Economy & Nation   Exclusive
Warburg Pincus’ dud investment in Moser Baer: An honest mistake?

Warburg Pincus, a private equity giant, sold its investment in Moser Baer after taking a massive loss. It is strange that Warburg took 12 years to realise what was apparent long time ago

The private equity giant Warburg Pincus has sold almost its entire stake in Moser Baer, for a huge loss, a few days ago. Warburg Pincus' love affair with a dubious company like Moser Baer has been an eternal mystery to us. What took Warburg Pincus so long to figure out that done a terrible investment? Moser Baer's share price has been down over 70% in the last one year. It touched its 52-week low of Rs10.95 (BSE) on 15 May 2012.

Those who have an elementary knowledge of Indian companies and corporate governance would have watched with eternal surprise how Warburg believed and funded Moser Baer's different dubious business ideas. We had pointed out that Warburg Pincus had made a terrible bet on Moser Baer three years ago in passing (Cash Machine-Check the 'Empire Building' section of the article). Let's go back 10 years when Warburg should have got alerted on the telltale signs. Moser Baer was a fast-growing, high-tech, export-oriented company having huge margins and 10% of the global market of its products in early 2000. And yet, it P/E was just around 7. The extraordinarily fat margins, ballooning revenues and bumper profits in a commodity business should have made Warburg suspicious. Few analysts ever covered Moser. When it was in the business of CDs, Moser Baer claimed to have a 10% of share of the global market. Its two key competitors Ritek and CMC Magnetics (both of Taiwan) at that time supplied nearly 50% the world's recordable, compact discs (CD-Rs). Their gross margins were under 20% in 2001. What was Moser Baer doing better than even the world leaders? Nobody could tell.

Moser Baer claimed to have a cost advantage of around 20% over its competitors. The business, which was high-tech and fully automated, is apparently labour-intensive too. The company claimed to employ 2,000 engineers and technicians for its 700 million capacity. Labour costs were claimed to be 4.7% of total operating costs compared with roughly 15% for the Taiwanese companies. That apparently accounted for half of the gross-margin differences with the Taiwanese. Secondly, for a company operating in high-cost India, Moser claimed that its capital cost was 20%-25% lower than competitors. Thirdly, its raw material cost is also supposed to be lower due to vertical integration and making in-house dyes. One bizarre explanation came from an ignorant analyst, quoted in the Asian Wall Street Journal:  Moser Baer's cost of power was 75% of that of its Taiwanese competitors because the Taiwanese factories were located across several floors, while Moser Baer's factory is all on one floor! "Maybe it requires more power to move things vertically than horizontally, because it takes more traction and energy to move upward than sideways," the analyst has been quoted as saying.

Another analyst speculated that Moser negotiated a lower royalty payment with Philips, which holds a patent for CD-Rs. But Ritek's spokesman Shaun Lee was quoted by the Journal as saying that "Ritek's royalty payment is 3.5 to 4 cents per unit, and it's the same for the whole industry." Moser Baer corroborates this. The management even offers a technology factor for lower costs. In an interview to the Journal, Ratul Puri said: "We are able to coat one disc (with dye chemicals) in about six to seven seconds compared with the conventional process that takes eight to ten seconds. That improves capacity (now 760 million pieces per year), resulting in 25%-30% cost savings." He also said the technology enables the company to price some products 10%- 30% higher. While there is no way to verify this, the market obviously does not believe this. Meanwhile, lots of questions are unanswered.

  •  Moser's products are commodity products. There is overcapacity in CDR and prices are not going up. Inventory build-ups are common. How can a manufacturer command high margins in this situation?
  •  The company claims to have nine major global brands as customers to whom it provides just-in-time delivery/local packaging/product & distribution management. It also claims to have strong brands and has penetrated large superstores in Europe. How does it manage such fine logistics out of a country like India when other exporters are frustrated?
  • There were several strange accounting signals. Although its margins and cash flow are very high, MBI has huge debts and high interest burden. In shady companies, this is a sign that cash routing is taking place to boost sales through borrowed money. While this may not be the case in MBI, it creates suspicion and explains the terrible P/E. Moser Baer claims that its investment cost is 10 cents of working capital and 27 cents of capital investment leading to 10 cents of PBIT. But only when it stops investing will the financial picture be clear.  

The business model was clearly hollow. If that was not enough of cause of concern for Warburg, alarm bells started ringing loudly when SR Batliboi, auditors of Moser Baer, resigned mid-way without certifying the full-year results for 2003. It is extraordinary that Warburg continued to back Moser management after this.

When a business model does not work, Indian businessmen either restructure or plan for a new business. As oil prices have been high since 2007, Moser cooked up the idea of getting into solar power-with more cash from Warburg. When you saddle a company, especially in one whose product is essentially a commodity, with lots of debt (and convoluted ideas), its interest costs alone will eat up the profits, leaving little or no room to not only service the debt but also to do any sort of business and a drastic decline in governance. The markets will be able spot this from a mile which is why Moser remained a 'cheap' stock.

But all such tricks come to an end and not surprisingly, the company has reported losses for the four consecutive years preceding 2011. In fact, its numbers have got so bad that it is currently undergoing Corporate Debt Restructuring for its businesses. Very few foreign institutional investors seriously bought this stock. Warburg Pincus was alone in keeping the faith for a very long time.

According to Bombay Stock Exchange filing, a company called Global Town Investments, which operates from Seychelles, has picked up Warburg Pincus' stake sale. Interestingly, the promoters of the firm hold only 16.29% of the company while Global Town Investments hold 24.5%  of the stake (which is just shy of an open offer trigger), making the latter the largest single shareholder of the company.

The question is, was it all an honest mistake on the part of Warburg, a large and smart global PE player? And that too, for over a decade? Or were Warburg managers were active partners in this game of value destruction?

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    11 months ago

    what is the minority position in such bankcurrupt company ?

    R Balakrishnan

    8 years ago

    Of course, now they want to acquire Future Capital. What does one make of this? Competence, value or vested motives? Will one talk about this in the future as another 'honest mistake"??

    R Balakrishnan

    8 years ago

    Most of the FII's, esp those that run their operations with expat Indians as the key person for investing in to India, end up getting in with wrong players. Or else, they get corrupted. All of them go by the intensity of the presentation and none of them have the ability nor or they willing to pay for due diligence on promoters, which cannot be done by banking firms.
    They will continue to be conned and bribed with everything, by Indian investment bankers and promoters. Warburg Pincus is no exception to the rest.

    a v moorthi besides TIHAR

    8 years ago

    Ratul Puri , the scion of Moser Bayer empire has recently announced commissioning of 100 MW of solar capacity which is likely to be increased to about 300MW shortly. MBI group is likely to invest around Rs 3,500 crores in this fiscal. MBI expects the solar power to contribute about 20% of group revenue by 2015. MBI has raised about a billion US$ in equity for their global solar capacity if this is true then MBI group could be one of top funded solar power developer of India. Waburg Pincus investments in CD/DVD business of MBI may in hindsight look an honest mistake because of rapid change in technology so it would not be fair to call MBI as a dubious company. If some body was really dubious it was Kulwant Rai firm Usha Rectifiers who swallowed over Rs 700 crores of Bank finance in late 1980s.



    In Reply to a v moorthi besides TIHAR 8 years ago

    You seem to know better than Warburg guys which were in the board :)

    Economy & Nation   Exclusive
    Unimpressive quarterly earnings results show cost pressures

    Sales growth of the 415 companies that have declared their results so far, have been excellent but their margins have been squeezed, leading to very poor profit growth

    A Moneylife research has shown that the latest quarterly earnings have been subdued. Sales of 415 companies in our sample which have declared results so far for the final quarter of the 2012 fiscal, increased by 19%. Although the sales increase was excellent, it wasn’t enough to boost operating profits, which went up by only 3% while net profits showed a marginal increase of just 4%. Hardly impressive at all.


    Overall, India Inc’s net profit margins have shrunk, from 11.30% to 9.85%, a 145 basis percentage points decline. Out of the 415 companies taken for consideration, over 60% of the companies saw their quarterly net profit margins shrink, year –on-year, which is a high percentage. This is despite four out of five firms saw recorded sales increase. This clearly shows cost pressures.

    The stock markets shot up in Jan-Feb period, hoping for improved profit growth. When this realisation set in, in late April, stocks started going down. The Sensex is up only 4.50% since the beginning of the year. Usually the market will factor in future expectations well in advance, and Sensex at one point of time was up 18.76% when the European crisis was at its peak. Clearly, the market has misread not only the earnings but the situation in Europe seems to have worsened.

    Among individual companies, Infosys had issued poor FY13 guidance. The stock tumbled 10% on the news. This is not surprising, but market took the opposite tack (i.e. it was surprised) and should have factored the future well in advance.

    Reliance Industries reported a decline in its operating profits and bottomline of 33% and 21.2% respectively. Bharti Airtel also reported a drop in net profit by 14% to Rs1,574 crore, due to increased cost and poor sales (only 9% increase).

    Another company which has reported poor results was Hindustan Zinc, which saw its net profit shrink by nearly 10% year on year, to Rs1,412 crore, due to lower zinc prices.

    On the brighter side, we have Hindustan Unilever which posted strong sales increase of 16% to take its topline to Rs5,765 crore. We had written a story on this earlier, and the same can be accessed here: (Hindustan Unilever’s strong margin expansion shows consumption is one bright spot in the Indian economy).

    Tata Consultancy Services, also reported good results after its sales increased 30% to Rs10,371 crore during the quarter. It became the first Indian Information technology (IT) company to cross the $10 billion threshold, when it posted annual revenues of $10.17 billion. 

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    8 years ago

    A very good analysis indeed but, pardon my saying so, rather lopsided too as the entire emphasis is on profit-maximisation at the cost of the larger interest of the country's urgent economic needs. True, business is NOT tantamount to charity, but can business houses of a country really ignore the people at large of their own country (I mean the country where the business is located)? Big business must shed its tradesman's attitude of the 16th and 17th centuries and make the so-called "corporate social responsibility" inter alia of employment generation, etc., as reality.

    Economy & Nation   Exclusive
    RIL does not hold stake in any media company – True or False?

    It may be true that on paper, RIL does not hold any stake in any media company, as the minister stated in Rajya Sabha. However, the Reliance group now openly controls Eenadu TV and the Network18 Group

    India's largest private sector entity, Reliance Industries Ltd (RIL), owned by billionaire Mukesh Ambani, does not have any direct holding in media houses or companies, listed or unlisted in print, broadcast and production. This is the written reply given by minister of state in the Ministry of Corporate Affairs, RPN Singh in the Rajya Sabha.

    However, since the question may not have been asked correctly, the answer is an incomplete one. Earlier, this year, Independent Media Trust, a trust set up by Mr Ambani's flagship RIL agreed to fund promoters of both Network18 Media and Investments (Network18) and TV18 Broadcast (TV18) to subscribe to the rights issue of these companies.  

    Following the deal, Mr Ambani directly or indirectly controls Eenadu TV and the Network18 Group. That is about 30 channels across entertainment and news segments in English and regional languages.

    RIL's deal with Raghav Bahl of TV18 group is one of the most complicated deals of all time. According to a press release, issued by RIL at that time, promoter companies of Network18 and TV18 and the Trust entered into a Term Sheet under which the Trust would be subscribing to the Optionally Convertible Debentures (OCDs) to be issued by the Promoter Companies.

    "Reliance will leverage its deep understanding of the Indian markets-consumer insights, technological expertise, and the ability to build & manage scale-to make this a "win-win" partnership. This will create value and be accretive to the shareholders of RIL," the Mukesh Ambani group company said in a press release.

    This was the first part of the deal. In the second part, Infotel Broadband Services (Infotel), a unit of RIL, signed a memorandum of understanding with both, TV18 and Network18 for preferential access for distributing all contents of the media group companies through its fourth-generation (4G) broadband network. As per the agreement, RIL would divest part of its interest in Eenadu TV (ETV) channels to TV18.
    Earlier, RIL had admitted that the company and its group companies invested Rs2,600 crore in Ushodaya Enterprises, the holding company of ETV channels. As per the deal with Mr Bahl, the Mukesh Ambani group divested its 100% interest in ETV news channels, 50% in entertainment channels and 24.5% interest in Telugu channels to TV18.

    About two months ago, Moneylife sent a mail to Nilrab Media Private Ltd, which is one of the trustees in RIL's Independent Media Trust. However, till date neither there is any answer nor there is any reply from Nilrab Media.
    More than two decades ago Reliance had made a bid to enter the media by buying the Observer newspaper which it ran half-heartedly and closed down. Anil Ambani, the estranged and debt-strapped younger brother of the RIL chief was leading that effort. The ADAG group controlled by Anil Ambani has large stakes in TV Today and other media companies.

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    gaurav kumar

    8 years ago


    A kumar

    8 years ago

    Thank God for the small mercies. How could we have all the media mentioned controlled by him?

    The most merciful thing in the world, I think, is the inability of the human mind to correlate all its contents.
    H. P. Lovecraft
    The Call of Cthulu (1926)

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