Solar dreams

Euro Multivision’s solar business is promising but execution remains the biggest risk.

Mumbai-based Euro Multivision, a manufacturer of storage media (CDs and DVDs), plans to tap the primary market with an Rs 66 crore issue to partly fund its Rs 178 crore photovoltaic solar cell manufacturing project at Gujarat. The company has taken an Rs 100 crore loan from the SBI and the Cosmos Cooperative Bank and intends to fund any shortfall post the issue from internal accruals.

The business
The company plans to import solar wafers, process it and make solar cells. These cells will then be sold to module manufacturers who build the photo voltaic systems for users. The company has tied up with OTB Solar, a Dutch company, for the supply of machinery and design know how to make solar cells with a capacity to generate 40 MW per year. The company has imported the equipment for setting up the plant at its Special Economic Zone (SEZ) and expects to start production by January 2010. Though it will export the entire production, it will also look at the domestic segment where the solar photovoltaic capacity is at 700 MW but solar cell manufacturing is pegged at around 350 MW. With most PV module makers (buyers) present in SEZs, the company could look to tap these manufacturers.
 

ISSUE DETAILS
Price band:	Rs 70-75
Issue size:	Rs 61-66 cr
Issue opens:	Sept-22
Issue closes:	Sept-24

Demand and competition
It is estimated that the installed capacity of the photovoltaic sector worldwide is 7 GW with growth rates of about 30-35 per cent. The management has said that demand supply gap has arisen due to long gestation period of about 15 months. While there are three major players viz., Tata BP Solar (100 MW), Moser Baer (100 MW) and Webel SL (30 MW) in the country, the company believes that significant entry barriers to competition in terms of gestation, higher cost of setting up in a non-SEZ area and technology act as deterrents.

The company believes that incentives given by the government such as nil duty on import of raw material and its target of reaching 20,000 MW of generation by 2020 from 2.5 MW currently, reducing cost of setting up a solar plant (25-35 per cent over the last one year) to about Rs 13-15 crore per MW should make this technology competitive vis-à-vis conventional sources going ahead. Further returns to the tune of 19-24 per cent for power projects based on renewable resources announced recently by CERC as compared to 16 per cent for conventional power projects should give a fillip to players such as Euro Multivision.
 

BANKING ON SUNSHINE
in Rs crore	FY08	FY09	FY10E	FY11E
Net Sales	90.92	73.21	102.49	204.99
Op profit	31.12	20.57	30.75	61.50
Net profit	9.74	1.83	8.20	20.50
Cash EPS (Rs)	13.77	9.13	-----	-----
EPS (Rs)	8.40	1.20	3.45	8.61
P/E (x) at Rs 75	8.93	62.50	21.77	8.71
P/E (x) at Rs 70	8.33	58.33	20.32	8.13

Valuations
While the company’s existing business fetches it operating profit margins of around 30 per cent, analysts estimate that the photovoltaic business typically has margins in the region of 35 per cent, which though looks optimistic as its peers enjoy margins ranging mid-20 per cent (like Webel SL). While the economic conditions saw the company’s revenues drop by about 19 per cent in 2008-09, the optical storage sector going by the growth in the IT hardware sector is expected to expand by about 12-15 per cent. Most of the increase in turnover over the next two years is likely to come from the photovoltaic business due to demand supply gap. Although not really comparable, the only peer is Moser Baer which has been struggling to turn profitable.

While the company’s optical storage capacity is a fifth of Moser Baer’s and solar PV capacity is half, it has been making profits since its inception. Since the PV business for Euro Multivision will only start contributing meaningfully from 2010-11, a two-year horizon is a must for investors who wish to participate in this issue and have an appetite for risk. That’s because, the promoters have no experience in executing projects in the solar PV segment. Moreover, the company is smaller when compared to established and better known names. As far as photovoltaic business segment is concerned, the nearest peer is Webel SL Energy (a 30 MW player expanding to about 100 MW), which trades at 22 times 2009-10 estimated earnings. The valuations are at par, indicating limited room for upside in the near-term.