"When we started, we were laggards-6-9 months behind the world. Today, we are ahead of the world" Deepak Puri Managing Director/ Moser Baer

Every minute, seven compact discs roll off the manufacturing line at Moser Baer's (MB's) Greater Noida optical storage plant. The machines hum with metronomic precision, beating raw polycarbonate into optical storage discs. This is high-tech, capital intensive manufacturing that is Moser Baer's forte. The 24-year-old Delhi-based company is the second-largest manufacturer of optical storage devices (read: CDs and DVDs) in the world; the largest is Taiwan's CMC Magnetics Corporation.

Emerging from a prolonged downturn in its core business, Moser Baer is now crafting a strategy to diversify and expand in line with Founder and Managing Director Deepak Puri's vision of growing into an engineering- and technology-driven business. "The transformation is about growing from a single-product manufacturing company to a conglomerate with multiple high-growth businesses," says Executive Director Ratul Puri. The goal: ramp up each of these modules into $500 million (Rs 2,150 crore) to $1 billion (Rs 4,300 crore) businesses. The company has also transformed itself into a technological leader. Says Deepak Puri: "When we started (in the optical media business), we were laggards-6-9 months behind the world. Today, we are ahead of the curve."

The evidence? Moser Baer is at the cutting edge of emerging optical formats in storage-Blu-ray discs and high density DVDs or HD DVDs. MB was the first to market the HD DVDs, selling the initial batches at prices as high as $8 (then Rs 360) apiece in August 2006. The price is now down to $7 (Rs 301) apiece. MB's recent acquisition of OM&T, a fully-owned subsidiary of the Netherlands-based Philips, puts it at the forefront of Blu-ray format as well. "OM&T is the only manufacturer outside of Japan to be shipping Blu-ray discs," says Puri Senior. This over-riding emphasis on being ahead of the technology curve is helping the company keep its leadership position in its core business. But the scenario wasn't this bright even two years ago.

Moser Baer reported a net loss of Rs 11.15 crore in the April-June quarter of 2005-06 (it showed a profit for the full year, though). Severe global pricing pressures coupled with competition from other low-cost producers and rising raw material prices eroded the exceptional returns that the industry was known for. Though the downturn was not unexpected, its duration and severity came as a rude shock.

Ashish Dhawan, Senior Managing Director of private equity firm ChrysCapital, which invested in Moser Baer during this downturn, says: "The downturn lasted longer than any of us had anticipated." Cost efficiencies helped sustain Moser Baer during this phase. It was also a period of learning, and the lessons were immediately implemented. Ratul recounts that despite the downturn, the company continued pumping funds into the business. Over the last four years, Moser Baer has invested over $1 billion (Rs 4,300 crore) and a large chunk of this has been spent on climbing up the technology curve.

As the downturn began petering out in early 2006, the hugely capital-intensive blank optical storage business again showed promise of generating massive amounts of free cash. "A year ago, we felt that over the next three years, the blank optical business would generate around $500 million (Rs 2,150 crore) of cash," says Ratul. So, an expansion and diversification was clearly in order. The big question was: in which industries? "Part of that free cash will be deployed in businesses that are adjacent to our existing business. Synergies will have to come from marketing, distribution, manufacturing and research and development," says Ratul.

"The transformation is about growing a single-product firm into a conglomerate with high-growth businesses" Ratul Puri Executive Director/ Moser Baer

This decided, the debate then shifted to Moser Baer's competencies. Yogesh B. Mathur, Group CFO, explains: "The investment areas had to be high-growth, high-technology industrial sectors where Moser Baer's competencies could make a difference." (see The Moser Baer Matrix)

The photovoltaic (PV) space-where solar PV arrays are used to convert the sun's energy into electricity-was an obvious choice "as the skills required here are very similar to those in the optical media (OM) business," says Rajesh Khanna, Managing Director, Warburg Pincus, which invested in the company in 2000. However, as Puri points out, globally, the industry is driven by government subsidies; this makes for a difficult operating environment. More importantly, there were internal differences; son Ratul had reservations about the PV foray. "However, he was convinced by the numbers," the father recounts.

The next problem that emerged was the span of technologies prevailing in the PV market. Here, MB has placed calculated technology bets. It has acquired minority stakes in PV companies focussed on different spheres of the technology. "Moser Baer and Germany's Q-Cells are probably the only two PV companies that have a strategy of spreading the technology risk over multiple investments," says Jeff Osborne, alternate energy analyst with CIBC World Markets, a Canada-based research firm. This gives the company an IPR exposure to developments in different technologies and also makes it the manufacturer of choice for these tech companies, helping it stay ahead of the curve.

"The core business is quite capital-intensive. The newer businesses are less so" Yogesh B. Mathur CFO/ Moser Baer

Even as it scouted around for emerging technologies in its chosen space, the company began building a crystalline silicon (C-Si)-based plant at its renewable energy Special Economic Zone in Greater Noida. This technology is proven and currently dominates the PV market with over an 80 per cent market share. The c-Si plant is expected to start commercial production any time now, even as work on the thin film plant carries on at a fast and furious pace (see MB's Photovoltaic Gambit). All the bets may not pay off, but Ravi Khanna, Head (PV Business), points out: "You have to participate in technology development, not wait for the outcome."

The upsides are huge as seen from the valuations of listed PV firms-ranging from price-earnings multiples from the high teens to 30s-40s. Q-Cells, listed on the Frankfurt Stock Exchange, has been trading at 25 times its estimated 2007 earnings. Significantly, MB's share price has almost doubled in the last one year from a low of Rs 162 to over Rs 300.

Another obvious diversification was a forward integration of the storage business into the home entertainment content (read: movies) business. "Though more closely aligned to the core business, entertainment has been a bigger diversification for the company," says ChrysCap's Dhawan.

Rampant piracy, a fragmented content market, coupled with high prices for licensed end products (Rs 150-350) had been the bane of several organised players. Moser Baer's unique selling proposition in this field was the price of the licensed software-Rs 28 for a cd and Rs 34 for a dvd. The result was astounding-two million pieces were sold within 48 hours of its launch in Tamil Nadu in December. These were numbers that the established players were clocking in a year. Now, MB is putting in place a distribution model along the lines of an FMCG company. "If a movie is available at the price of a chocolate, then it should be as easily available as well," says Harish Dayani, CEO, Entertainment Business.

Moser Baer has unobtrusively been buying intellectual property and now owns, or has exclusive licences to, 7,000 titles across languages, and plans to ramp up this number to 10,000-12,000 films over the next few years at a cost of Rs 430 crore. The margins are wafer thin, but like its core business, this, too, is a volumes game.

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Driving prices lower through larger volumes seems to be the leitmotif across the entire spectrum of businesses for Moser Baer. However, there is a critical difference as Mathur explains: "The core business is quite capital-intensive. The newer businesses are less so." For instance, the optical media business had an asset-turnover ratio of 0.6-0.7-60-70 paise of turnover for every rupee of capital invested-till a couple of years ago. This has improved to 1-2. In the entertainment and PV businesses, it is as much as 3-7.

All this might well sound like a mad and frightening rush towards diversification. But there is a method in the madness. Mathur points to the 3M model of diversification-into seemingly disparate industries linked by a set of core competencies. John Levack, MD, Electra Partners, one of the earliest private equity investors in Moser Baer, says: "The approach seems quite sensible."

The dreams are ambitious, but Ratul is clear that "nobody can doubt our execution capabilities". The big picture is in place and so are several of the smaller pieces. Now, Puri and his team has to string them together.