The Hindu Business Line : `Drives will thrive'

Depending on the market situation and demand, Moser Baer India says it can change its existing CD line to DVDs. This is part of its product mix strategy.

Deepak Puri

Moser Baer India, optical storage media manufacturer, is passing through interesting times. Sluggish selling prices for CDs/DVDs had kept its earnings performance under pressure during the past three quarters. However, things are improving now. Since November 2004, a 20 per cent increase in average selling prices, especially in the DVD space, and two straight quarters of robust growth in shipments have infused greater interest in the company's fortunes.

eWorld caught up with its Managing Director Deepak Puri and Executive Director Ratul Puri to dwell on the trends shaping optical media and the challenges for the year ahead.

How is the industry changing with the gradual switch from CD (compact disc) to DVDs (digital versatile disc) and further, towards Blu-Ray discs?

The optical media industry is a dynamic one. As in any hi-tech product cycle, the CD market has also reached its maturity. However, this does not imply that the CD market is not growing anymore or becoming obsolete.

This year, we saw low double-digit growth for CDs. And while the DVD market is growing (this year, Strategic Marketing Decisions, a research agency for the global optical media industry, forecast DVD growth at 200-plus per cent), we do not expect CDs to lose in numbers.

Any removable storage media has far more longevity than most people realise — and the resilience comes as much from the archival built up over the years as from the sheer number of drives installed across all user segments.

Drives of any kind are not thrown away — just because a superior format comes in. Look at floppy discs — we continue to manufacture and sell huge numbers. In fact, the single-largest selling computer accessory in 2004, worldwide, was the external floppy drive, even as top PC and laptop vendors began shipping without floppy drives.

As for the Blu Disc, any new format takes long to be accepted by the mass market, and it must cross a particular threshold level — both in terms of the number of users and price stability — before the media explosion kicks in. All top manufactures of drives, media and PCs (as also content providers), are working together to establish the final format for Blu-Ray discs. We see (and SMD concurs) Blu-Ray and HD DVD (high density DVD) really kicking-in 2007 onwards.

How would you change your product mix to capitalise on the sustained growth in the DVD-R segment in the international markets? Especially since you hold a 35-per cent domestic market share for branded CD-Rs?

Our optical media lines are fungible. CD lines can always be upgraded to DVD lines. Depending on the demand, we can change our existing CD lines to DVDs (the process is already on, to some extent). Currently, Moser Baer holds 17.5 per cent of the global market share, and we plan to grow this to 20 per cent. To achieve that, we have some robust processes in place and an in-house R&D department that constantly works on new formats and developments. Moser Baer is one of only two companies licensed by HP to work on LightScribe-enabled media.

As for the domestic market, high production volume is not to blame for the weak quarterly results (bottomline). In fact, optical disc manufacturing is a high-volumes game and it is sheer size and scale that has seen Moser Baer outperform the market, even during trying times. Through FY '05, Moser Baer has increased its global market share from 10 per cent to nearly 18 per cent.

Taiwanese manufacturers such as Ritek, CMC Magnetics and Prodisc have shown relatively flat sales in March, compared to December-January (February being a low base month). Did your growth also taper off in March, despite a 13-per cent sequential growth in Q4 2005?

We have been continually outperforming the industry, both in terms of market share growth and margins, through the last three to four tough quarters. The last two quarters saw record shipment volumes. The far more than expected rise in polycarbonate prices (key raw material in disc manufacturing) has played truant with industry projections. Polycarbonate constitutes around 70 per cent of our input costs. Since it is a petroleum derivative, we have little control over the pricing, especially since oil prices rose well over 250 per cent last year.

While we have managed to push such cost increases to our customers and increase realisations (by nearly 20 per cent) in the last two quarters, it has not been enough to offset the polycarbonate price rise. This is also because our procurement contracts stretch over six to eight months at a time, and we cannot renegotiate halfway. This holds true for our supply contracts with OEM partners.

Going into 2005-06, you appear to face problems on the revenue and cost front. How would you cope with the sluggish demand during the summer cycle (April-August)? The 5 per cent increase in polycarbonate prices during January-March adds to the pressure?

There is a big market for optical storage media in Europe and the US, and their festive seasons are in the winter months (Easter, Halloween, Christmas, New Year).

Traditionally, sales jump significantly in the second half of the financial year on the back of increased consumer demand. When we say "traditionally weak" summer months, we are only talking in a "comparative" way.

Summers are also profitable times for the optical storage media industry, but winter is stronger.

On the other hand, we have increased prices by nearly 20 per cent in the last two quarters. Apart from runaway prices, delay in arrival of additional capacities of polycarbonate worldwide led to a further crunch in the market. Polycarbonate prices have, however, stabilised somewhat and this will further improve when additional capacities come into play.

Since you have nearly Rs 90 crore inventory, you would need at least two quarters like the fourth quarter of 2004-05 to liquidate your inventory. When is this likely to happen?

Since September-October, we have been witnessing demand and shipments well in excess of production capacities. Shipment volumes have been about 140 per cent of production capacity and, as such, we are in a very comfortable position as far as inventories are concerned. In fact, in the DVD space, the market is witnessing a sharp shortage in supply as demand skyrockets.

Picture by Ramesh Sharma

moumita@thehindu.co.in

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