Moser Baer: Sunburnt

On most days, Ratul Puri is at work by 10 a.m. and the last to leave the office. The 37-year-old can be often seen puffing away on his Marlboro Lights in the space reserved for smokers in the Okhla headquarters in New Delhi. But if that conjures up an image of a hard-charging, aggressive workaholic, nothing would be further from the truth. Ratul Puri is impeccably dressed, courteous and approachable, always making everyone around him feel at ease. Older employees say that the son takes after his father and founder of the company, Deepak Puri.

The senior Puri, an engineer from Imperial College, London, had become an icon in the 1990s braving global competition and building the world’s second largest optical disc maker.
A few years ago, the elder Puri entrusted his son with the task of taking Moser Baer beyond this single business and driving its entry into new growth areas.

With this, Ratul Puri got an opportunity to go one up on his dad and build a company of global scale. Within a short time, this computer engineer from Carnegie Mellon University came up with a plan. He persuaded his father and the rest of the Moser Baer board to invest serious money — upwards of Rs. 800 crore — to make solar energy which he reckoned would be at the forefront of the alternative energy revolution. Today, the move stands exposed to the vagaries of a global recession and the solar energy industry’s peculiar problems.

Ratul knew what he was doing. “The optical business is not going to be a very high growth business for us, [though] it will be a free cash generator for us for a long time to come,” Puri Junior says. About five years ago, the optical disc industry began to see slower growth and Moser Baer needed to find a new thrust area. Ratul settled on the photovoltaic business. “The PV business, on the other hand, has the characteristics of very significant growth but needs capital to drive that business,” he says.
Beyond financials, there was also the technology risk. With the arrival of newer technologies such as Blu-ray, storage technology was becoming a niche business. So, Moser Baer needed to escape that trap. “In the next five years, you will see a completely different Moser Baer,” says Prakash Karnik, a member of the company’s board.

But today, after three years of effort, Ratul’s big bet is reaching a critical phase. Many of the critical assumptions that he had made on the global demand and supply, pricing and technology have turned awry. And Ratul has his back to the wall. In the next six months, he has to quickly figure out a way to resurrect his business model. That means going slow on capacity expansion, slashing costs, renegotiating contracts with suppliers and customers alike and rethinking his technology bet.

Murphy’s Law
At stake is the future of Moser Baer, which his dad had built. Expectedly, the optical media business is slowing down. New technologies like Blu-ray haven’t yet taken off. Some experts argue that Blu-ray may never deliver on its grand promise. (See Box: Ratul’s Two Horns of a Dilemma). And all the cash that Ratul chose to invest in solar panels and to a lesser extent, home entertainment, has shown no signs of paying off as yet.

So far, Moser Baer has sunk Rs. 800 crore, worth nearly three years of its operating cash flow, into the solar energy business over the past two and a half years. In October last year, Ratul raised another Rs. 411 crore from a consortium of private equity players, including CDC Group, Credit Suisse, Morgan Stanley, IDFC group and Nomura. This was part of his dream to invest as much as $1.5 billion (Rs. 7,200 crore at current exchange rates) in the segment. But the swings in the fortunes of the industry have meant that Ratul has not yet spent that private equity money. The company calls it “work in progress.”

The reason? The global euphoria for solar panels has evaporated. A gigawatt worth of solar panels, almost a fifth of the world’s production in 2008, is lying in factories all over the world with no takers. Solar module prices have nosedived. Solar panel makers across the globe have reduced their growth forecasts and slashed workforces. Subsidies in Spain, which made it the largest market in 2008, have been withdrawn. The credit crisis has brought solar installations around the globe to a standstill. Evidently, the solar industry is at its shaky worst.

Moser Baer reported a net loss of Rs. 129 crore for the financial year 2008-09 compared with a loss of Rs. 79 crore in the previous year. In the fourth quarter alone, optical media shipments fell by a fifth. The ride has been rough in the last three years, when growth in the optical media business fell from 80 percent to 15 percent.

All this got some analysts jittery. “It is going to be a very tough call and Moser Baer will continue to be a high risk business,” says Surendra Goyal, head of Indian IT service research at Citi. “Photovoltaic was expected to be the big growth business, but it is clear that the bet Moser Baer had taken on photovoltaic has not played out as expected,” he says. For the last one year, Goyal has put a ‘sell’ on the stock.

Ratul is already scaling down ambitions. He has cut the company’s investment plans for this year from Rs. 975 crore to a mere Rs. 154 crore. Not surprisingly, the biggest cutback is in the photovoltaic business; from Rs. 840 crore to Rs. 106 crore.

Convincing Father
Yet when he started out on the solar business, Puri wouldn’t have imagined that things would turn out this way, especially when he made his formal pitch to the Moser Baer board in October 2005. The PowerPoint presentation — with as many as 77 slides — was direct and upfront about the opportunity: ‘Companies in the photovoltaic space are witnessing increasing revenues, profits and high valuations,” he told the board. Ratul argued the demand for photovoltaic in India exceeded 1,000 MW and the diversification will mitigate single-business risk and fetch higher market value.
Ratul’s father wasn’t initially convinced and thought the solar energy business to be highly risky, but relented and gave his son the go-ahead seeing his bullishness.

In the second half of 2006, Moser Baer acquired equity stakes in companies like US-based Solaria and Stion Corporation, both working on a next-generation technology for solar power production. In the first half of 2007, Ratul went about tying up supplies of silicon, an expensive but crucial raw material to manufacture solar cells, and entering into silicon supply agreements with companies like Deutsche Solar and Norway based REC Group.

Moser Baer also set up an 80 MW crystalline silicon manufacturing facility and a 40 MW thin-film manufacturing facility, both in Noida. Last year, Ratul took a big bet on technology too, by taking on licence a special thin film technology from US-based Applied Materials because it was a simpler technology to drive.

But one by one, all the assumptions have fallen by the wayside.
The photovoltaic manufacturing industry had been running on a lopsided supply situation for raw materials. Polysilicon, a crucial raw material, was in perennial short supply while demand for solar cells and modules seemed to be shooting through the roof. That led to a mismatch. Companies with access to raw materials were making super-normal profits. And as is often the case, various companies around the globe rushed in to fill the void and grab a share of the pot of gold. Moser Baer was one of them. It wasn’t sustainable.

“In the last five years, completely supply side capacities were being created and nobody bothered about how sustainable demand would need to be,” says Ravi Khanna, president & CEO at Scatec Solar, a project management firm in the solar industry based in Norway. Khanna, in his last assignment, was the CEO of Moser Baer’s photovoltaic business. The oversupply and the slowdown have driven the customers away, he says.

The demand may be picking up now, but world production is still likely to be much more than demand. “I see a potential production of 12 GW this year against an aggressive demand of not more than 7 GW. I don’t see the demand supply equation easing out anytime before 2011,” says Charles Yonts, head of regional solar research at CLSA Asia Pacific Markets.

At the same time, Ratul may have underestimated the Chinese threat. He believed supply constraints in polysilicon would keep Chinese entrepreneurs in check at least until 2010. This assumption proved wrong. China has quickly grown to be the global epicenter of solar manufacturing.
So where does Puri go from here? To succeed in this tumultuous time, he must bring production cost to below $1 per watt. For this, he must build scale and improve the amount of solar energy converted into electricity in each module.

“You cannot be a 100 MW company and expect to compete with the cost structure of (US-based) First Solar which has a production capacity of 1 GW,” says Vishal Shah of Barclays Capital.
Ratul’s original plan was to scale up to 600 MW, but today he is practically helpless. In this period of oversupply, adding capacity would be the last thing on his mind. Simply put, Moser Baer is in a chicken-and-egg situation.

Even the pragmatic Ratul Puri would know that. He’s, of course, banking on the next best thing — a product differentiation strategy for his thin film offering that can help cut installation costs for customers by 8-10 percent. In the next one year, it’ll be clear whether Ratul Puri’s solar cells find acceptance in the global solar industry.

Meanwhile, he expects the core business of optical media to get back some of its old traction with Blu-ray, a segment where he was early to invest. He hopes this new technology will become popular this year, though the jury is still out on that. But Ratul will have a lot of explaining to do to his father if he can’t rev up growth either in the new, or old, business