Citi research: Moser Baer India (MOSR.BO) Alert: Fund Raising in Private Entity

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Moser Baer India (MOSR.BO)
Alert: Fund Raising in Private Entity
 What's New — Press reports suggest that Moser Baer Projects Private Ltd
(MBPPL, a non-listed entity), promoted by the founders of Moser Baer India Ltd
(MBIL, the listed entity), has announced a fund raising of Rs5.8b from Macquarie
SBI Infrastructure Fund. The investors have taken a 'significant minority stake' in
MBPPL's 2,520MW thermal power project at Anuppur in Madhya Pradesh. The
first phase of this project with capacity of 1,200 MW will cost Rs62.4b and is fully
funded, according to press reports (e.g., in livemint.com and Reuters).

 Previous round of fund raising — This recent round of fund raising comes on
the back of MBPPL having raised Rs13.5b from US-based private equity firm
Blackstone in August 2010.
 How are MBPPL and MBIL related? — Simply put, they are not related at all.
MBPPL's principal investors are the promoters of MBIL with the firm managed by
professionals. The listed entity MBIL only has a minority stake of Rs4.9m in
MBPPL (paid up capital Rs10b) – less than 0.1%.
 Maintain Sell — The news of fund raising may have a positive rub-off effect on the
stock price of the listed entity. However, with a total debt of Rs32.6b as of FY10
(D/E of 1.8x), there is a need for deleveraging the balance sheet in our view, and
with continued expectations of losses in FY11/12, we maintain Sell / High Risk
(3H).


Moser Baer India
Valuation
Our Rs60 target price is derived from a sum-of-parts (SOTP) methodology. We
value the optical media business at 0.75x Mar'12E EV/Capital employed. Over
FY05-07 (prior to its venture in the PV business), Moser Baer traded at an average
EV/Capital employed of 1.0x (in a 0.8-1.3x range). We believe that it will continue
to trade towards the lower end as the optical media business has not improved
significantly over the past few quarters. We value the PV business at 1.0x Mar'12E
EV/Sales, a ~25-30% premium to established global cell and module PV players,
despite Moser's limited operating history in this segment. We apply a premium
because Moser has some capacity on thin film technology, where multiples are
much higher than for cell and module PV makers. We use EV/Sales because its
PV margins are difficult to forecast in a ramp-up stage with a wide divergence in
margins for players in the PV industry. We value the home entertainment business
at 1.0x Mar'12E EV/Sales, given its decent growth phase.

Risks
We rate Moser Baer shares High Risk, despite our quantitative risk-rating system
suggesting Low Risk. We believe this is justified given the risk inherent in the
optical media business and given the early stages of the company's PV and home
entertainment businesses. The key upside risks that could support the shares
above our target price include: (1) Improvements in the ASP and margins of optical
media discs, (2) Improvement in margins for the solar industry, (3) Listing of the
PV business, and (4) Higher crude oil prices, leading to enhanced interest in solar
cell and module makers.