdings relatively illiquid!