IPO Analysis and Recommendation - Euro Multivision

Entering solar PV cell business

After feeling the impact of global slowdown in the optical business, entering the solar business without any experience

Part of Euro group, Euro Multivision is the second largest manufacturer of compact disc recordable (CDR) and digital versatile disc recordable (DVDR). The company began commercial production in April 2004 at Bhachau, Kutch, Gujarat, with five manufacturing lines with an installed capacity of 720 lakh units of CDR and 72 lakh units of DVDR a year. It increased its capacity to 10 lines comprising 1,800 lakh units a year and converted the DVDR capacity into CDR capacity. These lines are interchangeable and are convertible between CDR and DVDR. Euro Mutlivision has 16 distributors with over 515 district dealers and more than 1,50,000 retailers spread across the country.

To enter the solar photovoltaic business, Euro Multivision plans to manufacture solar cells from imported silicon wafers at a PV solar cell manufacturing unit in a proposed special economic zone (SEZ) at Bhachau, Kutch, Gujarat. One unit of silicon wafer can produce one cell with capacity of 3.5-3.8 watts. The cost of one unit of wafer is about US$ 2.75 – US$ 3.25. The selling price of one watt of PV cell is US$ 1.8 – US$ 2. There are at least nine companies in the solar PV cell manufacturing business. Euro Multivision would be selling the solar PV cells to solar module manufacturers. The modules would be set on solar panels and used to store solar energy.

OTB Solar B.V, Netherlands will sell and design, deliver, install, test and mechanically commission the production line needed for the project. The manufacturing line has already been delivered. The 40-MW facility will be commissioned by December 2009. Euro Multivision will be exporting the entire production and has identified Europe, US, South East Asia and Middle East as some of the key places to set up marketing offices.

The project, to cost an estimated at Rs 178.04 crore, has been appraised by State Bank of India. SBI has sanctioned Rs 80 crore as a term loan and has opened a letter of credit. Euro Multivision has utilized Rs 20 crore out of the sanctioned Rs 33.75 crore from Cosmos Co-operative Bank. The balance will be funded through the proceeds of the public issue and internal accruals.

Strengths

* Governments across the world have increased their thrust on renewable energy. With the Kyoto Protocol in place, industrial countries will have to reduce their collective emissions of greenhouse gases by 5.2% compared with 1990. Being a renewable energy, without emission of any greenhouse gases, solar energy will be one of the ways to lower emission. The Spanish solar PV market is expected to grow and reach 33,738 MW by 2020, the Italian solar PV market at a CAGR of around 48% to nearly 50 GW by 2020, and the US solar PV market at a higher CAGR of nearly 50% to more than 75 GW by end 2020. India's National Solar Mission is targeting 20,000 MW of installed solar generation capacity by 2020.

Weaknesses

* Solar PV cell production reached a consolidated 6.85 GW, with a capacity utilisation of 67%, in 2008 as against demand of 5.95 GW. With supply outstripping demand, prices of cells have crashed. With capacity expansions across all countries including in India and many projects either approved or awaiting approval in India as well as overseas, there are possibilities of continued overcapacity and higher competition.

* The solar PV cell business will need continuous capital investments for technology upgrade.

* The cost of solar energy is still high as compared with other sources of energy, thereby making it less feasible than other forms of energy without active government support.

* Prices of CDR/DVDR are falling continuously. Operating profit per unit sold has come down from Rs 2.42 per unit in fiscal ended March 2007 (FY 2007) to Rs 1.29 per unit in FY 2009.

* The price of polycarbonate, the basic raw material for optical business, is influenced by a variety of factors including crude oil prices and demand-supply balance. Any sharp increase in prices of crude will impact margin.

* Most of the raw material requirements are through imports. Polycarbonate, the basic raw material required for the optical business, and silicon wafer required for solar PV cell business are/will be imported. Adverse and volatile forex movements can affect performance.

* The Euro group has not lived up to the expectation of the investors. Euro Ceramics has disappointed since listing, with return a negative 67% as against the BSE Sensex return of 30%.

Valuation

At the price band of Rs 70 – Rs 75 on the FY 2009 EPS of Rs 0.8 on post-IPO equity, PE works out to 90.9 – 97.4 times. Among the listed companies, Moser Baer has a similar business model, but it is a very large company compared with Euro Vision on financials and capacities. Moser Baer reported production of 3,158 million units as against Euro Multivision's 159 million in FY 2009. In the PV business, Moser Baer has an operational capacity of 80MW crystalline silicon, 40MW of thin film. The company has at least 135 MW of capacity lined up. Against his, Euro Multivision's capacity will be 40 MW by December 2009. Moser Baer has reported large losses for the past two years and, excluding extraordinary item, continued to be in the red in the first quarter ending June 2009. Moser Baer currently trades around Rs 91.

via CM