MOSER BAER INDIA LIMITED
ANNUAL REPORT 2007-2008
DIRECTOR'S REPORT
Dear Shareholder,
Your Directors are pleased to present the 25th Annual Report and Audited Accounts for the financial year ended March 31, 2008. This is a milestone year for Moser Baer being the 25th year since the founding of the Company in 1983.
Financial Results (Rupees in Million)
Particulars Year ended March 31, 2008 2007
Gross sales and other income 20,873.1 21,533.7
Profit before depreciation, 5,339.8 6,022.1interest and tax but after priorperiod items
Depreciation 4,315.9 3,578.7
Interest and finance charges 1,793.6 1,244.9
Profit/(Loss) before tax (769.6) 1,198.5
Tax expenses 19.4 100.6
Profit/(Loss) after tax (789.1) 1,097.9
Profit/(Loss) carried forwardfrom last year 1,246.3 399.6
Profit/(Loss) available forappropriation 457.2 1,497.5
Appropriations:
Transfer to profit and loss account 260.1 1,301.6
Dividend (proposed)% 10 15
Operations
Revenues for FY'08 stood at 20,873.1 million, Profit before depreciation, interest and tax stood at Rs. 5,339.8 million, and Loss after tax was Rs.789.1 million. Turnover was impacted during the year by the strengthing of rupee and difficult business environment. Aggressive pricing and flat sales volumes were the two major contributory factors affecting the bottom line. However, net operating cash flow continues to be strong at Rs.3,062.8 million on the back of judicious capex spends and working capital control.
Industry consolidation and increasing demand traction in Blu-Ray are the positive hues to an otherwise sedate industry environment in near to medium term. Long term variables still remain healthy as need for storage and consumer demand continues to grow.
Market Development
Your Company continues its strategy to straddle the value chain, using innovation and product development to develop new markets. The success of this strategy has been reflected in the increase in market share with retail private labels and other select distribution channels. This has been accompanied by development of new products and product variants as'specials' and value-added products.
New Products
During the year, your Company introduced a number of new Products, including BDR 1X-6X, DVDR 8X Dual Layer, Double sided recordable discs, 'Diamond' CDR and Archival Media. The Company's in-house product development team successfully created new products for specialized customers. The Company launched 'Professional Select' Media, developed for the professional duplication market and CPRM Media with content protection for the Japanese Market.
Acquisitions
Last year's acquisition of OM&T (an erstwhile subsidiary of Philips) has added significant value to your Company's position. It has enabled us to emerge as a frontrunner in the next generation BDR formats, given OM&T's pioneering R&D work in the Blu-ray disc technology.
Photo Voltaic Project
Moser Baer Photo Voltaic Limited (MBPV) is moving towards technological leadership and sustainable competitive edge in this industry by investing in disruptive technologies. The Company has placed itself in a vantage position by spreading itself across the value chain and by developing expertise across multiple existing and future technologies. The global photovoltaic market is on a high growth curve and experts expect it to be worth US$ 40 billion by 2010.
MBPV achieved revenues of US$ 42.2 million in FY'08. The 40 MW crystalline silicon line is being expanded to 80 MW, as planned, by the end of 2008. The production capacity of solar modules has been expanded to 40 MW.
MBPV has tied up significant customer orders and MoUs, including two solar farms in Rajasthan and Punjab. The Company is aggressively pursuing tie-ups in several states to drive grid-connected solar farms to demonstrate their techno-economic viability and attractive returns as a source of green peaking power. The company is on track to ramp up the crystalline silicon cell line capacity to 180 MW in FY'09 and is tying up equipment for the 600 MW expansion of thin film capacity. The thin film project facility is nearing completion with commencement of mechanical trials expected in early May 2008.
Content Business
During the financial year, the Company's entertainment business achieved break-even and has registered revenues of US$ 38.5 million for FY07. Your Company released Shaurya, its first Hindi feature film, and Veftharai, its first Tamil film, in theatres across India. Emphasis on acquiring new title releases should give further impetus to the growth of the business, which remains on track to achieve revenues in excess of US$ 200 million by 2010.
Consumer Electronics
The Company is entering high growth areas in consumer electronics and launching multiple products. Your Company offers the best quality products, which are available at all major retail counters and major large format retail chains like Croma, Reliance, Jumbo, etc. Your Company has got a very god response for DVD Players and digital photo frames.
Your Company has launched the following products under its own brand name:
* Four models of DVD players* A model of home theatre system* A model of Digital Photo Frame (DPF).
Further, your company is in the process of launching the following products:
* Eight models of LCD TVs* MP3 and MP4 players* More DPF models* More DVD players.
Subsidiary Companies
Under the provisions of Section 212(8) of the Companies Act, 1956, the Ministry of Corporate Affairs vide its letters dated 13/03/2008 and 27/05/2008 granted the exemption under Section 212(8) of the Companies Act, 1956 from attaching the documents required under Section 212 of the Companies Act, 1956. The information required to be published in terms of the provisions of Section 212(1) of the Companies Act, 1956 is available for inspection by the investors of the holding Company and the subsidiary Companies at the registered office of the Company located at 43B, Okhla Industrial Estate, Phase III, New Delhi - 110 020.
Dividend
Your Directors are pleased to recommend a dividend @ 10% on the paid-up Equity Share Capital of the Company for the financial year 2007-08. The total payout will be Rs.19.7 crore, inclusive of dividend tax and surcharge thereon.
Directors
In terms of the provisions of Sections 255 and 256 of the Companies Act, 1956 and the Articles of Association of the Company, Mr. Arun Bharat Ram (Director) and Mr. Bernard Gallus (Director), retire at the ensuing Annual General Meeting and being eligible, have offered themselves for re-appointment.
Auditors
Price Waterhouse, Chartered Accountants, hold office until the conclusion of forthcoming Annual General Meeting and, being eligible, offer themselves for reappointment. The Company has received intimation to the effect that their reappointment, if done, will be within the limits laid down under Section 224(1 B) of the Companies Act, 1956.
Bonus Issue
During the Financial Year 2007-08, your Company announced an issue of Bonus Equity Shares in the ratio of 1:2 (one share for every two shares held) by capitalizing the reserves. As a result 56,077,035 Bonus Equity Shares were issued to the shareholders who were members or beneficial shareholders at the close of business hours on the record date i.e. July 18, 2007.
Stock Options Plans
The shareholders of the Company at the Annual General Meeting held on June 15, 2007, gave their approval to amend the Directors' Stock Option Plan (DSOP-2005) to increase the number of Equity Shares to be issued under DSOP-2005 from 450,000 to 1,000,000 and each Non-Executive Director is now entitled to receive a maximum of 100,000 stock options. Thus, 300,000 additional stock options were granted to the Non-Executive Directors of the Company. Further, pursuant to the declaration of the Bonus Equity Shares, the Compensation Committee of the Board of Directors decided to extend the benefit of the bonus issue to the employees and Non-Executive Directors who have the outstanding stock options under Employees Stock Option Plan (ESOP-2004) and Directors' Stock Option Plan (DSOP-2005). Thus, each employee and Non-Executive Directors holding outstanding stock options on the record date of bonus issue were granted bonus stock option in the ratio of 1:2, i.e. one bonus stock
option for every two stock options held.
Foreign Currency Convertible Bonds (FCCB)
Pursuant to approval of the shareholders in the Annual General Meeting held on June 15, 2007, your Company raised US$ 150 million through issue of Foreign Currency Convertible Bonds (FCCBs) with tenure of five years from their allotment. The issue received overwhelming response from the investor community and was oversubscribed by 2.25 times the issue size. The FCCB was issued in two tranches, with Tranche A being US$ 75 million and having a yield to maturity of 6.10% and a conversion premium of 25% over the closing price of Rs. 436.75 on the Bombay Stock Exchange (BSE) on June 4, 2007 and Tranche B being US$ 75 million with a yield to maturity of 6.75% and a conversion premium of 40% over the BSE closing price of Rs. 436.75 on June 4, 2007. The bonds are listed on the Singapore Exchange Securities Trading Limited.
Particulars of Employees
Particulars of employees, as required under Section 217(2A) of the Companies Act, 1956, read with the Companies (Particulars of Employees) Rules, 1975, as amended, form part of this report. However, in pursuance of Section 219(1)(b)(iv) of the Companies Act, 1956, this report is being sent to all shareholders of the Company, excluding the aforesaid information and the said particulars are made available at the Registered Office of the Company. The members interested in obtaining such particulars may write to the Company Secretary at the Registered Office of the Company.
Conservation of energy, research and development, technology absorption, foreign exchange earnings and outgo
The information pertaining to conservation of energy, technology absorption, foreign exchange earnings and outgo, as required under Section 217(1)(e) of the Companies Act, 1956, read with the Companies (Disclosure of particulars in the report of the Board of Directors) Rules, 1988 is given as per Annexure 'B' and forms part of the Directors' Report.
Fixed Deposits
During the year under review, your Company has not accepted any deposit under Section 58A of the Companies Act, 1956, read with Companies (Acceptance of Deposits) Rules, 1975.
Corporate Governance
A report on Corporate Governance, along with a certificate from the Statutory Auditors and a certificate from the Managing Director and Group CFO, have been included in the Annual Report, detailing the compliances of Corporate Governance norms as enumerated in Clause 49 of the Listing Agreements with the stock exchanges.
Management Discussion and Analysis
The Management Discussion and Analysis Report is attached and forms part of the Directors' Report.
Directors' Responsibility Statement
Your Directors state:
I. That in the preparation of the annual accounts, the applicable accounting standards have been followed;
II. That we have selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Company at the end of the financial year 2007-2008 and of the profit of the Company for that year;
III. That we have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 1956 for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities; and
IV. That we have prepared the annual accounts on a going concern basis.
Conclusion
Your Company has outperformed the industry in a challenging year and continues to maintain its leadership position. It has also been surpassing all international quality and cost benchmarks and continues to build shareholder value. Your Directors look to the future with confidence. Your Directors place on record their appreciation for the overwhelming cooperation and assistance received from investors, customers, business associates, bankers, vendors, as well as regulatory and government authorities. Your Directors also thank the employees at all levels, who, through their dedication, cooperation, support and smart work, have enabled the Company to achieve rapid growth.
For and on behalf of the Board of Directors
Sd/Place: New Delhi Deepak PuriDate : 22.05.2008 Chairman & Managing Director
Annexure-A
INFORMATION REGARDING EMPLOYEES STOCK OPTION PLAN, 2004 (ESOP) AND DIRECTORS' STOCK OPTION PLAN, 2005 (DSOP) (AS ON 31ST MARCH, 2008)'
ESOP-2004
1. Number of Stock : 4,776.300 Options granted
2. Pricing Formula : (i) Normal allocation: -Rs.125 per Option or prevailing Market Price, whichever is higher (ii) Special allocation: - 50 % of the Options at IRS. 125 per Option or prevailing Market Price, whichever is higher and the balance 5090 of the Options at Rs.170 per Option or prevailing Market Price, whichever is higher.
3. Number of : 954,075 Options vested
4. Number of : 616,125 Options exercised
5. Number of shares : 616,125 arising as a result of exercise of option
6. Number of : 1,056.800 options cancelled/lapsed
7. Variation of : Nil terms of options
8. Money realized : RS. 135,403,076 by exercise of options
9. Number of : 3,103,375options in force
10. Employee-wise : details of Options granted to:(a) Senior : a. Ms. Minni Katanya - 6,000 managerial b. Mr. Deepak Kukreja- 15,000 personnel; and c. Mr. V. C. Agerwal - 40.000 (b) Any other d. Mr. V,bhas Josn - 40.000 employee who e. Mr. Ratya Ghei - 20,000 receives a grant in f. Mr. R. Sampath - 24,000 any one year of g. Mr. Girimj Nyati - 20,000 options amounting to h. Mr Rajiv Arya - 24,0005% or more of options granted during that year.
11. Identified : Nilemployees who were granted Options during any one year, equal to or exceeding 1% of the issued capital (excluding outstanding warrantand Conversions) of the Company at the time of grant;
12. Diluted : (Rs. 4.70) Earnings Per Share (EPS) pursuant toissue of shares on exercise of option, calculated in accordance with AS 20
13. Method of : The Company has used intrinsic value method for calculation of calculating the employee compensation cost with employee respect to the stock options. compensation cost
14. Difference : Rs. 103.042.130 between the employee compensation cost so computed at serial number 13 above and theemployee compensation cost that shall have been recognized if it had used the fair value of options
15. The impact of : Impact on Profit Rs. 103.042,130 Impact on this difference on EPS-Basic-(Rs. 5.31), Diluted-(Rs. 5.31) profits 8 on EPS of the Company
16. Weighted-average a. Weighted average exercise price - RS. 370.23 exercise prices and b. Weighted average fair value of the Options- weighted average fair RS. 123.52 values of options granted during the year
DSOP-2005
1. Number of Stock : 700,000 Options granted
2. Pricing Formula : Rs.170 per Option or prevailing Market Price, whichever is higher
3. Number of : 150,000 Options vested
4. Number of : 25,000 Options exercised
5. Number of shares : 25,000 arising as a result of exercise of option
6. Number of : 50,000 options cancelled/lapsed
7. Variation of : Nil terms of options
8. Money realized : Rs. 5,707,500by exercise of options
9. Number of : 625,000options in force
10. Employee-wise : N.Adetails of Options granted to:
(a) Senior managerial personnel; and(b) Any other employee who receives a grant in any one year of options amounting to 5% or more of options granted during that year.
11. Identified : Nilemployees who were granted Options during any one year, equal to or exceeding 1% of the issued capital (excluding outstanding warrantand Conversions) of the Company at the time of grant;
12. Diluted : (Rs. 4.70) Earnings Per Share (EPS) pursuant toissue of shares on exercise of option, calculated in accordance with AS 20
13. Method of : The Company has used intrinsic value method for calculation of calculating the employee compensation cost with employee respect to the stock options. compensation cost
14. Difference : Rs. 103.042.130 between the employee compensation cost so computed at serial number 13 above and theemployee compensation cost that shall have been recognized if it had used the fair value of options
15. The impact of : Impact on Profit Rs. 103.042,130 Impact on this difference on EPS-Basic-(Rs. 5.31), Diluted-(Rs. 5.31) profits 8 on EPS of the Company
16. Weighted-average a. Weighted average exercise Price - Rs. 425.25 exercise prices and b. Weighted average fair value of the weighted average fair Options-Rs155.values of options granted during the year
The Weighted Average of Vesting Period in respect of the Options granted to the Directors under DSOP-2005 were as follows:-
Grants Weighted Average of the Vesting Period
1st Grant on 11th August, 2005 2.5 years
2nd Grant on 12th December, 2006 2.5 years
3rd Grant on 25th January, 2007 2.5 years
4th Grant on 19th June. 2007 2.5 years
The Weighted Average of Vesting Period in respect of the Options granted to the employees under ESOP-2004 were as follows:
Grants Weighted Average of Vesting Period
11th Grant on 9th January, 2004 3 years
2nd Grant on 29th November, 2004 2.5 years
3rd Grant on 2nd January. 2005 2.5 years
4th Grant on 24th June. 2005 2.5 years
5th Grant on 17th August, 2005 2.5 years
6th Grant on 27th October, 2005 2.5 years
7th Grant on 24th January. 2006 2.5 years
8th Grant on 26th April, 2006 2.5 years
9th Grant on 7th June, 2006 2.5 years
10th Grant on 27th October, 2006 2.5 years
11th Grant on 24th January, 2007 2.5 years
12th Grant on 30th April, 2007 2.5 years
13th Grant on 11th July, 2007 2.5 years
14th Grant on 25th October, 2007 2.5 years
15th Grant on 30th January, 2008 2.5 years
Fair value of options based on Black-Scholes' Enhanced Model i.e. Enhanced FASB 123 Model for DSOP-2005
Assumptions : Grant Date-11/08/05
Risk-free interest : 6.56% (for 5 years, source-NSF/Reuters as on rate 11th Aug 2005)
Expected life : 7 yrs
Expected Multiple : 1.25x
Expected : 61.46% (based on 5 years stock data from NSE) volatility
Expected : 0.58% (Weighted average dividend yield for last dividends 3 financial years)
Price of the : 228.30 underlying share in market at the time of option grant(in Rs.)
Assumptions : Grant Date -12172106 Risk-free interest : 7.56% (for 4.58 years, source-NSF/Reuters as on rate 12th December 2006) Expected life : 7 yrs Expected Multiple : 1.25x Expected : 54.73% (based on 5 years stock data from NSE) volatility Expected : 0.46% (Weighted average dividend yield for last dividends 3 financial years) Price of the : 242.60 underlying share in market at the time of option grant(in Rs.)
Assumptions : Grant Date-25/01/07 Risk-free interest : 7.68% (for 4.58 years, source-NSF/Reuters as on rate 25th Jan 2007) Expected life : 7 yrs Expected Multiple : 1.25x Expected : 55.03% (based on 5 years stock data from NSE) volatility Expected : 0.46% (Weighted average dividend yield for last dividends 3 financial years) Price of the : 319.25 underlying share in market at the time of option grant(in Rs.)
Assumptions : Grant Date-19/06/07 Risk-free interest : 7.87% (for 4.32 years, source-NSF/Reuters as on rate 19th Jun 2007) Expected life : 7 yrs Expected Multiple : 1.25x Expected : 56.20% (based on 5 years stock data from NSE) volatility Expected : 0.54% (Weighted average dividend yield for last dividends 3 financial years) Price of the : 425.25 underlying share in market at the time of option grant(in Rs.)
* Two Options granted before the record date i.e. 18 July, 2007, under the above plans, entitles the holder to three Equity Shares of the Company.
ANNEXURE B
Information as per Section 217(1)(e) of the Companies Act, 1956, read with the Companies (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988 and forming part of the Directors' Report for the year ended 31 st March, 2008.
A. Conservation of energy
Your Company's energy requirements continued to increase significantly as it commissioned new manufacturing facilities and increased production at existing facilities. As an ongoing process, the Company undertakes various measures to save energy and reduce its consumption. During the financial year 2007-08, some of the measures undertaken by the Company include:-
1) Saving of 80 KW of energy resulting in saving of Rs. 42 Lacs by removal of HEPA filters by incurring an expenditure of Rs. 0.11 Lacs for this purpose.
2) Saving of 572.2 KW of energy by increasing the hall temperature, stopping the Air Handling Units (AHU) in JB Area by reducing the exhaust quantity from productions machines. This resulted in saving of Rs. 300.7 Lacs.
3) Saving of 104.2 KW of energy and Rs. 54.8 Lacs by reducing the Air Pressure and by incurring Rs. 82 Lacs.
4) Saving of 864 KW of energy and Rs. 454.1 Lacs by installing VFDs system in AHUs.
5) Saving of 185.7 KW of energy and Rs. 97.6 Lacs by decreasing / shutting off lights of non critical areas & modification in light fittings locations for energy reduction.
6) Saving of 76.68 KW of energy and Rs. 40.3 Lacs by reducing the Air Consumption.
B. Technology absorption, adaptation and innovation, research & development
Technology absorption, adaptation and innovation
Technology plays a big role in our ability to offer a complete basket of products to our customers. Our company thus has entered agreement to acquire technology and the right to use technology belonging to other third party companies. During the year, a number of agreements were completed to acquire technology belonging to companies whose R&D efforts have been complementary to our technology development program.This technology has been successfully incorporated into some of the Company's products and an ongoing effort is being made to improve the utilization of this technology and produce newer innovative products based on this technology.
At the same time our Company is a part of many International Forums and R&D initiatives that are dedicated to the development of future formats like light scribe technology, HD-DVD and Blue-ray. Such participative activities have significantly enhanced the image of our Company as an individual entity and our country as a whole in the mind of the International community. Differential Scanning Calorimeter (DSC), Universal Testing Machine (UTM), Microinjector and Extruder have been installed at IIT BHU where our collaborative R&D work is under progress. Similarly, the co-sputtering unit has been installed at IIT Delhi which is smoothly working there.
Your Company bagged the first prize awarded by ELCINA for its R&D efforts made in the field of electronic sector. Further, your Company has been identified by some R&D institutes for collaboration and also in the process of approaching Govt. funding agencies through our own philosophical R&D projects. One R&D proposal has already been submitted to Nano Science Initiative Programme in Department of Science and Technology.
Research and Development
Research and Development efforts have been implemented in the following areas in order to support existing businesses as well as new futuristic formats and technologies beyond the optical media.
Innovative R&D efforts under progress:-
1. Co-sputtering has been achieved for the development of promising materials composition, having potential characteristics for next generation optical formats.
2. Chemical blends of polymers with sufficiently higher mechanical strength have been successfully made. Physical term is under exploration in order to obtain substitute for the substrate material for a CD and DVD.
3. Nano-structured materials for the development of alternate memory device.
4. Nano synthesis of blends for filter application.
5. Basic R&D and its application towards technology/device development are under extensive investigations in collaboration with our academia partners IIT Delhi and IIT BHU.
6. Holography- Hardcore technical feasibility is established through characterization of different kind of photopolymers for three dimensional recording.
Future plan of action is to set up holography manufacturing facility and explore digital holographic recording.
7. Uniform L*a*b Disc- is invented to uniform the color across the data area and the hub area of compact discs. This invention covers the complete idea of a CDR printable disc(possibly on DVDR), up to the hub area, which can esthetically look better after the printability exercise and the end user can print their image uniformly up to 95% of the disc area (conventional disc's uniform coverage area is - 80%).
8. Stamper Print- A stamper is made with a printing image in Stamper Print process and embossed dummy discs are replicated (L1 through this stamper). These discs are bonded with the active parts (LO) as usual. The media comes out of replication process with active layer as data and dummy layer with the customized image, as complete product.
Benefits derived as a result of the above R & D
1. As a result of the above R&D Activities, your Company is gearing-up for future storage media in the industry and gained experience in handling photopolymer from the point of view of data storage & further ready to cope with the market requirements in the next generation data storage.
2. Stamper Print has given the insight of cost saving through innovative method. The turn around time to the customer will improve with respect to the processing time. A fully automatic process without any intervention at line during production with a single stop solution.
3. Uniform L*a*b Disc- New product which has the aesthetic uniformity across the disc and we are first in the market with such a product. This product would be a value added product for the company.
Capital expenditure of Rs. 104.9 million and recurring expenses of Rs. 16.5 million were incurred during the year towards R&D expenses, which is 0.6% of the total turnover of the Company.
These expenses are part of expenses incurred under various revenue or capital heads.
C. Foreign exchange earnings and outgo
Total foreign exchange earned comprising of FOB value of exports, interest, insurance claim and dividend received was Rs. 13,442.1 million, whereas total foreign exchange used (comprising of CIF value of imports, dividend and other outgoings) was Rs. 9,551.7 million.
For and on behalf of the Board of Directors
Sd/-Place: New Delhi Deepak PuriDate : 22.05.2008 Chairman & Managing Director
MANAGEMENT DISCUSSION AND ANALYSIS
OVERVIEW
2008 marks Moser Baer's twenty fifth year. It was in 1983, in New Delhi, that Moser Baer India was founded to manufacture time devices in technical collaboration with Maruzen Corporation, Japan, and Moser Baer Sumiswald, Switzerland.
Today Moser Baer ranks among the world's leading technology companies operating in distinct business verticals: optical storage media; solar energy; entertainment; IT peripherals and consumer electronics. Moser Baer's products are sold in over 80 countries and it employs more than 7,500 people.
Through these 25 years it has been Moser Baer's endeavour to achieve technological leadership and operate in all its business at on internationally competitive global scale. This has been possible through a carefully-planned and sustainable business model: low costs, high margins, high profits, reinvestment and capacity growth.
FY 2007-08 has been a year of growth for Moser Baer. The Company strengthened its position as a well diversified organization with presence in high-growth, technologydriven global scale businesses providing superior returns on investment (ROI). The year has seen contribution from the new businesses of Moser Baer growing significantly.
Improving operational efficiencies and optimal use of assets (fixed and working capital) helped the Company maintain a positive trend in the face of difficult industry environment in the optical media.
During the year, the Company maintained its leadership position in the global optical media industry. The Company further strengthened its unique technology and IP position in the Blu-ray format through its own pioneering work, coupled with strong in-house R&D in development of high definition formats, giving the Company a strong position as a technology developer.
OPTICAL STORAGE MEDIA
Driven by a combination of factors, the global blank optical media Industry went through a difficult period during the financial year. End consumer demand for CDR continued to remain flat with early signs of decline in developed markets. DVDR maintaines a positive growth trend during the year with robust demand from developed as well as emerging markets. Flash memory devices had a marginal impact on the re-writable market in PC Segment (for data interchange application). The industry witnessed a short term overcapacity situation with excess inventory in the supply chain due to patent licensing issues with some of the other players. This resulted in a downward pressure on prices. Strategic Marketing & Decisions (SMD) estimates global demand for blank optical media products to be over 22 billion units in 2008, representing a strong demand growth over 2007.
A notable development during the year was the emergence of Blu-ray disc (BDR) as the future High Definition media format, with Toshiba announcing the discontinuation of HD DVD investments in mid-February, 2008. This settlement will accelerate the adoption of the format by different stakeholders, including retail, studios, components, hardware, drive makers, software vendors, line integrators and media manufacturers. The industry expects exponential growth for the BDR format in the coming years. Moser Baer is the first non-Japanese supplier of BDR and this development will give the Company a significant advantage in the anticipated growth of the BDR market.
Moser Baer Developments FY 2007-08 (Optical Storage Media)
During the year, the Company evolved into a technology driven, multiple business transnational by adding high growth technology driven businesses to its portfolio. These businesses have the potential to significantly increase combined revenues and overall returns on invested capital.
FY 2007-08 was a difficult year for the global blank optical media industry, which has been significantly challenged by the overall demand-supply situation. Alternative technologies for data storage also impacted growth in the optical media sector. The steep appreciation in the rupee also resulted in margin erosion. At the same time, energy costs faced a huge escalation driven by steep increase in crude prices, in turn impacting furnace oil costs. Consequently the Company's operating and financial parameters were under severe pressure and clearly below the sustainable levels for medium to long term.
Margin erosion in the year under review notwithstanding, the base optical media business remains significantly cash accretive, driven by higher asset turnover and sharp improvement in working capital cycles. In overall terms, growth and returns remain attractive from a long term perspective.
The High Definition formats are likely to give the Company a growth edge and with BDR winning the race against HD DVD, the industry should witness faster penetration compared to earlier projections, clearly giving the Company a significant edge.
With the Company's continued focus on improving manufacturing efficiencies, growing market share, proprietary technology and 'first to market' position in next generation Blue-ray laser-based formats, the Company is well poised to benefit from improved industry dynamics and high growth potential.
During the year, the Company retained its global position as one of the largest producer of optical storage media. It also continues to maintain its lead as a technology developer through its relentless efforts on R&D and various technology collaborations.
In FY-08, the Company maintained its status as one of the top rung suppliers of the next generation High Definition formats through its earlier acquisition of OM&T from Philips last year, which brought several technologies with it, giving it a head start over its rivals. The Company's pioneering work in Blu-ray phase change technology and a unique IP position should provide a significant competitive edge to the Company and enable it to change the cost dynamics for the format to the consumer. As per Strategic Marketing & Decisions (SMD) the demand for blue laser based formats is set to exceed over 122 million discs by 2009 from a few million units at present, and the Company is well positioned to capture a significant share of this emerging opportunity.
Moser Baer's acquisition of an 81% stake in OM&T B.V, a highly specialized technology Company, has started bearing fruit in terms of exploiting cutting edge technologies. This acquisition strongly complements the existing research being done in Moser Baer's R&D Centre in India and helps the Company to be at the forefront of technology in both the optical and solar photovoltaic (PV) segments.
OM&T provided significant contribution to the development of alternate Blu-ray technology and its commercialization to enhance the leadership position of Moser Baer in this format.
The Company's aggressive strategy over the past year has started to yield results with fringe players finding it hard to sustain themselves. Industry consolidation and increasing demand traction in Blu-ray are the positive cues to an otherwise sedate industry environment in the near to medium term. Long term variables still remain healthy as need for storage and consumer demand continues to grow. Moser Baer is investing judiciously in new generation technologies as the optical media business continues to generate substantial free cash in a difficult environment.
In blank optical media, production was disrupted in midyear due to problems in the power plant. The issue was fully resolved and capacity optimization will be achieved by mid-2008. Turnover was also impacted during the year by the strengthening of rupee and the difficult industry environment.
Overall, aggressive pricing and flat sales volume were the two major contributory factors affecting earnings; however, net operating cash flows continue to be strong on the back of judicious capex spends and working capital control.
The size of the blank optical media market in India is over one billion discs. The market has grown by 17 per cent yearon-year. CDR is a predominant format accounting for 80 per cent of the Indian market. DVDR has grown exponentially by almost 100 per cent over last year.
The overall Indian market is growing at 15 per cent with DVD growing at 50% year-on-year. For CDR the market is expected to be flat. ASP of imports has been very low leading to price erosion. Antidumping duty has been imposed from March 2008 for CDR imports from 10 countries, which has considerably reduced the imports of CDRs. Firming up of global prices will also help the Company to improve the realization from the domestic market.
Strategy
Short term
* Leverage 'first to market' and IP position in next generation Blu-ray laser formats
* Leverage existing R&D and technology capabilities in expanding the product portfolio
* Enhance the contribution of value added products (Specials).
Long Term
* Consolidate global leadership position
* Improve Return on Capital Employed (ROCE) and asset turnover
* Target 'first to market' in near field and holographic technologies.
Near-term Operational Objectives
Optical
* Further augment technological and cost leadership
* Scale up the contribution of value-added next generation products and penetrate markets with these products
* Continuously launch new innovative products for customers, in conjunction with new drive launches
* Drive working capital efficiencies and generate free cash flows
* Develop strategic alliances for efficient raw material supplies.
SOLAR PV BUSINESS
Global Industry Scenario
Despite the mid term outlook of high oil and natural gas prices, global energy demand continious to grow. The most rapid growth is expected from non OECD* (Organization for Economic Cooperation and Development members) member countries due to the strong economic growth in these countries.
Renewable energy sources like geothermal, solar and wind constitute approximately 2.2 per cent of the world energy generation. Solar energy contributes 0.1% of the world's total energy needs. Solar energy costs are declining while base load and retail costs are increasing; indicating that grid parity could be reached earlier than estimated. Price declines drive elasticity of demand. A current cost reduction rates, a bulk of the solar industry will reach grid parity within nearly 10 years. Solar generated electricity can be cost competitive with grid when costs fall to $2.5/watt.
Despite increased availability of polysilicon from new and existing players, demand from Europe (Spain, Italy, and Germany) has been very strong. A key trend in the solar energy sector is the diversification away from the top three markets-Germany, Japan, and the US-which together drove almost 85% of solar demand in 2006-07. Progress in Spain and other European countries form the key variables for demand in 2008. Progress in Italy and the US remain the key variables for demand in 2009.
Higher energy costs, declining fossil fuel supplies and a thrust on reducing carbon emissions have ensured that that the worldwide interest in the renewable energy space, and particularly PV, continues to grow. Driven by recent significant technological advancements, it is estimated that the solar market will have a 43% CAGR and is poised to achieve grid parity in the short to medium term. Current demand projections translate to a market value of US$5070 billion by 2010.
Matching these demand projections, incentives from government led subsidies, and better margins have ensured that there is global interest from large market participants.
The robust growth in last few years will be further accelerated by reducing the PV energy costs. Development of disruptive technologies within the PV space will also contribute to accelerated cost reduction.
Currently, PV generates less than one percent of the world's electricity needs, leaving a massive potential market. The International Energy Agency(IEA)estimatesthatgovernments and the private sector will invest around US$10 trillion to expand and upgrade global electricity infrastructure over the next 30 years.
Apart from the developed world, governments in the Asia Pacific region are continuing to strengthen their policies and support for the implementation of technologies that can produce power with lower emissions than traditional technologies, such as power plants using coal, gas, or oil as a fuel source. The Indian and Korean feed in tariff initiatives are a step in this direction.
Indian Government has recently announced subsidy plans ranging between US$750/kW (US$0.75/watt) for installed capacity for residential or commercial use and US$1,250/ kW ($1.25/watt) for community and institutional use. The Central Government also announced feed-in-tariffs of up to US$0.30 per kWh for grid connected solar PV capacity of 1 MW and above. Some of the Indian states have also announced independent programmes to support large size solar PV installations.
Moser Baer's Endeavours
The Company aims to distinguish itself as a significant player in the global photovoltaic market by leveraging its highvolume manufacturing expertise and planned investments of nearly US$ 3.2 billion in research, development and manufacturing of products dedicated to generating solar power.
The Company realizes that PV markets have different needs and emerging technologies have to be developed today to realize the world's future energy needs. It has already announced investments in a mix of currently available and emerging technologies as follows:
* A first of its kind 80 MW, state-of-the-art, fully automated in-line horizontal crystalline silicon cell manufacturing facility.
* A 80 MW module manufacturing facility.
* In excess of 600 MW amorphous silicon thin film module capacity, capable of producing the world's largest non-flexible thin film modules.
* A high concentrator photovoltaic (CPV) module manufacturing facility and multi-million dollar investments in : Solfocus Inc., a US-based Company and the developer of the CPV technology in partnership with the world renowned PaloAI to Research Centre(PARC),California. The technology is based on gallium arsenide cells, originally developed for extra-terrestrial solar applications and environments
* A significant equity stake in Solaria, a US-based technology Company that has developed a unique form of low-concentration solar PV technology. It is capable of producing power equivalent to two to three times the
power produced by conventional PV modules, using the same amount of silicon material
* A significant minority stake in Stion Corporation, a nano structures development Company based in the Silicon Valley, California, for producing extremely low-cost solar power generating surfaces
* Acquisition of 40% equity stake in Solar Value, Proizvodnja dal, a solar grade silicon production facility in Slovenia, to provide access and assurance of supply to low-cost solar grade silicon. The initial test results of the facility have been encouraging and the development of commercial scale facilities is underway
* An R&D centre dedicated for the improvement and rapid commercialization of solar technology products is coming up in Greater Noida.
In addition to the above, the Company has invested in strategic partnerships involving the entire value chain, particularly for strategic sources such as silicon ingots and wafers, glass, etc. through short-term and long-term supply agreements.
ENTERTAINMENT & MEDIA INDUSTRY
The Indian Entertainment and Media (E&M) industry report 2008, jointly issued by FICCI and Pricewater house Coopers, says: 'Home video rights is becoming a sizeable chunk of revenue for film producers with the rise in disposable incomes, increased affordability of DVD players and home theatre systems and shorter release windows. Further, the entry of players such as Moser Baer has changed the entire model prevalent for last several years from rental to a sell through.'
The Indian E&M industry has been growing at a healthy rate in the last few years and the trend is expected to continue for the next few years. In 2007, the E&M industry recorded a growth of 17% over the previous year, higher than the forecasted growth of 15% projected in the previous year. The industry reached an estimated size of Rs. 513 billion in 2007, up from Rs. 438 billion in 2006.
Home video market has also witnessed dynamic changes in the last four years, having achieved a growth rate of 30 per cent over the period 2004-2007. Its contribution stands at 8% of the overall film industry revenues in 2007, up from 6% in 2004. In 2007, the home video market is estimated at Rs. 7.5 billion, up from Rs. 6.5 billion in 2006, translating into a growth of 15% from the previous year. Year-wise growth of the Indian film industry in different segments:
Moser Baer Entertainment offers home video titles in various Indian languages at unmatched prices and is also engaged in media content creation.
Moser Baer is today India's largest home entertainment Company and the first to offer home videos in every popular language of India. It currently offers home video titles in Hindi, English, Tamil, Telugu, Malayalam, Kannada, Marathi, Gujarati, Bengali and non-film categories.
Moser Baer Entertainment has acquired the rights for close to 10,000 titles in all the popular languages and has released almost 4,000 of them in the market.
The Company has established a strong presence across the country in all major metros, as well as in smaller towns through an active and well-organized multi-tiered channel. The Company has released video content in DVD and Video CD formats using Moser Baer's proprietary and patented technology that ensures the highest quality standards and significantly reduces cost. The movie titles come with worldclass packaging.
CONSUMER ELECTRONICS
Having established itself as a global leader in the high technology manufacturing space and the global blank optical storage media industry, Moser Baer is leveraging its existing synergies, established brand equity and large distribution network in the domestic market to enter the PC peripherals market. Moser Baer brand is recognized for high quality products which the Company extended during the year
In Rs billion 2005 2006 2007 CAGR 2004-07
Box office-Domestic 46.5 52.8 64.0 71.5% growth - 14% 21% 15%
Box office-Overseas 5.0 5.7 7.0 8.5% growth - 13% 24% 19%
Home Video 3.4 4.0 6.5 7.5% growth - 18% 63%* 30%
Ancillary revenues 5.0 5.7 7.0 8.5% growth - 13% 24% 19%
Total 59.9 68.1 84.5 96.0% growth - 14% 24% 17%
* Moser Baer entered the Home Video market in 2007
into the fast growing PC peripherals market in India. The Company has entered this market by launching products in five metros. The product segment launch complements existing optical media business and leverages Moser Baer's strong brand equity.
Currently the IT vertical industry (PCs and notebooks) is pegged at Rs. 20,000 crore and the PC peripherals industry is worth Rs. 12,000 crore.
Moser Baer has already established itself as a major player in the USB drives and memory cards market. Its foray into PC peripherals in the form of ODDS will further help in strengthening its position is the industry.
OPPORTUNITIES AND THREATS
Optical Storage Media
Opportunities
1. A first-to-market and unique IP position in the next generation Blu-ray based formats provides a significant competitive edge and growth opportunity as demand for these formats grows exponentially over the next two or three years. With a first mover advantage in this segment, the Company is likely to earn high margins on High Definition formats during the initial stages.
2. The Company has emerged as one of the largest players in the DVDR/RW formats in the world and continues to strengthen its position in the global market which is growing at a healthy clip of over 20% p.a.
3. Domestic market: India is one of the fastest growing markets for Optical Media. The Company has a strong Brand and presence in the channel and is well positioned to dominate this captive market.
Threats
1. Alternative technologies: Given Moser Baer's presence in high technology businesses, managing technology evolution and being at the forefront of the technology curve assumes prime importance. Threats of technology obsolescence exist at all times in the optical media space. However, over the years, the Company has evolved from a being a technology innovator to becoming a developer and to emerge as a technology driven Company, thereby mitigating this threat.
2. Prices of key inputs: Polycarbonate for optical media is a critical key raw material, and is influenced by a variety of factors, including crude prices, demand-supply balance, etc. Any sharp increase in prices or demand supply imbalances could adversely impact business. The Company works on strategic sourcing relationships and has long term agreements with key vendors for critical raw materials. This should ease the impact of any pricing volatility and improve production planning.
3. Anti-dumping and anti-subsidy / government policies: The Company derives a significant part of its revenues from international markets. These have seen a growing protectionist attitude and a tendency by some local governments to use antidumping and trade protection tools to provide protection to local businesses.
However, the Company continues to keep a close watch on this front and take necessary steps to minimize any fallout.
4. Fall in product prices: As products move into the mature phase in their life-cycle, they start to emulate commodity type characteristics. Also, optical media industry has relatively high capital intensity; hence a sharp fall in prices could severely impact overall returns. The Company has been consistently improving its asset turnover by installing more efficient lines, improving product mix towards higher value added products, etc. The leadership position in high value next generation formats should further improve these returns.
PV Business
Opportunities and Threats-Industry Risks
In the short term, Government subsidies play a significant role in the development and promotion of solar power across the globe. The subsidies have to be promoted and encouraged for the next 4-6 years, until solar achieves grid parity and becomes cost competitive. Interest rates also play a key role to ensure good return for investors, thereby promoting its growth. Moser Baer has been championing the development of solar energy in India through several means. The recently announced feed-in-tariff scheme, which was a cumulative effort of several groups and organizations, has created on investor friendly regime and will rebuilt in a significant creation of solar power capacity.
Entertainment & Media Industry
Opportunities:
The new emerging revenue streams like animation, gaming, merchandise, etc are creating new business opportunities for E&M Industry. Next-generation technologies will reinvigorate maturing segments and drive E&M growth. Digital television and IPTV are replacing analog, thus expanding the potential market for advertisers and subscribers. Digital distribution of content in terms of digital music and digital cinema holds huge opportunities for growth in the entertainment industry, making content available in even smaller towns where it cannot currently reach in its physical form. Digital platforms are also facilitating rollouts of PPV and Video on-demand services, thereby fueling overall growth. Additionally, DVDs have revitalized home video, with rapid growth in the sell through market. Also, there are enormous opportunities for the Indian E&M industry in the overseas market.
Threats:
The major threat in E&M Industry is rising content price and piracy.
SEGMENT WISE AND PRODUCT WISE PERFORMANCE
Optical Storage Media
CDR/RW
Consumer demand for the CDR/RW Format continues to grow in BRIC and Middle Eastern markets, somewhat compensating for the decline in the developed markets. There are however, certain niche applications and professional segments, which continue to witness growth in the CDR space.
Meanwhile global CDR/RW supply continues to consolidate through some of the capacities being converted to DVDR and also on account of closure of inefficient capacities around the world. This may help CDR/RW demand-supply balance return to equilibrium, thereby providing some stimulus to arrest the decline in CDR/RW pricing in the medium term.
DVD/RW
Shifting consumer preferences, increasing drive penetration and improving price-value proposition of DVDR/RW media continues to lead the growth for the format. As per SMD global shipments of DVDR/RW Formats rose 20% y/y in 2008 to 7.5 billion units from the preceding year. SMD expects DVDR/RW shipments to touch almost nine billion units in 2008, representing a further 20% growth. The DVDR/RW media prices are expected to continue to follow the manufacturing cost curve, enabling reasonable margins for manufacturers. The DL format gives further opportunities in coming years, which although smaller in terms of absolute volumes, has been showing good growth rates.
Solar PV Business
Polysilicon supplies are likely to remain tight until 2010. Analyst reports and market sentiments suggest that companies that have secured the most polysilicon supplies for the next few years are best positioned in the market. As costs remain relatively stable, industry will continue to generate attractive returns on the employed capital.
At Moser Baer Photo Voltaic, we continue to secure polysilicon through long term supply contracts. We believe that our ongoing contracts with Deutsche Solar, REC, GSM and now LDK puts us in a comfortable and competitive position on the supply front.
At current price levels, wafer costs make up to 75% of total cell costs and hence access to reasonably priced silicon is essential to maintain healthy margins. Improved conversion efficiencies and using thinner wafers are key to reducing costs.
Solar module (panel) prices are more meticulously tracked than overall system costs. The market in 2008 has been erratic - an environment that is seeing rising prices for all products. This situation is mainly due to the rush to meet project deadlines in Spain before revision of feed-in-tariffs. However, the industry estimates suggest that over the long term, the Average Selling Prices (ASP) of the solar energy equipment is set to fall by 5-7% per annum driving the enormous demand growth.
The BoS includes all costs other than the module (including inverter, cabling and the structure; and installation/service) that go into a solar installation. Despite making up for 40% of total installation costs (and sometimes much more), the impact of the BoS costs on module ASPs is often overlooked and is a major opportunity in the future for cost reduction.
The Company stabilized its first 40 MW of production line in crystalline silicon cell manufacturing during the year. Currently, Moser Baer is in the process of scaling up the initial 40 MW capacity to 80 MW.
Thin Films
Various thin-film technologies are in development to reduce the amount of light absorbing material required to produce a solar cell. Thin-film PV modules are produced through the deposition of a light absorbing film on a substrate (eg, glass).
Some of the advantages of thin film include:
* Reduced dependence on polysilicon
* Lower overall cost as significantly lower active material less than 1 % vs. conventional)
* Higher energy generation throughout the day compared with silicon panels, given the ability to generate energy in low light
* High throughput manufacturing process and equipment.
Currently, there are three main technologies available in the thin films area:
* Amorphous Silicon (a-Si) Thin Films, (61 %)
* Cadmium Telluride (CdTe) Thin Films (34%)
* Copper Indium Gallium Selenide (CIS & CIGS) (5%)
(% in brackets indicates share of technology in current thin films market)
Rapid scalability, high potential for cost reduction and stable manufacturing processes made amorphous silicon as the thin film technology of choice for Moser Baer Photo Voltaic. MBPV has tied up with Applied Materials Inc. for setting up the initial 40MW line that is currently undergoing trials. A road map has been developed to enhance the thin film capacity to more than 600OMW by 2010.
Lower supply side constraints, higher efficiencies (through tandem junction technologies), and high product stability are key growth drivers for Thin Film PV which is estimated to be 20% of the global PV market by 2010. It is estimated that with low overall costs, the sub-dollar module cost through thin films technology may be a reality. MBPV has decided to participate in this competitive technology segment through significant investments and is positioned to be among the market leaders.
Concentrating Photo Voltaics (CPV)
CPV use mirrors and/or lenses to focus sunlight on a small piece of semiconductor material and use a fraction of the polysilicon to produce electricity.
Concentrator solar is ideally suited for regions receiving high levels of solar insolation (exposure to sunlight) including parts of North America and the tropics. CPV offers significant potential for rapidly lowering the Levelized Cost of Electricity (LCOE) to end customer while growth in this segment will be driven through demonstrated sustenance of CPV and lower costs. Several countries including Spain have been promoting CPV growth through specific MW sized demonstration initiatives.
MBPV through strategic participation in high concentration (Solfocus) and low concentration (Solaria) seeks to capture the opportunities offered in this technology space.
The Company started manufacturing High Concentration SoIFocus panels at its facility in Greater Noida during the year and shipped the panels to various SoIFocus installations.
The Company is working closely with SoIFocus Inc., USA to scale up the manufacturing operations and indigenization of majority of components to drive down the manufacturing costs of the panels.
PV Systems
PV penetration levels in India - either through off-grid (110MW aggregated capacity) or on-grid (2MW) have been low considering India receives good solar insolation for the majority of the year. In an attempt to boost the PV market in India, the Government recently announced subsidy driven tariffs and income tax exemptions. Consequent to this, it is estimated that the annual market potential in the short to medium term would be in the range of 150-500MW. The potential is offered through both off-grid (rural electrification) and state supported large grid connected projects
With an ability to deploy the appropriate PV technology for the right market, the MBPV Systems group seeks to build on the market potential and is working actively towards seeding the market. The group has recently signed MOU's with the Rajasthan and Punjab state governments and is working closely with financing institutions and other overseas agencies for cost effective offerings.
OUTLOOK
Optical Storage Media
Next generation formats
With the end of High Definition format war, BDR/RE technology is likely to grow faster than anticipated earlier and has the potential of significantly mitigating the impact of slow down in some of the earlier formats. During the year, commercial shipments of this next generation format continued from Moser Baer and other major Japanese manufacturers. The current pricing for these formats continues to be 20-25 times that of the DVD formats.
As per the US-based Strategic Marketing and Decisions, the demand for BDR formats is expected at grow sharply to over 1.7 billion discs over the next three years on account of increasing applications driven by high definition video content and improving price value proposition offered by these formats as their pricing curve approaches the inflection point required to expand market demand.
Given the complexity and manufacturing capabilities required to mass produce these formats, only a small select group of companies will emerge as key players in this high growth segment, thereby increasing the differentiation between the technology innovators and developers and the tier-II companies over the long term.
Solar PV Business
The market outlook for 2008 is very strong and we expect strong growth due to growth in select regions including US, Europe and Asia. However, the second half of 2008 will be carefully observed given the limited demand visibility due to changes in Spain, Germany and the United States and uncertainty around the ramp of new polysilicon entrants in China and elsewhere. The industry seems to be marching towards rapid growth (3X-4X in the near future) with scale reduction for the end consumer.
Moser Baer continues to look at the market aggressively with a mix of technology products capable of addressing different market needs within the PV applications.
Entertainment and Media Industry
The Indian film industry is projected to grow by 13% CAGR over the next five years, reaching a size of Rs. 176 billion in 2012 from Rs. 96 billion in 2007.
The home video market is expected to significantly shift in the next five years given the developments in 2007. Though an overall growth of 15% is projected over the next five years, in line with the previous years, the current rental market domination is projected to significantly reduce to 25% in 2012 from 95% in 2006 in favour of the sellthrough market.
The penetration of home video subscribers is expected to increase from 10% of the pay-TV homes in 2007 to 25% in 2012. This translates into an addition of 41 million subscribers over the next five years period. Though the home video subscribers are expected to increase in the next five years, the sell-through prices expected to decline over the forecast period from a current average of Rs. 90 in 2007 to Rs. 50 in 2012.The home video market is thus projected to double its size to Rs.15 billion in 2012 from the current Rs. 7.5 billion in 2007, translating into a cumulative growth of 15% over the five-year forecast period.
RISKS AND CONCERNS
Running a business in any environment has risks that are as varied as they are copious. Stringent and effective risk management throughout the organization is imperative to succeed in the fierce business environment. An effective risk management framework drives continued competitive sustainability of an organization as it enables alignment of operations and activities of the organization to its vision and values.
At Moser Baer the vision is to establish and maintain enterprise-wide risk management capabilities for active monitoring and mitigating the risks on continuous basis.
BUSINESS RISK MANAGEMENT
A strong risk management framework is in place at Moser Baer that enables active monitoring of the business environment and identification, assessment and mitigation of internal or external risks. Given the established processes and guidelines we already have in place, combined with strong oversight and monitoring system at the Board, we believe, we have a robust risk management strategy in place.
Our senior management team sets the overall tone and risk culture of the organization through defined and communicated corporate values, appropriate delegated authority and a set of processes and guidelines. We have a process to inform Board members about the risk assessment and risk minimization procedures. We promote strong ethical values and high levels of integrity in all our activities, which in itself is a significant risk litigator.
RISK ENVIRONMENT
Moser Baerisaglobal leader inthedevelopment,manufacture and supply of technology products across the globe and is fast transforming into a multi-business technology group. All three businesses-optical media, photovoltaic and content distribution-have an inherent risk quotient. These risks may stem from technology obsolescence, high customer concentration, commodity cycles and geographical risks, among others. The Company is, however, well positioned to manage and mitigate these risks.
A solid entrenchment is observed with CDR, whereby huge global installed bases of readers and writers have served to provide the format with considerable staying power even in the face of existing new options. The versatility of the CD and DVD format families has served to establish them as a bridge between the information storage and entertainment segments, extending their utility and reach. The growth of DVDs not only maintains backward compatibility with CDs, but also opens up complementary new video, multi-media, and game application segments, further strengthening the global mass appeal of the 120 mm disc formats.
The Company expects these factors to result in stable/ marginal declining market for CDR media, while DVDR and the next generation Blu-ray laser based media will drive the growth in the medium to long term.
The Company's strategy is to transform Moser Baer from a technology recipient into a technology developer and innovator. Strong R&D will enable us develop high value products which will build the differentiation barriers in the long term. The world is moving towards High Definition content. This is a significant technology shift in the global optical media industry and will radically change the consumer's viewing experience. According to the US-based Strategic Marketing and Decisions (SDM), the demand for the next generation high definition formats is expected to be two billion discs over the next three years. A notable development during the year was the emergence of Blu-ray disc as the clear winner in format rivalry. The Company is in technology leadership position in the Blu-ray media.
This intensive R&D thrust will help us to further consolidate our global leadership position in the optical media space.
STEPS TAKEN TO MITIGATE TECHNOLOGY
RISKS
The Company's technology-led optic media storage products being part of a very active market segment are prone to significant technological risks. These risks exist in a number of critical areas, all of which can have considerable commercial implications. As a prudent and forward-looking organization, Moser Baer has invested substantially in R&D and engineering to address and mitigate risks in all these areas, often with multiple degrees of redundancy:
* Strong in-house R&D capabilities enable the Company to rapidly commercialize new products
* Longstanding strategic partnerships with key technology providers, allows the Company to access new technologies
* Cooperative links with all major hardware suppliers facilitate drive/media compatibility
* Seamlessly future-proofing our capital investments assure evolutionary capabilities of manufacturing infrastructure
* Technology collaborations and tech sourcing arrangements with global technology companies in emerging areas
* Acquisitions of pioneering companies in optical media R&D, will enhance the leadership position of Moser Baer in the next generation optical format race.
OTHER RISKS AND KEY MANAGEMENT INITIATIVES
a) INDUSTRY RISK MANAGEMENT
The Company operates in an industry where technology trends are constantly changing and evolving which may jeopardize future growth. The Company, however, faces no immediate threat from the dynamic environment in which it operates. On the contrary, it stands to benefit from the current growth trends in the DVDR format. It also stands to benefit from the demand for the next generation High Definition formats, which is expected at two billion discs over the next three years.
In line with the long term strategy of creating multiple synergistic businesses, the Company entered into the entertainment industry through the Indian home video market last year. This business is identified as an important value-enhancing, forward integration initiative to the optical media business. It will de-commoditize the blank optical media business due to the higher value addition to its products. The entertainment business is significantly less capital intensive compared to optical media business and will contribute to improving the overall returns on invested capital. The Company has made a foray into film production.
Additionally, the Company entered into the exciting global photovoltaic industry, which is growing at a rapid pace. The PV industry is also significantly less capital intensive than optical media industry and it is expected to improve the overall returns on invested capital.
During the year Company further strengthened its position in IT peripherals market by launching new products. Further, the Company also entered into the consumer electronics market and intends launching various products next year.
Entry into these businesses mitigates the risk of exposure to a single industry.
b) CUSTOMER ATTRITION RISK CONTROL
Over-dependence on a few customers could impact revenues in the event of attrition. The Company with its combined value proposition of high quality standards, competitive prices, and excellent service will continue to expand its customer base. The Company believes the event of customer attrition and the chances of an adverse impact on the Company would be low.
c) GEOGRAPHIC RISK MANAGEMENT
Concentration of customers and revenue bases in a close geographic area may impact growth in case some of these regions are not performing up to expectations. A geographically concentrated revenue base may impact growth in the case of some of these regions not delivering as per expectations.
The consumer base is primarily addressed through global technology OEMs which sell products indifferent continents across the globe. As we supply to global customers, the geographical risk is mitigated. Additionally, we continue to focus on emerging and new markets.
d) PEOPLE RISK MANAGEMENT
Quality of our human resources charts the success and growth potential of our business.
The Company has managed to keep attrition rates well in control by imbibing a sense of ownership and pride and strong HR initiatives geared to nurturing latent talent and unlocking the power of intellectual capital. The Company continues to drive organization development and also build management resources for a multi-business enterprise.
e) COMPETITION DE-RISKING
As installed capacities in global data storage industry have risen, prices have declined. The Company has addressed thisthrough an unbeatable price-value proposition: superior quality, timely delivery, attractive price and introduction of new value added products.
f) FAILURE TO FORECAST ACCURATELY
Understanding and forecasting emerging trends in the technology space is critical. The Company has strengthened its forecasting and S&OP process for high level production planning and plans for key materials.
g) FAILURE TO ENTER INTO LONG TERM CONTRACTS FOR CRITICAL RAW MATERIALS AND CONSUMABLES
Sharp commodity cycles and demand-supply imbalances in critical raw material can severely impact operations. The Company has entered into long term contracts for procurement of critical raw material and continues to work on other long term strategic sourcing arrangements with key raw material suppliers, to significantly mitigate this risk.
h) CASH FLOW RISK
Moser Baer operates in a high growth and capital intensive industry. Hence, it is imperative to efficiently estimate and manage cash flows in this volatile environment. The Company's working capital arrangements are well in place to guard against any uneven or seasonal factors. We are set to emerge as a free cash Company aided by improving margins and better working capital management. The rising contribution of next generation formats and value added products to further aid revenue and margin expansion.
Additionally, the Company also entered the exciting global photovoltaic which is growing at a brisk pace. The foray into the home entertainment business with value propositions which will directly discourage the rampant piracy by facilitating much higher consumption of legal home video content and expand the markets.
This not only mitigates the risk of exposure to a single industry, but both these industries are significantly less capital intensivethan the optical media industry, it is expected to improve the overall returns on invested capital.
i) SECURITY/DISASTER RISK MANAGEMENT
Natural, political and economic disturbances could disrupt operations. To counter balance this, the Company has implemented an extensive IT disaster recovery plan across all its facilities. The Company has mapped out all the related risks on these accounts and put in place sufficient risk mitigations and control mechanisms which are regularly updated and monitored.
NEW BUSINESS RISKS
Home Entertainment
This is a new business for the Company and is thus prone to execution risk, associated with any new venture. Diversity of offering and the library size will be important business drivers in this segment. To achieve a leadership position, a strong presence across all genres is critical. Moser Baer has acquired copyright/exclusive license/marketing and distribution rights for around 10,000 titles across all languages in a short period of time.
The Company has successfully created an entry barrier in the Home Video industry by acquiring a huge number of titles, and establishing a strong nationwide distribution network. The Company's distribution platform, comprising of 100k outlets, is designed to target all segments of consumers, creating incremental spend on home entertainment from all pockets of disposable income. To augment supply of titles for its Home Video business, the Company has also entered into film production, by releasing Vellitherai (the Company's first Tamil production) and Shaurya (the first Hindi production).The Company currently has 3 Hindi and 6 regional movies under production.
The Company is offering its products at the lowest rate as compared to the prevailing price for the similar legitimate products. The Company's disruptive pricing strategy will boost home video demand by lowering market prices, and thus killing the price power of pirates.
PV Business
The PV business which is also a part of the Company's new business initiatives; is prone to risks on account of being a new business, project delays, technology risk, shortage of raw material, availability of Capital for the business and shortage of manpower.
Project Execution Risk
Delay in execution of the Company's new projects can negatively impact the Company's profitability. Any delay in the Company's second phase 40 MW crystalline silicon or its Thin Film project will certainly impact the financial projections and return on investments of the Company. The Company is on track for its various projects and with a right team in place, it is confident of mitigating the risk of project delays.
Technology and commercialization risks
PV being a new business and being a high technology driven business faces the risk of commercialization. Success will be determined by the right human capital, right technology and being present at the right time. Moser Baer with its experience in high tech manufacturing, in achieving rapid scale and commercializing technology products is poised to emerge as a global leader in this rapidly growing market. The Company plans to straddle multiple future technologies and has made strategic investments in high technology startups and joint development plans and it believes that the risk is adequately mitigated. Additionally, the OM&T acquisition, which has brought in world class capabilities in thin film, wet chemical processing, optics and concentration and testing procedures, will further reduce the technology risk.
Raw material shortage risk
A global demand supply imbalance of silicon exists which can impact the PV industry. The Company has entered into medium and long term contracts for supply of silicon wafers. The Company has also made an investment in a Company as a backward integration measure. The industry is currently in the 'pass through' stage and the Company believes that any hike in raw material prices can be easily passed on to its customers.
Funding Risk
The developmental plans of the PV business; envisages strategic tie ups and technology-intensive capex projects to be executed requiring the mobilisation of funds. The Company's inability to mobilize funds would impact the business prospects. The Company intends to fund these projects through debts and internal accruals as a measure of prudence.
Human capital risk
Human capital is a distinctive business driver as the PV business is in a nascent stage and is a technology driven segment requires specialized manpower. The PV space is an emerging and complex business and challenge is in getting the right people with a deep understanding, skills and ability to take the business to the next level. The Company has put in place key technical and managerial resources.
FINANCIAL ANALYSIS
Overview
The financial statements have been prepared in compliance with the requirements of the Companies Act, 1956, and Accounting Standards in India. Our management accepts responsibility for the integrity and the objectivity of these financial statements, as well as for various estimates and judgments used therein. The estimates and judgments relating to the financial statements have been made on a prudent and reasonable basis, in order that the financial statements reflect in a true and fair manner the form and substance of transactions and reasonably present our state of affairs and loss for the year.
Revenue Analysis
The gross revenues in fiscal year 2007-08 declined by 5.6% over the previous year to INR 19,582 million, while declining margins in resulted in loss after tax of Rs.789.1 million. EBIDTA (including other income) at INR 5,339.8 million dropped by 11.3% to 25.1 %. Despite the current industry conditions and impact of appreciating rupee vis-a-vis US dollar, the Company was able to minimise decreases in its operating margin through production efficiencies and control on working capital.
Fully diluted earnings per share for FY 2007-08 were INR (4.7) against INR 6.5 in FY 07 after adjusting for Bonus issue. The Company generated gross cash flow of INR 3,526.8 million in FY 2007-08.
Capital Structure
The authorized share capital increased to INR 2,075 million from 1,425 million and the paid up equity capital post bonus issue was INR 1,682.3 million as on March 31, 2008 against INR 1,116 million in the previous year.
Reserves
The Company's reserves declined to INR 18,013.2 million in FY 08 against INR 19,852.2 million in FY 07. As on 31st March 2008, Securities premium account comprised 48% of the total reserves and General Reserves (including loss for the year) comprised the remaining 52%. There are no re-valuation reserves as on March 31, 2008.
Loans
Over the years the Company has part funded its ongoing expansions and investment programs through loans raised at aggressively at lower costs. We have also tried to build a prudent basket of currency to hedge against currency risks and minimize cost. Our currency wise total debt outstanding is as follows:-
Table on Currency-wise Total Debt Outstanding. in millionsCurrency Amount in Amount in % of Total Currency Indian Rupees Debt
USD 247.5 9,926.2 38Euro 14.1 894.8 3INR 15,352.6 15,352.3 59
During FY 08 there was a net addition of a debt of INR 8923.2 million mainly for ongoing expansion programmes of the Company and its investments into Photo Voltaic and Home Entertainment businesses. We believe that our current total debt to equity ratio of 1.3:1 and interest service cover ratio of 3.0 is still good.
FINANCIAL OBJECTIVES, INITIATIVES AND ACHIEVEMENTS
Your Company is taking proactive measures to ensure all financial costs are effectively reduced to have a positive impact on the bottomline. The Company continued to focus on efficient working capital management to release cash into the system. The Company generated INR 3,193.2 million of cash from operations as against INR 7,140.0 million in the previous year.
The ongoing foreign exchange risk management policy has been further strengthened that there is no adverse impact of volatile exchange rates beyond agreed-upon tolerance levels.
Interest
The outflow on account of interest and finance charges increased to INR 1,793.6 million in FY 08 from INR 1,244.9 million in FY 07, representing an increase of 44% primarily on account of rise in overall debt levels as well as interest costs. However, despite the hardening of interest rate, the interest cost as a percentage of the average debt for the Company was maintained at 8.3% in FY 08.
Capital expenditure
Gross block of the Company increased by INR 6,090.4 million during FY 08 to reach INR 45 billion. Majority of this increment in assets was towards creation of capacities for next generation formats and new businesses of the Company. We intend to make further investments in our Entertainment and Photovoltaic businesses. The incremental capital expenditure will be funded by a prudent mix of internal accrual and debt.
Depreciation
Depreciation increased by 20.6% in FY 08 (from INR 3,578.7 million to INR 4,315.9 million) on account of increase in gross fixed assets. Due to the flexible nature of the asset base and the relatively long life-cycle of products in the industry, we believe that the risk of the asset base becoming obsolete is low
Working capital management
The overall net working capital was 32.7% of gross revenues in FY 08 which was marginally higher from the levels of FY 07.
Working FY04 FY05 FY06 FY07 FY08Capital (INR)
Debtors 3030.2 3315.4 3798.9 3288.4 3,150.6
Days 70.1 89.5 80.1 57.9 58.7
Inventory 1985.0 3435.4 4469.9 5392.9 6.179.8
Days 45.9 92.7 94.2 94.9 115.2
Creditors 2795.4 2253.9 2151.8 3245.2 2,935.8
Days 64.7 60.8 75.5 110.1 99.9
Debtors
The Company has been able to hold its receivable cycle to 58.7 days which is well below the industry levels of 90-120 days. Debt for more than six months reduced significantly and represents only 3.8% of overall receivables of INR 120 million in FY 08, down from 4.2% and 7.3% of receivables in FY 07 and FY 06 respectively.
Loans and advances
In FY 08 the loans and advances increased to INR 2,419.2 million against INR 1,186.2 million in FY 07
Capital employed
The capital employed at INR 45,960 million increased by 20% over FY 07. The increase in capital employed is on account of Photovoltaic and other new businesses of the Company.
Management of surplus funds
The short term surpluses were invested in low risk financial instruments that optimized return and protected the invested principal.
INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY
The Company has adequate internal control systems commensurate with the size of the Company and nature of its business to provide reasonable assurance regarding adequacy of safeguard of all assets, effectiveness and efficiency of operations, reliability of financial controls and compliance with applicable statues, corporate policies and code of conduct. The internal controls are continuously reviewed for effectiveness and are augmented by written policies and guidelines.
Internal audit activity is carried out in different areas of Company's operations by internal audit team as well as by reputed firms of Chartered Accountants. Post audit reviews are carried out to ensure that audit recommendations are implemented. The scope of the internal audit activity is guided by the annual audit plan, which is approved by the Audit Committee.
The Audit Committee met four times during the year and reviewed the audit observations covering the operations on a quarterly basis and monitored the implementation of agreed action plan. The Statutory auditors were invited to attend all the Audit Committee meetings and shared their views on adequacy of internal controls.
Significant accounting policies
1. Revenue recognition
Revenue from sale of goods is recognized on transfer of significant risks and rewards of ownership to the customer and when no significant uncertainty exists regarding realization of the consideration. Sales are recorded net of sales returns, rebates and trade discounts and price differences and are inclusive of duties. Theatrical revenues from films are recognised as and when the films are exhibited. Revenues from other rights such as satellite rights, music rights, overseas assignment rights etc. is recognised on the date when the rights are available for exploitation. Service income from SEZ Division is recognised as and when services are rendered. Interest is accounted on time proportion basis taking into account the amount invested and the rate of interest. Dividend is recognised as and when the right of the Company to receive the payment is established.
2. Inventory valuation
Finished goods, work in progress, goods held for resale, raw materials and stores and spares; at lower of cost or net realizable value. Cost of raw materials, goods held for resale, packing materials and stores and spares, is determined on the basis of the weighted average method. Cost of work in progress and finished goods is determined by considering direct material, labor costs and appropriate portion of overheads. Liability for excise duty in respect of goods manufactured by the Company, other than for exports, is accounted upon completion of manufacture. Inventories under production films and films completed and not released are valued at cost. The cost of released films is amortized using the individual film forecast method. The said amortization pertaining to theatrical rights, satellite rights, music rights, home video rights and others is based on management estimates of revenues from each of these rights. The inventory, thus, comprises of unamortized cost of such movie rights. These estimates are reviewed periodically and losses, if any, based on revised estimates are provided in full. At the end of each accounting period, such unamortized cost is compared with net expected revenue. In case of net expected revenue being lower than actual unamortized costs, inventories are written down to net expected revenue. The purchase cost of the rights acquire in released films is apportioned between satellite rights and other rights (excluding home video rights) based on management's estimates of revenue potential.
3. Fixed assets
Tangible fixed assets are stated at cost less accumulated depreciation. Cost includes all expenses, direct and indirect, specifically attributable to its acquisition and bringing it to its working condition for its intended use. Expenditure pending allocation are allocated to productive fixed assets in the year of commencement of the related project. Intangible assets are stated at cost less accumulated amortization. The cost incurred to acquire 'right to use and exploit' home video titles, are capitalized as copyrights/marketing and distribution rights where the right allows the Company to obtain a future economic benefit from such titles. Impairment, if any, in the carrying value of fixed assets is assessed at the end of each financial year in accordance with the accounting policy on 'Impairment of Assets'.
4. Depreciation and amortization
Depreciation on tangible fixed assets is provided based on estimated usefull life on a pro-rata basis under the straight-line method. The depriciation rates are not below the minimum rate as specified in Schedule XIV to the Companies Act, 1956. In respect of assets whose useful life has been revised, unamortized depreciable amount is charged over the revised remaining useful life. Intangible assets otherthan copyrights/marketing & distribution rights are amortized on an equated basis over their estimated economic life not exceeding 1 Oyears. Copyrights/marketing and distribution rights are amortized from the date they are available for use, at the higher of the amount calculated on a straight line basis over the period the intangible asset is available, not exceeding 10 years, and the number of units sold during the period basis. Leasehold land and improvement to the leased premises are amortized over the period of the lease. The assets taken on finance lease are depreciated over the lease period.
5. Taxation
a) Current Tax
Provision is made for current income tax liability based on the applicable provisions of the Income Tax Act, 1961, for the income chargeable under the said Act and as per the applicable overseas laws relating to the foreign branch.
b) Deferred Tax
Deferred tax assets (DTA) and liabilities are computed on the timing differences at the Balance Sheet date between the carrying amount of assets and liabilities and their respective tax bases. DTA is recognized based on management estimates of reasonable / virtual certainty that sufficient future taxable income will be available against which such DTA can be realized. The deferred tax change or credit is recognized using the tax rates and tax laws that have been enacted or substantively enacted by the Balance Sheet date.
HUMAN RESOURCE/INDUSTRIAL RELATIONS
As we continue to grow into different businesses, we firmly believe our most important resource are our employees. It is Moser Baer's constant endeavour to keep our ready for the future by proactively looking at their development and growth. Our comprehensive HR model is aimed at fulfilling our HR vision of providing our employees a meaningful professional life and joy of association through work-life balance. In order to sustain our competitive advantage, we have given emphasis on employee-engagement across levels. Individual managers have been given the onus of enhancing engagement at their local-team level. In addition, corporate initiatives have been implemented to enhance employee engagement across the organization. For example: more than 12 Reward and Recognition schemes are implemented across the organization through which employees are appreciated for positive behaviour and/or exceptional performance. We have also deployed our values successfully in all the businesses. Besides this, development centres have been implemented to facilitate in competency-development of our employees. We have also initiated a 360 degree feedback for senior management. In addition, there has been focus on training and development. A comprehensive behavioural-training calendar is being implemented to help our employees develop various competencies. All these initiatives have helped to reach higher levels of employee-engagement across all levels, locations and businesses.
Like last year, we have also been successful in implementing the Balanced Scorecard methodology for all our businesses, and this is used as a base for cascading respective performance-targets to functions, departments and employees through our performance management system. We also have launched fast-track programmes that help deserving employees grow relatively faster in the organization.
We are proud that industrial relations have been cordial in all our manufacturing units, and we ensure that our
Communication and Benefit programmes span across all levels and locations. Our employee-friendly policies help to look at employee-involvement through various forums like Open Houses, Townhall meeting, family get-togethers family visits, coupled with a host of other communication forums. We have an open door policy and a structured grievance-redressal system to help our employees. Besides a healthy work-life balance and professional work culture, our employees work in an environment that encourages innovation and teamwork. We also have various employeecommittees so that there is shared ownership for various initiatives.
We have also been accredited SA 8000 for manufacturing locations at Greater Noida, Noida and the corporate office. As we continue to relentlessly march forward and grow our businesses while venturing into new areas, our employee strength has also increased over the last year. During the year 2007-08, the Company added 284 employees, taking the total strength to 6,138-up from 5,854 at the end of the previous financial year.
ANNUAL REPORT 2007-2008
DIRECTOR'S REPORT
Dear Shareholder,
Your Directors are pleased to present the 25th Annual Report and Audited Accounts for the financial year ended March 31, 2008. This is a milestone year for Moser Baer being the 25th year since the founding of the Company in 1983.
Financial Results (Rupees in Million)
Particulars Year ended March 31, 2008 2007
Gross sales and other income 20,873.1 21,533.7
Profit before depreciation, 5,339.8 6,022.1interest and tax but after priorperiod items
Depreciation 4,315.9 3,578.7
Interest and finance charges 1,793.6 1,244.9
Profit/(Loss) before tax (769.6) 1,198.5
Tax expenses 19.4 100.6
Profit/(Loss) after tax (789.1) 1,097.9
Profit/(Loss) carried forwardfrom last year 1,246.3 399.6
Profit/(Loss) available forappropriation 457.2 1,497.5
Appropriations:
Transfer to profit and loss account 260.1 1,301.6
Dividend (proposed)% 10 15
Operations
Revenues for FY'08 stood at 20,873.1 million, Profit before depreciation, interest and tax stood at Rs. 5,339.8 million, and Loss after tax was Rs.789.1 million. Turnover was impacted during the year by the strengthing of rupee and difficult business environment. Aggressive pricing and flat sales volumes were the two major contributory factors affecting the bottom line. However, net operating cash flow continues to be strong at Rs.3,062.8 million on the back of judicious capex spends and working capital control.
Industry consolidation and increasing demand traction in Blu-Ray are the positive hues to an otherwise sedate industry environment in near to medium term. Long term variables still remain healthy as need for storage and consumer demand continues to grow.
Market Development
Your Company continues its strategy to straddle the value chain, using innovation and product development to develop new markets. The success of this strategy has been reflected in the increase in market share with retail private labels and other select distribution channels. This has been accompanied by development of new products and product variants as'specials' and value-added products.
New Products
During the year, your Company introduced a number of new Products, including BDR 1X-6X, DVDR 8X Dual Layer, Double sided recordable discs, 'Diamond' CDR and Archival Media. The Company's in-house product development team successfully created new products for specialized customers. The Company launched 'Professional Select' Media, developed for the professional duplication market and CPRM Media with content protection for the Japanese Market.
Acquisitions
Last year's acquisition of OM&T (an erstwhile subsidiary of Philips) has added significant value to your Company's position. It has enabled us to emerge as a frontrunner in the next generation BDR formats, given OM&T's pioneering R&D work in the Blu-ray disc technology.
Photo Voltaic Project
Moser Baer Photo Voltaic Limited (MBPV) is moving towards technological leadership and sustainable competitive edge in this industry by investing in disruptive technologies. The Company has placed itself in a vantage position by spreading itself across the value chain and by developing expertise across multiple existing and future technologies. The global photovoltaic market is on a high growth curve and experts expect it to be worth US$ 40 billion by 2010.
MBPV achieved revenues of US$ 42.2 million in FY'08. The 40 MW crystalline silicon line is being expanded to 80 MW, as planned, by the end of 2008. The production capacity of solar modules has been expanded to 40 MW.
MBPV has tied up significant customer orders and MoUs, including two solar farms in Rajasthan and Punjab. The Company is aggressively pursuing tie-ups in several states to drive grid-connected solar farms to demonstrate their techno-economic viability and attractive returns as a source of green peaking power. The company is on track to ramp up the crystalline silicon cell line capacity to 180 MW in FY'09 and is tying up equipment for the 600 MW expansion of thin film capacity. The thin film project facility is nearing completion with commencement of mechanical trials expected in early May 2008.
Content Business
During the financial year, the Company's entertainment business achieved break-even and has registered revenues of US$ 38.5 million for FY07. Your Company released Shaurya, its first Hindi feature film, and Veftharai, its first Tamil film, in theatres across India. Emphasis on acquiring new title releases should give further impetus to the growth of the business, which remains on track to achieve revenues in excess of US$ 200 million by 2010.
Consumer Electronics
The Company is entering high growth areas in consumer electronics and launching multiple products. Your Company offers the best quality products, which are available at all major retail counters and major large format retail chains like Croma, Reliance, Jumbo, etc. Your Company has got a very god response for DVD Players and digital photo frames.
Your Company has launched the following products under its own brand name:
* Four models of DVD players* A model of home theatre system* A model of Digital Photo Frame (DPF).
Further, your company is in the process of launching the following products:
* Eight models of LCD TVs* MP3 and MP4 players* More DPF models* More DVD players.
Subsidiary Companies
Under the provisions of Section 212(8) of the Companies Act, 1956, the Ministry of Corporate Affairs vide its letters dated 13/03/2008 and 27/05/2008 granted the exemption under Section 212(8) of the Companies Act, 1956 from attaching the documents required under Section 212 of the Companies Act, 1956. The information required to be published in terms of the provisions of Section 212(1) of the Companies Act, 1956 is available for inspection by the investors of the holding Company and the subsidiary Companies at the registered office of the Company located at 43B, Okhla Industrial Estate, Phase III, New Delhi - 110 020.
Dividend
Your Directors are pleased to recommend a dividend @ 10% on the paid-up Equity Share Capital of the Company for the financial year 2007-08. The total payout will be Rs.19.7 crore, inclusive of dividend tax and surcharge thereon.
Directors
In terms of the provisions of Sections 255 and 256 of the Companies Act, 1956 and the Articles of Association of the Company, Mr. Arun Bharat Ram (Director) and Mr. Bernard Gallus (Director), retire at the ensuing Annual General Meeting and being eligible, have offered themselves for re-appointment.
Auditors
Price Waterhouse, Chartered Accountants, hold office until the conclusion of forthcoming Annual General Meeting and, being eligible, offer themselves for reappointment. The Company has received intimation to the effect that their reappointment, if done, will be within the limits laid down under Section 224(1 B) of the Companies Act, 1956.
Bonus Issue
During the Financial Year 2007-08, your Company announced an issue of Bonus Equity Shares in the ratio of 1:2 (one share for every two shares held) by capitalizing the reserves. As a result 56,077,035 Bonus Equity Shares were issued to the shareholders who were members or beneficial shareholders at the close of business hours on the record date i.e. July 18, 2007.
Stock Options Plans
The shareholders of the Company at the Annual General Meeting held on June 15, 2007, gave their approval to amend the Directors' Stock Option Plan (DSOP-2005) to increase the number of Equity Shares to be issued under DSOP-2005 from 450,000 to 1,000,000 and each Non-Executive Director is now entitled to receive a maximum of 100,000 stock options. Thus, 300,000 additional stock options were granted to the Non-Executive Directors of the Company. Further, pursuant to the declaration of the Bonus Equity Shares, the Compensation Committee of the Board of Directors decided to extend the benefit of the bonus issue to the employees and Non-Executive Directors who have the outstanding stock options under Employees Stock Option Plan (ESOP-2004) and Directors' Stock Option Plan (DSOP-2005). Thus, each employee and Non-Executive Directors holding outstanding stock options on the record date of bonus issue were granted bonus stock option in the ratio of 1:2, i.e. one bonus stock
option for every two stock options held.
Foreign Currency Convertible Bonds (FCCB)
Pursuant to approval of the shareholders in the Annual General Meeting held on June 15, 2007, your Company raised US$ 150 million through issue of Foreign Currency Convertible Bonds (FCCBs) with tenure of five years from their allotment. The issue received overwhelming response from the investor community and was oversubscribed by 2.25 times the issue size. The FCCB was issued in two tranches, with Tranche A being US$ 75 million and having a yield to maturity of 6.10% and a conversion premium of 25% over the closing price of Rs. 436.75 on the Bombay Stock Exchange (BSE) on June 4, 2007 and Tranche B being US$ 75 million with a yield to maturity of 6.75% and a conversion premium of 40% over the BSE closing price of Rs. 436.75 on June 4, 2007. The bonds are listed on the Singapore Exchange Securities Trading Limited.
Particulars of Employees
Particulars of employees, as required under Section 217(2A) of the Companies Act, 1956, read with the Companies (Particulars of Employees) Rules, 1975, as amended, form part of this report. However, in pursuance of Section 219(1)(b)(iv) of the Companies Act, 1956, this report is being sent to all shareholders of the Company, excluding the aforesaid information and the said particulars are made available at the Registered Office of the Company. The members interested in obtaining such particulars may write to the Company Secretary at the Registered Office of the Company.
Conservation of energy, research and development, technology absorption, foreign exchange earnings and outgo
The information pertaining to conservation of energy, technology absorption, foreign exchange earnings and outgo, as required under Section 217(1)(e) of the Companies Act, 1956, read with the Companies (Disclosure of particulars in the report of the Board of Directors) Rules, 1988 is given as per Annexure 'B' and forms part of the Directors' Report.
Fixed Deposits
During the year under review, your Company has not accepted any deposit under Section 58A of the Companies Act, 1956, read with Companies (Acceptance of Deposits) Rules, 1975.
Corporate Governance
A report on Corporate Governance, along with a certificate from the Statutory Auditors and a certificate from the Managing Director and Group CFO, have been included in the Annual Report, detailing the compliances of Corporate Governance norms as enumerated in Clause 49 of the Listing Agreements with the stock exchanges.
Management Discussion and Analysis
The Management Discussion and Analysis Report is attached and forms part of the Directors' Report.
Directors' Responsibility Statement
Your Directors state:
I. That in the preparation of the annual accounts, the applicable accounting standards have been followed;
II. That we have selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Company at the end of the financial year 2007-2008 and of the profit of the Company for that year;
III. That we have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 1956 for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities; and
IV. That we have prepared the annual accounts on a going concern basis.
Conclusion
Your Company has outperformed the industry in a challenging year and continues to maintain its leadership position. It has also been surpassing all international quality and cost benchmarks and continues to build shareholder value. Your Directors look to the future with confidence. Your Directors place on record their appreciation for the overwhelming cooperation and assistance received from investors, customers, business associates, bankers, vendors, as well as regulatory and government authorities. Your Directors also thank the employees at all levels, who, through their dedication, cooperation, support and smart work, have enabled the Company to achieve rapid growth.
For and on behalf of the Board of Directors
Sd/Place: New Delhi Deepak PuriDate : 22.05.2008 Chairman & Managing Director
Annexure-A
INFORMATION REGARDING EMPLOYEES STOCK OPTION PLAN, 2004 (ESOP) AND DIRECTORS' STOCK OPTION PLAN, 2005 (DSOP) (AS ON 31ST MARCH, 2008)'
ESOP-2004
1. Number of Stock : 4,776.300 Options granted
2. Pricing Formula : (i) Normal allocation: -Rs.125 per Option or prevailing Market Price, whichever is higher (ii) Special allocation: - 50 % of the Options at IRS. 125 per Option or prevailing Market Price, whichever is higher and the balance 5090 of the Options at Rs.170 per Option or prevailing Market Price, whichever is higher.
3. Number of : 954,075 Options vested
4. Number of : 616,125 Options exercised
5. Number of shares : 616,125 arising as a result of exercise of option
6. Number of : 1,056.800 options cancelled/lapsed
7. Variation of : Nil terms of options
8. Money realized : RS. 135,403,076 by exercise of options
9. Number of : 3,103,375options in force
10. Employee-wise : details of Options granted to:(a) Senior : a. Ms. Minni Katanya - 6,000 managerial b. Mr. Deepak Kukreja- 15,000 personnel; and c. Mr. V. C. Agerwal - 40.000 (b) Any other d. Mr. V,bhas Josn - 40.000 employee who e. Mr. Ratya Ghei - 20,000 receives a grant in f. Mr. R. Sampath - 24,000 any one year of g. Mr. Girimj Nyati - 20,000 options amounting to h. Mr Rajiv Arya - 24,0005% or more of options granted during that year.
11. Identified : Nilemployees who were granted Options during any one year, equal to or exceeding 1% of the issued capital (excluding outstanding warrantand Conversions) of the Company at the time of grant;
12. Diluted : (Rs. 4.70) Earnings Per Share (EPS) pursuant toissue of shares on exercise of option, calculated in accordance with AS 20
13. Method of : The Company has used intrinsic value method for calculation of calculating the employee compensation cost with employee respect to the stock options. compensation cost
14. Difference : Rs. 103.042.130 between the employee compensation cost so computed at serial number 13 above and theemployee compensation cost that shall have been recognized if it had used the fair value of options
15. The impact of : Impact on Profit Rs. 103.042,130 Impact on this difference on EPS-Basic-(Rs. 5.31), Diluted-(Rs. 5.31) profits 8 on EPS of the Company
16. Weighted-average a. Weighted average exercise price - RS. 370.23 exercise prices and b. Weighted average fair value of the Options- weighted average fair RS. 123.52 values of options granted during the year
DSOP-2005
1. Number of Stock : 700,000 Options granted
2. Pricing Formula : Rs.170 per Option or prevailing Market Price, whichever is higher
3. Number of : 150,000 Options vested
4. Number of : 25,000 Options exercised
5. Number of shares : 25,000 arising as a result of exercise of option
6. Number of : 50,000 options cancelled/lapsed
7. Variation of : Nil terms of options
8. Money realized : Rs. 5,707,500by exercise of options
9. Number of : 625,000options in force
10. Employee-wise : N.Adetails of Options granted to:
(a) Senior managerial personnel; and(b) Any other employee who receives a grant in any one year of options amounting to 5% or more of options granted during that year.
11. Identified : Nilemployees who were granted Options during any one year, equal to or exceeding 1% of the issued capital (excluding outstanding warrantand Conversions) of the Company at the time of grant;
12. Diluted : (Rs. 4.70) Earnings Per Share (EPS) pursuant toissue of shares on exercise of option, calculated in accordance with AS 20
13. Method of : The Company has used intrinsic value method for calculation of calculating the employee compensation cost with employee respect to the stock options. compensation cost
14. Difference : Rs. 103.042.130 between the employee compensation cost so computed at serial number 13 above and theemployee compensation cost that shall have been recognized if it had used the fair value of options
15. The impact of : Impact on Profit Rs. 103.042,130 Impact on this difference on EPS-Basic-(Rs. 5.31), Diluted-(Rs. 5.31) profits 8 on EPS of the Company
16. Weighted-average a. Weighted average exercise Price - Rs. 425.25 exercise prices and b. Weighted average fair value of the weighted average fair Options-Rs155.values of options granted during the year
The Weighted Average of Vesting Period in respect of the Options granted to the Directors under DSOP-2005 were as follows:-
Grants Weighted Average of the Vesting Period
1st Grant on 11th August, 2005 2.5 years
2nd Grant on 12th December, 2006 2.5 years
3rd Grant on 25th January, 2007 2.5 years
4th Grant on 19th June. 2007 2.5 years
The Weighted Average of Vesting Period in respect of the Options granted to the employees under ESOP-2004 were as follows:
Grants Weighted Average of Vesting Period
11th Grant on 9th January, 2004 3 years
2nd Grant on 29th November, 2004 2.5 years
3rd Grant on 2nd January. 2005 2.5 years
4th Grant on 24th June. 2005 2.5 years
5th Grant on 17th August, 2005 2.5 years
6th Grant on 27th October, 2005 2.5 years
7th Grant on 24th January. 2006 2.5 years
8th Grant on 26th April, 2006 2.5 years
9th Grant on 7th June, 2006 2.5 years
10th Grant on 27th October, 2006 2.5 years
11th Grant on 24th January, 2007 2.5 years
12th Grant on 30th April, 2007 2.5 years
13th Grant on 11th July, 2007 2.5 years
14th Grant on 25th October, 2007 2.5 years
15th Grant on 30th January, 2008 2.5 years
Fair value of options based on Black-Scholes' Enhanced Model i.e. Enhanced FASB 123 Model for DSOP-2005
Assumptions : Grant Date-11/08/05
Risk-free interest : 6.56% (for 5 years, source-NSF/Reuters as on rate 11th Aug 2005)
Expected life : 7 yrs
Expected Multiple : 1.25x
Expected : 61.46% (based on 5 years stock data from NSE) volatility
Expected : 0.58% (Weighted average dividend yield for last dividends 3 financial years)
Price of the : 228.30 underlying share in market at the time of option grant(in Rs.)
Assumptions : Grant Date -12172106 Risk-free interest : 7.56% (for 4.58 years, source-NSF/Reuters as on rate 12th December 2006) Expected life : 7 yrs Expected Multiple : 1.25x Expected : 54.73% (based on 5 years stock data from NSE) volatility Expected : 0.46% (Weighted average dividend yield for last dividends 3 financial years) Price of the : 242.60 underlying share in market at the time of option grant(in Rs.)
Assumptions : Grant Date-25/01/07 Risk-free interest : 7.68% (for 4.58 years, source-NSF/Reuters as on rate 25th Jan 2007) Expected life : 7 yrs Expected Multiple : 1.25x Expected : 55.03% (based on 5 years stock data from NSE) volatility Expected : 0.46% (Weighted average dividend yield for last dividends 3 financial years) Price of the : 319.25 underlying share in market at the time of option grant(in Rs.)
Assumptions : Grant Date-19/06/07 Risk-free interest : 7.87% (for 4.32 years, source-NSF/Reuters as on rate 19th Jun 2007) Expected life : 7 yrs Expected Multiple : 1.25x Expected : 56.20% (based on 5 years stock data from NSE) volatility Expected : 0.54% (Weighted average dividend yield for last dividends 3 financial years) Price of the : 425.25 underlying share in market at the time of option grant(in Rs.)
* Two Options granted before the record date i.e. 18 July, 2007, under the above plans, entitles the holder to three Equity Shares of the Company.
ANNEXURE B
Information as per Section 217(1)(e) of the Companies Act, 1956, read with the Companies (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988 and forming part of the Directors' Report for the year ended 31 st March, 2008.
A. Conservation of energy
Your Company's energy requirements continued to increase significantly as it commissioned new manufacturing facilities and increased production at existing facilities. As an ongoing process, the Company undertakes various measures to save energy and reduce its consumption. During the financial year 2007-08, some of the measures undertaken by the Company include:-
1) Saving of 80 KW of energy resulting in saving of Rs. 42 Lacs by removal of HEPA filters by incurring an expenditure of Rs. 0.11 Lacs for this purpose.
2) Saving of 572.2 KW of energy by increasing the hall temperature, stopping the Air Handling Units (AHU) in JB Area by reducing the exhaust quantity from productions machines. This resulted in saving of Rs. 300.7 Lacs.
3) Saving of 104.2 KW of energy and Rs. 54.8 Lacs by reducing the Air Pressure and by incurring Rs. 82 Lacs.
4) Saving of 864 KW of energy and Rs. 454.1 Lacs by installing VFDs system in AHUs.
5) Saving of 185.7 KW of energy and Rs. 97.6 Lacs by decreasing / shutting off lights of non critical areas & modification in light fittings locations for energy reduction.
6) Saving of 76.68 KW of energy and Rs. 40.3 Lacs by reducing the Air Consumption.
B. Technology absorption, adaptation and innovation, research & development
Technology absorption, adaptation and innovation
Technology plays a big role in our ability to offer a complete basket of products to our customers. Our company thus has entered agreement to acquire technology and the right to use technology belonging to other third party companies. During the year, a number of agreements were completed to acquire technology belonging to companies whose R&D efforts have been complementary to our technology development program.This technology has been successfully incorporated into some of the Company's products and an ongoing effort is being made to improve the utilization of this technology and produce newer innovative products based on this technology.
At the same time our Company is a part of many International Forums and R&D initiatives that are dedicated to the development of future formats like light scribe technology, HD-DVD and Blue-ray. Such participative activities have significantly enhanced the image of our Company as an individual entity and our country as a whole in the mind of the International community. Differential Scanning Calorimeter (DSC), Universal Testing Machine (UTM), Microinjector and Extruder have been installed at IIT BHU where our collaborative R&D work is under progress. Similarly, the co-sputtering unit has been installed at IIT Delhi which is smoothly working there.
Your Company bagged the first prize awarded by ELCINA for its R&D efforts made in the field of electronic sector. Further, your Company has been identified by some R&D institutes for collaboration and also in the process of approaching Govt. funding agencies through our own philosophical R&D projects. One R&D proposal has already been submitted to Nano Science Initiative Programme in Department of Science and Technology.
Research and Development
Research and Development efforts have been implemented in the following areas in order to support existing businesses as well as new futuristic formats and technologies beyond the optical media.
Innovative R&D efforts under progress:-
1. Co-sputtering has been achieved for the development of promising materials composition, having potential characteristics for next generation optical formats.
2. Chemical blends of polymers with sufficiently higher mechanical strength have been successfully made. Physical term is under exploration in order to obtain substitute for the substrate material for a CD and DVD.
3. Nano-structured materials for the development of alternate memory device.
4. Nano synthesis of blends for filter application.
5. Basic R&D and its application towards technology/device development are under extensive investigations in collaboration with our academia partners IIT Delhi and IIT BHU.
6. Holography- Hardcore technical feasibility is established through characterization of different kind of photopolymers for three dimensional recording.
Future plan of action is to set up holography manufacturing facility and explore digital holographic recording.
7. Uniform L*a*b Disc- is invented to uniform the color across the data area and the hub area of compact discs. This invention covers the complete idea of a CDR printable disc(possibly on DVDR), up to the hub area, which can esthetically look better after the printability exercise and the end user can print their image uniformly up to 95% of the disc area (conventional disc's uniform coverage area is - 80%).
8. Stamper Print- A stamper is made with a printing image in Stamper Print process and embossed dummy discs are replicated (L1 through this stamper). These discs are bonded with the active parts (LO) as usual. The media comes out of replication process with active layer as data and dummy layer with the customized image, as complete product.
Benefits derived as a result of the above R & D
1. As a result of the above R&D Activities, your Company is gearing-up for future storage media in the industry and gained experience in handling photopolymer from the point of view of data storage & further ready to cope with the market requirements in the next generation data storage.
2. Stamper Print has given the insight of cost saving through innovative method. The turn around time to the customer will improve with respect to the processing time. A fully automatic process without any intervention at line during production with a single stop solution.
3. Uniform L*a*b Disc- New product which has the aesthetic uniformity across the disc and we are first in the market with such a product. This product would be a value added product for the company.
Capital expenditure of Rs. 104.9 million and recurring expenses of Rs. 16.5 million were incurred during the year towards R&D expenses, which is 0.6% of the total turnover of the Company.
These expenses are part of expenses incurred under various revenue or capital heads.
C. Foreign exchange earnings and outgo
Total foreign exchange earned comprising of FOB value of exports, interest, insurance claim and dividend received was Rs. 13,442.1 million, whereas total foreign exchange used (comprising of CIF value of imports, dividend and other outgoings) was Rs. 9,551.7 million.
For and on behalf of the Board of Directors
Sd/-Place: New Delhi Deepak PuriDate : 22.05.2008 Chairman & Managing Director
MANAGEMENT DISCUSSION AND ANALYSIS
OVERVIEW
2008 marks Moser Baer's twenty fifth year. It was in 1983, in New Delhi, that Moser Baer India was founded to manufacture time devices in technical collaboration with Maruzen Corporation, Japan, and Moser Baer Sumiswald, Switzerland.
Today Moser Baer ranks among the world's leading technology companies operating in distinct business verticals: optical storage media; solar energy; entertainment; IT peripherals and consumer electronics. Moser Baer's products are sold in over 80 countries and it employs more than 7,500 people.
Through these 25 years it has been Moser Baer's endeavour to achieve technological leadership and operate in all its business at on internationally competitive global scale. This has been possible through a carefully-planned and sustainable business model: low costs, high margins, high profits, reinvestment and capacity growth.
FY 2007-08 has been a year of growth for Moser Baer. The Company strengthened its position as a well diversified organization with presence in high-growth, technologydriven global scale businesses providing superior returns on investment (ROI). The year has seen contribution from the new businesses of Moser Baer growing significantly.
Improving operational efficiencies and optimal use of assets (fixed and working capital) helped the Company maintain a positive trend in the face of difficult industry environment in the optical media.
During the year, the Company maintained its leadership position in the global optical media industry. The Company further strengthened its unique technology and IP position in the Blu-ray format through its own pioneering work, coupled with strong in-house R&D in development of high definition formats, giving the Company a strong position as a technology developer.
OPTICAL STORAGE MEDIA
Driven by a combination of factors, the global blank optical media Industry went through a difficult period during the financial year. End consumer demand for CDR continued to remain flat with early signs of decline in developed markets. DVDR maintaines a positive growth trend during the year with robust demand from developed as well as emerging markets. Flash memory devices had a marginal impact on the re-writable market in PC Segment (for data interchange application). The industry witnessed a short term overcapacity situation with excess inventory in the supply chain due to patent licensing issues with some of the other players. This resulted in a downward pressure on prices. Strategic Marketing & Decisions (SMD) estimates global demand for blank optical media products to be over 22 billion units in 2008, representing a strong demand growth over 2007.
A notable development during the year was the emergence of Blu-ray disc (BDR) as the future High Definition media format, with Toshiba announcing the discontinuation of HD DVD investments in mid-February, 2008. This settlement will accelerate the adoption of the format by different stakeholders, including retail, studios, components, hardware, drive makers, software vendors, line integrators and media manufacturers. The industry expects exponential growth for the BDR format in the coming years. Moser Baer is the first non-Japanese supplier of BDR and this development will give the Company a significant advantage in the anticipated growth of the BDR market.
Moser Baer Developments FY 2007-08 (Optical Storage Media)
During the year, the Company evolved into a technology driven, multiple business transnational by adding high growth technology driven businesses to its portfolio. These businesses have the potential to significantly increase combined revenues and overall returns on invested capital.
FY 2007-08 was a difficult year for the global blank optical media industry, which has been significantly challenged by the overall demand-supply situation. Alternative technologies for data storage also impacted growth in the optical media sector. The steep appreciation in the rupee also resulted in margin erosion. At the same time, energy costs faced a huge escalation driven by steep increase in crude prices, in turn impacting furnace oil costs. Consequently the Company's operating and financial parameters were under severe pressure and clearly below the sustainable levels for medium to long term.
Margin erosion in the year under review notwithstanding, the base optical media business remains significantly cash accretive, driven by higher asset turnover and sharp improvement in working capital cycles. In overall terms, growth and returns remain attractive from a long term perspective.
The High Definition formats are likely to give the Company a growth edge and with BDR winning the race against HD DVD, the industry should witness faster penetration compared to earlier projections, clearly giving the Company a significant edge.
With the Company's continued focus on improving manufacturing efficiencies, growing market share, proprietary technology and 'first to market' position in next generation Blue-ray laser-based formats, the Company is well poised to benefit from improved industry dynamics and high growth potential.
During the year, the Company retained its global position as one of the largest producer of optical storage media. It also continues to maintain its lead as a technology developer through its relentless efforts on R&D and various technology collaborations.
In FY-08, the Company maintained its status as one of the top rung suppliers of the next generation High Definition formats through its earlier acquisition of OM&T from Philips last year, which brought several technologies with it, giving it a head start over its rivals. The Company's pioneering work in Blu-ray phase change technology and a unique IP position should provide a significant competitive edge to the Company and enable it to change the cost dynamics for the format to the consumer. As per Strategic Marketing & Decisions (SMD) the demand for blue laser based formats is set to exceed over 122 million discs by 2009 from a few million units at present, and the Company is well positioned to capture a significant share of this emerging opportunity.
Moser Baer's acquisition of an 81% stake in OM&T B.V, a highly specialized technology Company, has started bearing fruit in terms of exploiting cutting edge technologies. This acquisition strongly complements the existing research being done in Moser Baer's R&D Centre in India and helps the Company to be at the forefront of technology in both the optical and solar photovoltaic (PV) segments.
OM&T provided significant contribution to the development of alternate Blu-ray technology and its commercialization to enhance the leadership position of Moser Baer in this format.
The Company's aggressive strategy over the past year has started to yield results with fringe players finding it hard to sustain themselves. Industry consolidation and increasing demand traction in Blu-ray are the positive cues to an otherwise sedate industry environment in the near to medium term. Long term variables still remain healthy as need for storage and consumer demand continues to grow. Moser Baer is investing judiciously in new generation technologies as the optical media business continues to generate substantial free cash in a difficult environment.
In blank optical media, production was disrupted in midyear due to problems in the power plant. The issue was fully resolved and capacity optimization will be achieved by mid-2008. Turnover was also impacted during the year by the strengthening of rupee and the difficult industry environment.
Overall, aggressive pricing and flat sales volume were the two major contributory factors affecting earnings; however, net operating cash flows continue to be strong on the back of judicious capex spends and working capital control.
The size of the blank optical media market in India is over one billion discs. The market has grown by 17 per cent yearon-year. CDR is a predominant format accounting for 80 per cent of the Indian market. DVDR has grown exponentially by almost 100 per cent over last year.
The overall Indian market is growing at 15 per cent with DVD growing at 50% year-on-year. For CDR the market is expected to be flat. ASP of imports has been very low leading to price erosion. Antidumping duty has been imposed from March 2008 for CDR imports from 10 countries, which has considerably reduced the imports of CDRs. Firming up of global prices will also help the Company to improve the realization from the domestic market.
Strategy
Short term
* Leverage 'first to market' and IP position in next generation Blu-ray laser formats
* Leverage existing R&D and technology capabilities in expanding the product portfolio
* Enhance the contribution of value added products (Specials).
Long Term
* Consolidate global leadership position
* Improve Return on Capital Employed (ROCE) and asset turnover
* Target 'first to market' in near field and holographic technologies.
Near-term Operational Objectives
Optical
* Further augment technological and cost leadership
* Scale up the contribution of value-added next generation products and penetrate markets with these products
* Continuously launch new innovative products for customers, in conjunction with new drive launches
* Drive working capital efficiencies and generate free cash flows
* Develop strategic alliances for efficient raw material supplies.
SOLAR PV BUSINESS
Global Industry Scenario
Despite the mid term outlook of high oil and natural gas prices, global energy demand continious to grow. The most rapid growth is expected from non OECD* (Organization for Economic Cooperation and Development members) member countries due to the strong economic growth in these countries.
Renewable energy sources like geothermal, solar and wind constitute approximately 2.2 per cent of the world energy generation. Solar energy contributes 0.1% of the world's total energy needs. Solar energy costs are declining while base load and retail costs are increasing; indicating that grid parity could be reached earlier than estimated. Price declines drive elasticity of demand. A current cost reduction rates, a bulk of the solar industry will reach grid parity within nearly 10 years. Solar generated electricity can be cost competitive with grid when costs fall to $2.5/watt.
Despite increased availability of polysilicon from new and existing players, demand from Europe (Spain, Italy, and Germany) has been very strong. A key trend in the solar energy sector is the diversification away from the top three markets-Germany, Japan, and the US-which together drove almost 85% of solar demand in 2006-07. Progress in Spain and other European countries form the key variables for demand in 2008. Progress in Italy and the US remain the key variables for demand in 2009.
Higher energy costs, declining fossil fuel supplies and a thrust on reducing carbon emissions have ensured that that the worldwide interest in the renewable energy space, and particularly PV, continues to grow. Driven by recent significant technological advancements, it is estimated that the solar market will have a 43% CAGR and is poised to achieve grid parity in the short to medium term. Current demand projections translate to a market value of US$5070 billion by 2010.
Matching these demand projections, incentives from government led subsidies, and better margins have ensured that there is global interest from large market participants.
The robust growth in last few years will be further accelerated by reducing the PV energy costs. Development of disruptive technologies within the PV space will also contribute to accelerated cost reduction.
Currently, PV generates less than one percent of the world's electricity needs, leaving a massive potential market. The International Energy Agency(IEA)estimatesthatgovernments and the private sector will invest around US$10 trillion to expand and upgrade global electricity infrastructure over the next 30 years.
Apart from the developed world, governments in the Asia Pacific region are continuing to strengthen their policies and support for the implementation of technologies that can produce power with lower emissions than traditional technologies, such as power plants using coal, gas, or oil as a fuel source. The Indian and Korean feed in tariff initiatives are a step in this direction.
Indian Government has recently announced subsidy plans ranging between US$750/kW (US$0.75/watt) for installed capacity for residential or commercial use and US$1,250/ kW ($1.25/watt) for community and institutional use. The Central Government also announced feed-in-tariffs of up to US$0.30 per kWh for grid connected solar PV capacity of 1 MW and above. Some of the Indian states have also announced independent programmes to support large size solar PV installations.
Moser Baer's Endeavours
The Company aims to distinguish itself as a significant player in the global photovoltaic market by leveraging its highvolume manufacturing expertise and planned investments of nearly US$ 3.2 billion in research, development and manufacturing of products dedicated to generating solar power.
The Company realizes that PV markets have different needs and emerging technologies have to be developed today to realize the world's future energy needs. It has already announced investments in a mix of currently available and emerging technologies as follows:
* A first of its kind 80 MW, state-of-the-art, fully automated in-line horizontal crystalline silicon cell manufacturing facility.
* A 80 MW module manufacturing facility.
* In excess of 600 MW amorphous silicon thin film module capacity, capable of producing the world's largest non-flexible thin film modules.
* A high concentrator photovoltaic (CPV) module manufacturing facility and multi-million dollar investments in : Solfocus Inc., a US-based Company and the developer of the CPV technology in partnership with the world renowned PaloAI to Research Centre(PARC),California. The technology is based on gallium arsenide cells, originally developed for extra-terrestrial solar applications and environments
* A significant equity stake in Solaria, a US-based technology Company that has developed a unique form of low-concentration solar PV technology. It is capable of producing power equivalent to two to three times the
power produced by conventional PV modules, using the same amount of silicon material
* A significant minority stake in Stion Corporation, a nano structures development Company based in the Silicon Valley, California, for producing extremely low-cost solar power generating surfaces
* Acquisition of 40% equity stake in Solar Value, Proizvodnja dal, a solar grade silicon production facility in Slovenia, to provide access and assurance of supply to low-cost solar grade silicon. The initial test results of the facility have been encouraging and the development of commercial scale facilities is underway
* An R&D centre dedicated for the improvement and rapid commercialization of solar technology products is coming up in Greater Noida.
In addition to the above, the Company has invested in strategic partnerships involving the entire value chain, particularly for strategic sources such as silicon ingots and wafers, glass, etc. through short-term and long-term supply agreements.
ENTERTAINMENT & MEDIA INDUSTRY
The Indian Entertainment and Media (E&M) industry report 2008, jointly issued by FICCI and Pricewater house Coopers, says: 'Home video rights is becoming a sizeable chunk of revenue for film producers with the rise in disposable incomes, increased affordability of DVD players and home theatre systems and shorter release windows. Further, the entry of players such as Moser Baer has changed the entire model prevalent for last several years from rental to a sell through.'
The Indian E&M industry has been growing at a healthy rate in the last few years and the trend is expected to continue for the next few years. In 2007, the E&M industry recorded a growth of 17% over the previous year, higher than the forecasted growth of 15% projected in the previous year. The industry reached an estimated size of Rs. 513 billion in 2007, up from Rs. 438 billion in 2006.
Home video market has also witnessed dynamic changes in the last four years, having achieved a growth rate of 30 per cent over the period 2004-2007. Its contribution stands at 8% of the overall film industry revenues in 2007, up from 6% in 2004. In 2007, the home video market is estimated at Rs. 7.5 billion, up from Rs. 6.5 billion in 2006, translating into a growth of 15% from the previous year. Year-wise growth of the Indian film industry in different segments:
Moser Baer Entertainment offers home video titles in various Indian languages at unmatched prices and is also engaged in media content creation.
Moser Baer is today India's largest home entertainment Company and the first to offer home videos in every popular language of India. It currently offers home video titles in Hindi, English, Tamil, Telugu, Malayalam, Kannada, Marathi, Gujarati, Bengali and non-film categories.
Moser Baer Entertainment has acquired the rights for close to 10,000 titles in all the popular languages and has released almost 4,000 of them in the market.
The Company has established a strong presence across the country in all major metros, as well as in smaller towns through an active and well-organized multi-tiered channel. The Company has released video content in DVD and Video CD formats using Moser Baer's proprietary and patented technology that ensures the highest quality standards and significantly reduces cost. The movie titles come with worldclass packaging.
CONSUMER ELECTRONICS
Having established itself as a global leader in the high technology manufacturing space and the global blank optical storage media industry, Moser Baer is leveraging its existing synergies, established brand equity and large distribution network in the domestic market to enter the PC peripherals market. Moser Baer brand is recognized for high quality products which the Company extended during the year
In Rs billion 2005 2006 2007 CAGR 2004-07
Box office-Domestic 46.5 52.8 64.0 71.5% growth - 14% 21% 15%
Box office-Overseas 5.0 5.7 7.0 8.5% growth - 13% 24% 19%
Home Video 3.4 4.0 6.5 7.5% growth - 18% 63%* 30%
Ancillary revenues 5.0 5.7 7.0 8.5% growth - 13% 24% 19%
Total 59.9 68.1 84.5 96.0% growth - 14% 24% 17%
* Moser Baer entered the Home Video market in 2007
into the fast growing PC peripherals market in India. The Company has entered this market by launching products in five metros. The product segment launch complements existing optical media business and leverages Moser Baer's strong brand equity.
Currently the IT vertical industry (PCs and notebooks) is pegged at Rs. 20,000 crore and the PC peripherals industry is worth Rs. 12,000 crore.
Moser Baer has already established itself as a major player in the USB drives and memory cards market. Its foray into PC peripherals in the form of ODDS will further help in strengthening its position is the industry.
OPPORTUNITIES AND THREATS
Optical Storage Media
Opportunities
1. A first-to-market and unique IP position in the next generation Blu-ray based formats provides a significant competitive edge and growth opportunity as demand for these formats grows exponentially over the next two or three years. With a first mover advantage in this segment, the Company is likely to earn high margins on High Definition formats during the initial stages.
2. The Company has emerged as one of the largest players in the DVDR/RW formats in the world and continues to strengthen its position in the global market which is growing at a healthy clip of over 20% p.a.
3. Domestic market: India is one of the fastest growing markets for Optical Media. The Company has a strong Brand and presence in the channel and is well positioned to dominate this captive market.
Threats
1. Alternative technologies: Given Moser Baer's presence in high technology businesses, managing technology evolution and being at the forefront of the technology curve assumes prime importance. Threats of technology obsolescence exist at all times in the optical media space. However, over the years, the Company has evolved from a being a technology innovator to becoming a developer and to emerge as a technology driven Company, thereby mitigating this threat.
2. Prices of key inputs: Polycarbonate for optical media is a critical key raw material, and is influenced by a variety of factors, including crude prices, demand-supply balance, etc. Any sharp increase in prices or demand supply imbalances could adversely impact business. The Company works on strategic sourcing relationships and has long term agreements with key vendors for critical raw materials. This should ease the impact of any pricing volatility and improve production planning.
3. Anti-dumping and anti-subsidy / government policies: The Company derives a significant part of its revenues from international markets. These have seen a growing protectionist attitude and a tendency by some local governments to use antidumping and trade protection tools to provide protection to local businesses.
However, the Company continues to keep a close watch on this front and take necessary steps to minimize any fallout.
4. Fall in product prices: As products move into the mature phase in their life-cycle, they start to emulate commodity type characteristics. Also, optical media industry has relatively high capital intensity; hence a sharp fall in prices could severely impact overall returns. The Company has been consistently improving its asset turnover by installing more efficient lines, improving product mix towards higher value added products, etc. The leadership position in high value next generation formats should further improve these returns.
PV Business
Opportunities and Threats-Industry Risks
In the short term, Government subsidies play a significant role in the development and promotion of solar power across the globe. The subsidies have to be promoted and encouraged for the next 4-6 years, until solar achieves grid parity and becomes cost competitive. Interest rates also play a key role to ensure good return for investors, thereby promoting its growth. Moser Baer has been championing the development of solar energy in India through several means. The recently announced feed-in-tariff scheme, which was a cumulative effort of several groups and organizations, has created on investor friendly regime and will rebuilt in a significant creation of solar power capacity.
Entertainment & Media Industry
Opportunities:
The new emerging revenue streams like animation, gaming, merchandise, etc are creating new business opportunities for E&M Industry. Next-generation technologies will reinvigorate maturing segments and drive E&M growth. Digital television and IPTV are replacing analog, thus expanding the potential market for advertisers and subscribers. Digital distribution of content in terms of digital music and digital cinema holds huge opportunities for growth in the entertainment industry, making content available in even smaller towns where it cannot currently reach in its physical form. Digital platforms are also facilitating rollouts of PPV and Video on-demand services, thereby fueling overall growth. Additionally, DVDs have revitalized home video, with rapid growth in the sell through market. Also, there are enormous opportunities for the Indian E&M industry in the overseas market.
Threats:
The major threat in E&M Industry is rising content price and piracy.
SEGMENT WISE AND PRODUCT WISE PERFORMANCE
Optical Storage Media
CDR/RW
Consumer demand for the CDR/RW Format continues to grow in BRIC and Middle Eastern markets, somewhat compensating for the decline in the developed markets. There are however, certain niche applications and professional segments, which continue to witness growth in the CDR space.
Meanwhile global CDR/RW supply continues to consolidate through some of the capacities being converted to DVDR and also on account of closure of inefficient capacities around the world. This may help CDR/RW demand-supply balance return to equilibrium, thereby providing some stimulus to arrest the decline in CDR/RW pricing in the medium term.
DVD/RW
Shifting consumer preferences, increasing drive penetration and improving price-value proposition of DVDR/RW media continues to lead the growth for the format. As per SMD global shipments of DVDR/RW Formats rose 20% y/y in 2008 to 7.5 billion units from the preceding year. SMD expects DVDR/RW shipments to touch almost nine billion units in 2008, representing a further 20% growth. The DVDR/RW media prices are expected to continue to follow the manufacturing cost curve, enabling reasonable margins for manufacturers. The DL format gives further opportunities in coming years, which although smaller in terms of absolute volumes, has been showing good growth rates.
Solar PV Business
Polysilicon supplies are likely to remain tight until 2010. Analyst reports and market sentiments suggest that companies that have secured the most polysilicon supplies for the next few years are best positioned in the market. As costs remain relatively stable, industry will continue to generate attractive returns on the employed capital.
At Moser Baer Photo Voltaic, we continue to secure polysilicon through long term supply contracts. We believe that our ongoing contracts with Deutsche Solar, REC, GSM and now LDK puts us in a comfortable and competitive position on the supply front.
At current price levels, wafer costs make up to 75% of total cell costs and hence access to reasonably priced silicon is essential to maintain healthy margins. Improved conversion efficiencies and using thinner wafers are key to reducing costs.
Solar module (panel) prices are more meticulously tracked than overall system costs. The market in 2008 has been erratic - an environment that is seeing rising prices for all products. This situation is mainly due to the rush to meet project deadlines in Spain before revision of feed-in-tariffs. However, the industry estimates suggest that over the long term, the Average Selling Prices (ASP) of the solar energy equipment is set to fall by 5-7% per annum driving the enormous demand growth.
The BoS includes all costs other than the module (including inverter, cabling and the structure; and installation/service) that go into a solar installation. Despite making up for 40% of total installation costs (and sometimes much more), the impact of the BoS costs on module ASPs is often overlooked and is a major opportunity in the future for cost reduction.
The Company stabilized its first 40 MW of production line in crystalline silicon cell manufacturing during the year. Currently, Moser Baer is in the process of scaling up the initial 40 MW capacity to 80 MW.
Thin Films
Various thin-film technologies are in development to reduce the amount of light absorbing material required to produce a solar cell. Thin-film PV modules are produced through the deposition of a light absorbing film on a substrate (eg, glass).
Some of the advantages of thin film include:
* Reduced dependence on polysilicon
* Lower overall cost as significantly lower active material less than 1 % vs. conventional)
* Higher energy generation throughout the day compared with silicon panels, given the ability to generate energy in low light
* High throughput manufacturing process and equipment.
Currently, there are three main technologies available in the thin films area:
* Amorphous Silicon (a-Si) Thin Films, (61 %)
* Cadmium Telluride (CdTe) Thin Films (34%)
* Copper Indium Gallium Selenide (CIS & CIGS) (5%)
(% in brackets indicates share of technology in current thin films market)
Rapid scalability, high potential for cost reduction and stable manufacturing processes made amorphous silicon as the thin film technology of choice for Moser Baer Photo Voltaic. MBPV has tied up with Applied Materials Inc. for setting up the initial 40MW line that is currently undergoing trials. A road map has been developed to enhance the thin film capacity to more than 600OMW by 2010.
Lower supply side constraints, higher efficiencies (through tandem junction technologies), and high product stability are key growth drivers for Thin Film PV which is estimated to be 20% of the global PV market by 2010. It is estimated that with low overall costs, the sub-dollar module cost through thin films technology may be a reality. MBPV has decided to participate in this competitive technology segment through significant investments and is positioned to be among the market leaders.
Concentrating Photo Voltaics (CPV)
CPV use mirrors and/or lenses to focus sunlight on a small piece of semiconductor material and use a fraction of the polysilicon to produce electricity.
Concentrator solar is ideally suited for regions receiving high levels of solar insolation (exposure to sunlight) including parts of North America and the tropics. CPV offers significant potential for rapidly lowering the Levelized Cost of Electricity (LCOE) to end customer while growth in this segment will be driven through demonstrated sustenance of CPV and lower costs. Several countries including Spain have been promoting CPV growth through specific MW sized demonstration initiatives.
MBPV through strategic participation in high concentration (Solfocus) and low concentration (Solaria) seeks to capture the opportunities offered in this technology space.
The Company started manufacturing High Concentration SoIFocus panels at its facility in Greater Noida during the year and shipped the panels to various SoIFocus installations.
The Company is working closely with SoIFocus Inc., USA to scale up the manufacturing operations and indigenization of majority of components to drive down the manufacturing costs of the panels.
PV Systems
PV penetration levels in India - either through off-grid (110MW aggregated capacity) or on-grid (2MW) have been low considering India receives good solar insolation for the majority of the year. In an attempt to boost the PV market in India, the Government recently announced subsidy driven tariffs and income tax exemptions. Consequent to this, it is estimated that the annual market potential in the short to medium term would be in the range of 150-500MW. The potential is offered through both off-grid (rural electrification) and state supported large grid connected projects
With an ability to deploy the appropriate PV technology for the right market, the MBPV Systems group seeks to build on the market potential and is working actively towards seeding the market. The group has recently signed MOU's with the Rajasthan and Punjab state governments and is working closely with financing institutions and other overseas agencies for cost effective offerings.
OUTLOOK
Optical Storage Media
Next generation formats
With the end of High Definition format war, BDR/RE technology is likely to grow faster than anticipated earlier and has the potential of significantly mitigating the impact of slow down in some of the earlier formats. During the year, commercial shipments of this next generation format continued from Moser Baer and other major Japanese manufacturers. The current pricing for these formats continues to be 20-25 times that of the DVD formats.
As per the US-based Strategic Marketing and Decisions, the demand for BDR formats is expected at grow sharply to over 1.7 billion discs over the next three years on account of increasing applications driven by high definition video content and improving price value proposition offered by these formats as their pricing curve approaches the inflection point required to expand market demand.
Given the complexity and manufacturing capabilities required to mass produce these formats, only a small select group of companies will emerge as key players in this high growth segment, thereby increasing the differentiation between the technology innovators and developers and the tier-II companies over the long term.
Solar PV Business
The market outlook for 2008 is very strong and we expect strong growth due to growth in select regions including US, Europe and Asia. However, the second half of 2008 will be carefully observed given the limited demand visibility due to changes in Spain, Germany and the United States and uncertainty around the ramp of new polysilicon entrants in China and elsewhere. The industry seems to be marching towards rapid growth (3X-4X in the near future) with scale reduction for the end consumer.
Moser Baer continues to look at the market aggressively with a mix of technology products capable of addressing different market needs within the PV applications.
Entertainment and Media Industry
The Indian film industry is projected to grow by 13% CAGR over the next five years, reaching a size of Rs. 176 billion in 2012 from Rs. 96 billion in 2007.
The home video market is expected to significantly shift in the next five years given the developments in 2007. Though an overall growth of 15% is projected over the next five years, in line with the previous years, the current rental market domination is projected to significantly reduce to 25% in 2012 from 95% in 2006 in favour of the sellthrough market.
The penetration of home video subscribers is expected to increase from 10% of the pay-TV homes in 2007 to 25% in 2012. This translates into an addition of 41 million subscribers over the next five years period. Though the home video subscribers are expected to increase in the next five years, the sell-through prices expected to decline over the forecast period from a current average of Rs. 90 in 2007 to Rs. 50 in 2012.The home video market is thus projected to double its size to Rs.15 billion in 2012 from the current Rs. 7.5 billion in 2007, translating into a cumulative growth of 15% over the five-year forecast period.
RISKS AND CONCERNS
Running a business in any environment has risks that are as varied as they are copious. Stringent and effective risk management throughout the organization is imperative to succeed in the fierce business environment. An effective risk management framework drives continued competitive sustainability of an organization as it enables alignment of operations and activities of the organization to its vision and values.
At Moser Baer the vision is to establish and maintain enterprise-wide risk management capabilities for active monitoring and mitigating the risks on continuous basis.
BUSINESS RISK MANAGEMENT
A strong risk management framework is in place at Moser Baer that enables active monitoring of the business environment and identification, assessment and mitigation of internal or external risks. Given the established processes and guidelines we already have in place, combined with strong oversight and monitoring system at the Board, we believe, we have a robust risk management strategy in place.
Our senior management team sets the overall tone and risk culture of the organization through defined and communicated corporate values, appropriate delegated authority and a set of processes and guidelines. We have a process to inform Board members about the risk assessment and risk minimization procedures. We promote strong ethical values and high levels of integrity in all our activities, which in itself is a significant risk litigator.
RISK ENVIRONMENT
Moser Baerisaglobal leader inthedevelopment,manufacture and supply of technology products across the globe and is fast transforming into a multi-business technology group. All three businesses-optical media, photovoltaic and content distribution-have an inherent risk quotient. These risks may stem from technology obsolescence, high customer concentration, commodity cycles and geographical risks, among others. The Company is, however, well positioned to manage and mitigate these risks.
A solid entrenchment is observed with CDR, whereby huge global installed bases of readers and writers have served to provide the format with considerable staying power even in the face of existing new options. The versatility of the CD and DVD format families has served to establish them as a bridge between the information storage and entertainment segments, extending their utility and reach. The growth of DVDs not only maintains backward compatibility with CDs, but also opens up complementary new video, multi-media, and game application segments, further strengthening the global mass appeal of the 120 mm disc formats.
The Company expects these factors to result in stable/ marginal declining market for CDR media, while DVDR and the next generation Blu-ray laser based media will drive the growth in the medium to long term.
The Company's strategy is to transform Moser Baer from a technology recipient into a technology developer and innovator. Strong R&D will enable us develop high value products which will build the differentiation barriers in the long term. The world is moving towards High Definition content. This is a significant technology shift in the global optical media industry and will radically change the consumer's viewing experience. According to the US-based Strategic Marketing and Decisions (SDM), the demand for the next generation high definition formats is expected to be two billion discs over the next three years. A notable development during the year was the emergence of Blu-ray disc as the clear winner in format rivalry. The Company is in technology leadership position in the Blu-ray media.
This intensive R&D thrust will help us to further consolidate our global leadership position in the optical media space.
STEPS TAKEN TO MITIGATE TECHNOLOGY
RISKS
The Company's technology-led optic media storage products being part of a very active market segment are prone to significant technological risks. These risks exist in a number of critical areas, all of which can have considerable commercial implications. As a prudent and forward-looking organization, Moser Baer has invested substantially in R&D and engineering to address and mitigate risks in all these areas, often with multiple degrees of redundancy:
* Strong in-house R&D capabilities enable the Company to rapidly commercialize new products
* Longstanding strategic partnerships with key technology providers, allows the Company to access new technologies
* Cooperative links with all major hardware suppliers facilitate drive/media compatibility
* Seamlessly future-proofing our capital investments assure evolutionary capabilities of manufacturing infrastructure
* Technology collaborations and tech sourcing arrangements with global technology companies in emerging areas
* Acquisitions of pioneering companies in optical media R&D, will enhance the leadership position of Moser Baer in the next generation optical format race.
OTHER RISKS AND KEY MANAGEMENT INITIATIVES
a) INDUSTRY RISK MANAGEMENT
The Company operates in an industry where technology trends are constantly changing and evolving which may jeopardize future growth. The Company, however, faces no immediate threat from the dynamic environment in which it operates. On the contrary, it stands to benefit from the current growth trends in the DVDR format. It also stands to benefit from the demand for the next generation High Definition formats, which is expected at two billion discs over the next three years.
In line with the long term strategy of creating multiple synergistic businesses, the Company entered into the entertainment industry through the Indian home video market last year. This business is identified as an important value-enhancing, forward integration initiative to the optical media business. It will de-commoditize the blank optical media business due to the higher value addition to its products. The entertainment business is significantly less capital intensive compared to optical media business and will contribute to improving the overall returns on invested capital. The Company has made a foray into film production.
Additionally, the Company entered into the exciting global photovoltaic industry, which is growing at a rapid pace. The PV industry is also significantly less capital intensive than optical media industry and it is expected to improve the overall returns on invested capital.
During the year Company further strengthened its position in IT peripherals market by launching new products. Further, the Company also entered into the consumer electronics market and intends launching various products next year.
Entry into these businesses mitigates the risk of exposure to a single industry.
b) CUSTOMER ATTRITION RISK CONTROL
Over-dependence on a few customers could impact revenues in the event of attrition. The Company with its combined value proposition of high quality standards, competitive prices, and excellent service will continue to expand its customer base. The Company believes the event of customer attrition and the chances of an adverse impact on the Company would be low.
c) GEOGRAPHIC RISK MANAGEMENT
Concentration of customers and revenue bases in a close geographic area may impact growth in case some of these regions are not performing up to expectations. A geographically concentrated revenue base may impact growth in the case of some of these regions not delivering as per expectations.
The consumer base is primarily addressed through global technology OEMs which sell products indifferent continents across the globe. As we supply to global customers, the geographical risk is mitigated. Additionally, we continue to focus on emerging and new markets.
d) PEOPLE RISK MANAGEMENT
Quality of our human resources charts the success and growth potential of our business.
The Company has managed to keep attrition rates well in control by imbibing a sense of ownership and pride and strong HR initiatives geared to nurturing latent talent and unlocking the power of intellectual capital. The Company continues to drive organization development and also build management resources for a multi-business enterprise.
e) COMPETITION DE-RISKING
As installed capacities in global data storage industry have risen, prices have declined. The Company has addressed thisthrough an unbeatable price-value proposition: superior quality, timely delivery, attractive price and introduction of new value added products.
f) FAILURE TO FORECAST ACCURATELY
Understanding and forecasting emerging trends in the technology space is critical. The Company has strengthened its forecasting and S&OP process for high level production planning and plans for key materials.
g) FAILURE TO ENTER INTO LONG TERM CONTRACTS FOR CRITICAL RAW MATERIALS AND CONSUMABLES
Sharp commodity cycles and demand-supply imbalances in critical raw material can severely impact operations. The Company has entered into long term contracts for procurement of critical raw material and continues to work on other long term strategic sourcing arrangements with key raw material suppliers, to significantly mitigate this risk.
h) CASH FLOW RISK
Moser Baer operates in a high growth and capital intensive industry. Hence, it is imperative to efficiently estimate and manage cash flows in this volatile environment. The Company's working capital arrangements are well in place to guard against any uneven or seasonal factors. We are set to emerge as a free cash Company aided by improving margins and better working capital management. The rising contribution of next generation formats and value added products to further aid revenue and margin expansion.
Additionally, the Company also entered the exciting global photovoltaic which is growing at a brisk pace. The foray into the home entertainment business with value propositions which will directly discourage the rampant piracy by facilitating much higher consumption of legal home video content and expand the markets.
This not only mitigates the risk of exposure to a single industry, but both these industries are significantly less capital intensivethan the optical media industry, it is expected to improve the overall returns on invested capital.
i) SECURITY/DISASTER RISK MANAGEMENT
Natural, political and economic disturbances could disrupt operations. To counter balance this, the Company has implemented an extensive IT disaster recovery plan across all its facilities. The Company has mapped out all the related risks on these accounts and put in place sufficient risk mitigations and control mechanisms which are regularly updated and monitored.
NEW BUSINESS RISKS
Home Entertainment
This is a new business for the Company and is thus prone to execution risk, associated with any new venture. Diversity of offering and the library size will be important business drivers in this segment. To achieve a leadership position, a strong presence across all genres is critical. Moser Baer has acquired copyright/exclusive license/marketing and distribution rights for around 10,000 titles across all languages in a short period of time.
The Company has successfully created an entry barrier in the Home Video industry by acquiring a huge number of titles, and establishing a strong nationwide distribution network. The Company's distribution platform, comprising of 100k outlets, is designed to target all segments of consumers, creating incremental spend on home entertainment from all pockets of disposable income. To augment supply of titles for its Home Video business, the Company has also entered into film production, by releasing Vellitherai (the Company's first Tamil production) and Shaurya (the first Hindi production).The Company currently has 3 Hindi and 6 regional movies under production.
The Company is offering its products at the lowest rate as compared to the prevailing price for the similar legitimate products. The Company's disruptive pricing strategy will boost home video demand by lowering market prices, and thus killing the price power of pirates.
PV Business
The PV business which is also a part of the Company's new business initiatives; is prone to risks on account of being a new business, project delays, technology risk, shortage of raw material, availability of Capital for the business and shortage of manpower.
Project Execution Risk
Delay in execution of the Company's new projects can negatively impact the Company's profitability. Any delay in the Company's second phase 40 MW crystalline silicon or its Thin Film project will certainly impact the financial projections and return on investments of the Company. The Company is on track for its various projects and with a right team in place, it is confident of mitigating the risk of project delays.
Technology and commercialization risks
PV being a new business and being a high technology driven business faces the risk of commercialization. Success will be determined by the right human capital, right technology and being present at the right time. Moser Baer with its experience in high tech manufacturing, in achieving rapid scale and commercializing technology products is poised to emerge as a global leader in this rapidly growing market. The Company plans to straddle multiple future technologies and has made strategic investments in high technology startups and joint development plans and it believes that the risk is adequately mitigated. Additionally, the OM&T acquisition, which has brought in world class capabilities in thin film, wet chemical processing, optics and concentration and testing procedures, will further reduce the technology risk.
Raw material shortage risk
A global demand supply imbalance of silicon exists which can impact the PV industry. The Company has entered into medium and long term contracts for supply of silicon wafers. The Company has also made an investment in a Company as a backward integration measure. The industry is currently in the 'pass through' stage and the Company believes that any hike in raw material prices can be easily passed on to its customers.
Funding Risk
The developmental plans of the PV business; envisages strategic tie ups and technology-intensive capex projects to be executed requiring the mobilisation of funds. The Company's inability to mobilize funds would impact the business prospects. The Company intends to fund these projects through debts and internal accruals as a measure of prudence.
Human capital risk
Human capital is a distinctive business driver as the PV business is in a nascent stage and is a technology driven segment requires specialized manpower. The PV space is an emerging and complex business and challenge is in getting the right people with a deep understanding, skills and ability to take the business to the next level. The Company has put in place key technical and managerial resources.
FINANCIAL ANALYSIS
Overview
The financial statements have been prepared in compliance with the requirements of the Companies Act, 1956, and Accounting Standards in India. Our management accepts responsibility for the integrity and the objectivity of these financial statements, as well as for various estimates and judgments used therein. The estimates and judgments relating to the financial statements have been made on a prudent and reasonable basis, in order that the financial statements reflect in a true and fair manner the form and substance of transactions and reasonably present our state of affairs and loss for the year.
Revenue Analysis
The gross revenues in fiscal year 2007-08 declined by 5.6% over the previous year to INR 19,582 million, while declining margins in resulted in loss after tax of Rs.789.1 million. EBIDTA (including other income) at INR 5,339.8 million dropped by 11.3% to 25.1 %. Despite the current industry conditions and impact of appreciating rupee vis-a-vis US dollar, the Company was able to minimise decreases in its operating margin through production efficiencies and control on working capital.
Fully diluted earnings per share for FY 2007-08 were INR (4.7) against INR 6.5 in FY 07 after adjusting for Bonus issue. The Company generated gross cash flow of INR 3,526.8 million in FY 2007-08.
Capital Structure
The authorized share capital increased to INR 2,075 million from 1,425 million and the paid up equity capital post bonus issue was INR 1,682.3 million as on March 31, 2008 against INR 1,116 million in the previous year.
Reserves
The Company's reserves declined to INR 18,013.2 million in FY 08 against INR 19,852.2 million in FY 07. As on 31st March 2008, Securities premium account comprised 48% of the total reserves and General Reserves (including loss for the year) comprised the remaining 52%. There are no re-valuation reserves as on March 31, 2008.
Loans
Over the years the Company has part funded its ongoing expansions and investment programs through loans raised at aggressively at lower costs. We have also tried to build a prudent basket of currency to hedge against currency risks and minimize cost. Our currency wise total debt outstanding is as follows:-
Table on Currency-wise Total Debt Outstanding. in millionsCurrency Amount in Amount in % of Total Currency Indian Rupees Debt
USD 247.5 9,926.2 38Euro 14.1 894.8 3INR 15,352.6 15,352.3 59
During FY 08 there was a net addition of a debt of INR 8923.2 million mainly for ongoing expansion programmes of the Company and its investments into Photo Voltaic and Home Entertainment businesses. We believe that our current total debt to equity ratio of 1.3:1 and interest service cover ratio of 3.0 is still good.
FINANCIAL OBJECTIVES, INITIATIVES AND ACHIEVEMENTS
Your Company is taking proactive measures to ensure all financial costs are effectively reduced to have a positive impact on the bottomline. The Company continued to focus on efficient working capital management to release cash into the system. The Company generated INR 3,193.2 million of cash from operations as against INR 7,140.0 million in the previous year.
The ongoing foreign exchange risk management policy has been further strengthened that there is no adverse impact of volatile exchange rates beyond agreed-upon tolerance levels.
Interest
The outflow on account of interest and finance charges increased to INR 1,793.6 million in FY 08 from INR 1,244.9 million in FY 07, representing an increase of 44% primarily on account of rise in overall debt levels as well as interest costs. However, despite the hardening of interest rate, the interest cost as a percentage of the average debt for the Company was maintained at 8.3% in FY 08.
Capital expenditure
Gross block of the Company increased by INR 6,090.4 million during FY 08 to reach INR 45 billion. Majority of this increment in assets was towards creation of capacities for next generation formats and new businesses of the Company. We intend to make further investments in our Entertainment and Photovoltaic businesses. The incremental capital expenditure will be funded by a prudent mix of internal accrual and debt.
Depreciation
Depreciation increased by 20.6% in FY 08 (from INR 3,578.7 million to INR 4,315.9 million) on account of increase in gross fixed assets. Due to the flexible nature of the asset base and the relatively long life-cycle of products in the industry, we believe that the risk of the asset base becoming obsolete is low
Working capital management
The overall net working capital was 32.7% of gross revenues in FY 08 which was marginally higher from the levels of FY 07.
Working FY04 FY05 FY06 FY07 FY08Capital (INR)
Debtors 3030.2 3315.4 3798.9 3288.4 3,150.6
Days 70.1 89.5 80.1 57.9 58.7
Inventory 1985.0 3435.4 4469.9 5392.9 6.179.8
Days 45.9 92.7 94.2 94.9 115.2
Creditors 2795.4 2253.9 2151.8 3245.2 2,935.8
Days 64.7 60.8 75.5 110.1 99.9
Debtors
The Company has been able to hold its receivable cycle to 58.7 days which is well below the industry levels of 90-120 days. Debt for more than six months reduced significantly and represents only 3.8% of overall receivables of INR 120 million in FY 08, down from 4.2% and 7.3% of receivables in FY 07 and FY 06 respectively.
Loans and advances
In FY 08 the loans and advances increased to INR 2,419.2 million against INR 1,186.2 million in FY 07
Capital employed
The capital employed at INR 45,960 million increased by 20% over FY 07. The increase in capital employed is on account of Photovoltaic and other new businesses of the Company.
Management of surplus funds
The short term surpluses were invested in low risk financial instruments that optimized return and protected the invested principal.
INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY
The Company has adequate internal control systems commensurate with the size of the Company and nature of its business to provide reasonable assurance regarding adequacy of safeguard of all assets, effectiveness and efficiency of operations, reliability of financial controls and compliance with applicable statues, corporate policies and code of conduct. The internal controls are continuously reviewed for effectiveness and are augmented by written policies and guidelines.
Internal audit activity is carried out in different areas of Company's operations by internal audit team as well as by reputed firms of Chartered Accountants. Post audit reviews are carried out to ensure that audit recommendations are implemented. The scope of the internal audit activity is guided by the annual audit plan, which is approved by the Audit Committee.
The Audit Committee met four times during the year and reviewed the audit observations covering the operations on a quarterly basis and monitored the implementation of agreed action plan. The Statutory auditors were invited to attend all the Audit Committee meetings and shared their views on adequacy of internal controls.
Significant accounting policies
1. Revenue recognition
Revenue from sale of goods is recognized on transfer of significant risks and rewards of ownership to the customer and when no significant uncertainty exists regarding realization of the consideration. Sales are recorded net of sales returns, rebates and trade discounts and price differences and are inclusive of duties. Theatrical revenues from films are recognised as and when the films are exhibited. Revenues from other rights such as satellite rights, music rights, overseas assignment rights etc. is recognised on the date when the rights are available for exploitation. Service income from SEZ Division is recognised as and when services are rendered. Interest is accounted on time proportion basis taking into account the amount invested and the rate of interest. Dividend is recognised as and when the right of the Company to receive the payment is established.
2. Inventory valuation
Finished goods, work in progress, goods held for resale, raw materials and stores and spares; at lower of cost or net realizable value. Cost of raw materials, goods held for resale, packing materials and stores and spares, is determined on the basis of the weighted average method. Cost of work in progress and finished goods is determined by considering direct material, labor costs and appropriate portion of overheads. Liability for excise duty in respect of goods manufactured by the Company, other than for exports, is accounted upon completion of manufacture. Inventories under production films and films completed and not released are valued at cost. The cost of released films is amortized using the individual film forecast method. The said amortization pertaining to theatrical rights, satellite rights, music rights, home video rights and others is based on management estimates of revenues from each of these rights. The inventory, thus, comprises of unamortized cost of such movie rights. These estimates are reviewed periodically and losses, if any, based on revised estimates are provided in full. At the end of each accounting period, such unamortized cost is compared with net expected revenue. In case of net expected revenue being lower than actual unamortized costs, inventories are written down to net expected revenue. The purchase cost of the rights acquire in released films is apportioned between satellite rights and other rights (excluding home video rights) based on management's estimates of revenue potential.
3. Fixed assets
Tangible fixed assets are stated at cost less accumulated depreciation. Cost includes all expenses, direct and indirect, specifically attributable to its acquisition and bringing it to its working condition for its intended use. Expenditure pending allocation are allocated to productive fixed assets in the year of commencement of the related project. Intangible assets are stated at cost less accumulated amortization. The cost incurred to acquire 'right to use and exploit' home video titles, are capitalized as copyrights/marketing and distribution rights where the right allows the Company to obtain a future economic benefit from such titles. Impairment, if any, in the carrying value of fixed assets is assessed at the end of each financial year in accordance with the accounting policy on 'Impairment of Assets'.
4. Depreciation and amortization
Depreciation on tangible fixed assets is provided based on estimated usefull life on a pro-rata basis under the straight-line method. The depriciation rates are not below the minimum rate as specified in Schedule XIV to the Companies Act, 1956. In respect of assets whose useful life has been revised, unamortized depreciable amount is charged over the revised remaining useful life. Intangible assets otherthan copyrights/marketing & distribution rights are amortized on an equated basis over their estimated economic life not exceeding 1 Oyears. Copyrights/marketing and distribution rights are amortized from the date they are available for use, at the higher of the amount calculated on a straight line basis over the period the intangible asset is available, not exceeding 10 years, and the number of units sold during the period basis. Leasehold land and improvement to the leased premises are amortized over the period of the lease. The assets taken on finance lease are depreciated over the lease period.
5. Taxation
a) Current Tax
Provision is made for current income tax liability based on the applicable provisions of the Income Tax Act, 1961, for the income chargeable under the said Act and as per the applicable overseas laws relating to the foreign branch.
b) Deferred Tax
Deferred tax assets (DTA) and liabilities are computed on the timing differences at the Balance Sheet date between the carrying amount of assets and liabilities and their respective tax bases. DTA is recognized based on management estimates of reasonable / virtual certainty that sufficient future taxable income will be available against which such DTA can be realized. The deferred tax change or credit is recognized using the tax rates and tax laws that have been enacted or substantively enacted by the Balance Sheet date.
HUMAN RESOURCE/INDUSTRIAL RELATIONS
As we continue to grow into different businesses, we firmly believe our most important resource are our employees. It is Moser Baer's constant endeavour to keep our ready for the future by proactively looking at their development and growth. Our comprehensive HR model is aimed at fulfilling our HR vision of providing our employees a meaningful professional life and joy of association through work-life balance. In order to sustain our competitive advantage, we have given emphasis on employee-engagement across levels. Individual managers have been given the onus of enhancing engagement at their local-team level. In addition, corporate initiatives have been implemented to enhance employee engagement across the organization. For example: more than 12 Reward and Recognition schemes are implemented across the organization through which employees are appreciated for positive behaviour and/or exceptional performance. We have also deployed our values successfully in all the businesses. Besides this, development centres have been implemented to facilitate in competency-development of our employees. We have also initiated a 360 degree feedback for senior management. In addition, there has been focus on training and development. A comprehensive behavioural-training calendar is being implemented to help our employees develop various competencies. All these initiatives have helped to reach higher levels of employee-engagement across all levels, locations and businesses.
Like last year, we have also been successful in implementing the Balanced Scorecard methodology for all our businesses, and this is used as a base for cascading respective performance-targets to functions, departments and employees through our performance management system. We also have launched fast-track programmes that help deserving employees grow relatively faster in the organization.
We are proud that industrial relations have been cordial in all our manufacturing units, and we ensure that our
Communication and Benefit programmes span across all levels and locations. Our employee-friendly policies help to look at employee-involvement through various forums like Open Houses, Townhall meeting, family get-togethers family visits, coupled with a host of other communication forums. We have an open door policy and a structured grievance-redressal system to help our employees. Besides a healthy work-life balance and professional work culture, our employees work in an environment that encourages innovation and teamwork. We also have various employeecommittees so that there is shared ownership for various initiatives.
We have also been accredited SA 8000 for manufacturing locations at Greater Noida, Noida and the corporate office. As we continue to relentlessly march forward and grow our businesses while venturing into new areas, our employee strength has also increased over the last year. During the year 2007-08, the Company added 284 employees, taking the total strength to 6,138-up from 5,854 at the end of the previous financial year.
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