A few years back i became interested in moser baer. This company seemed (on the face of it ) to be doing very well. It was getting into a product (CD) which was growing fast. The margins were great. The return on capital was high. The valuation looked great.
But then digging deeper, there were a few things which troubled
– was the depreciation enough to take care of the rate of obselence of the Fixed assets in the fast changing memory business
– how would the margins behave when 1) growth slowed down 2) the price deflation continued and accelerated ( memory prices have dropped by factor of 10 in the last 3-4 years )
– the business seems to be needing regular equity infusion for growth (maybe not important if the business is in high growth phase )
I was looking at the latest results and inspite of the topline growth the margins seem to be dropping. In addittion CD/DVD are getting cheaper by the month. so there is going to a constant pressure on margins. End of the day, it is a commodity business where the price of the product just keeps dropping. In addition , any new memory would require new captial equipment and hence more capital ( especially if it is a new technology )
So the business looks profitable , but if one looks closely ,the money coming out has a mirage like feel …you can see it , but never touch it
Business mirage
B
