Euro Multivision Limited (EML) has a strong brand and sells its products under the brand name ‘Eurovision’ which is a part of the Euro group having diversified interests in vitrified and ceramic tiles, sanitary ware and aluminum panels etc. The group has one listed entity in the Euro Ceramics Limited. The group is promoted by Mr. Nenshi Shah.

EML commenced operations in April 2005, manufacturing Compact Disc Recordable (CDRs) and Digital Versatile Disc Recordable (DVDRs) at Bhachau, Gujarat, which was hit by a severe earthquake on 26th January 2001. The epicenter of this earthquake was about 18kms from Bhachau. The central government and the state government announced various schemes which led to the rapid industrialization of this backward and neglected district of India. EML is India’s distant second largest player of CDR’s and DVDR’s after Moser Baer and has a capacity of 180 million units per annum.

Photo-voltaic cell

EML is now venturing into the sunrise industry of manufacture of photo-voltaic cells. It is setting up a unit to manufacture 40 Mega Watts per annum of these cells adjacent to its existing facilities in Bhachau in a dedicated SEZ. This SEZ would ensure that all imports and exports are duty free and there are tax benefits as well to the company. The plant has been procured and has already arrived at the company’s warehouse and the same is from OTB Solar from the Netherlands, a leading supplier of such equipment.  

The present players in India of photo-voltaic cells (PV) include names like Tata BP Solar, Webel –SL Energy and Moser Baer. Their capacities are being increased from the existing 52 MW, 30 MW and 40 MW respectively to 180 MW, 120 MW and 240 MW respectively. The increase in combined capacity from 122 MW to 540 MW and after including EML’s capacity to 580 MW is a more than fourfold increase clearly indicating the growth potential of the sector. At present the total installed solar power capacity in the country is a mere 2.1 MW. The National Solar Mission envisages raising this to 20,000 MW by 2020. The government of India has increased the support to solar power units and the breakeven of solar power generating units has come down from 12-13 years to just 8-9 years.

At present almost the entire production of PV cells is being sold to panel makers who in turn export their products. It is expected that going forward a substantial portion of this capacity and new capacity would be used within the country to generate solar power. As recently as 7th September 2009, the William J Clinton foundation has signed preliminary agreement to set up the world’s largest solar project of 3000 MW in the state of Gujarat. This project is expected to be completed by 2012-2013 and is expected to cost about 10 billion US$ or about Rs 48,000 cars. To gauge the opportunity that is available in this field it may be said that the proposed capacity of all players put together is insufficient to take care of this one single project.

Besides the use of PV cells for making panels and using for solar power generation, there is large residential and industrial use of such products which do not generate power for the grid. Companies like Tata BP Solar make solar powered heaters which are used in residential and industrial applications.

The manufacture of PV cells would be on a fully automatic machine and the process virtually eliminates human touch. The process is such that production ramp up and selling of the finished product is virtually assured once the unit goes into production. The current market price of the raw material which is silicon wafer is around US$ 3 per piece while the selling price of the PV cell is around 1.8 $ per watt. It should be clarified that each cell contains around 3.65 watts and therefore the price per cell becomes 6.57 $ per silicon wafer. This corresponds to a price of Rs 315 per silicon wafer. The company expects to commission the plant in early 4th quarter of FY 2009-10 and the first full year of production would be FY 10-11. Each MW corresponds to 1 million watts. This means that the company will produce 40 million watts and will need 10.96 million silicon wafers for the manufacture of the PV cells. (Each PV cell is equal to 3.65 watts). The expected turnover based on 80% capacity utilization in a full year of operation would be in the vicinity of Rs 270-Rs 280 crs. The gross margins in the manufacture of PV cells are in the range of 30% and net margins are around 12-14%. This is based on what happens internationally and also on the basis of published data in the country.

The Company

The company EML in the second phase intends to backward integrate with the manufacture of poly silicon. The company has entered into a technology transfer and license agreement with SRI International California. The implementation of this phase would help the company improve its margins further.

I am not talking about the existing CDR and DVDR business, because it is a very highly competitive business and there is considerable pressure on margins on an on-going basis in this business. The company after its initial capacity of 90 million pieces doubled its capacity to 180 million pieces and thereafter did not increase it any further. The margins in the business are very thin and it is a pure commodity business. 

Major Risks

There are always risks associated with any project. The biggest risk that EML runs is that they are entering into a business in which they have no past experience. PV cells and silicon wafers are both commodity products, however the demand for PV cells being a green power are highly in demand. Prices have been extremely volatile but after 2008 global upheaval have settled in a tighter price band and have ceased to be highly volatile. The other risk that EML runs is that there could be delays in the stabilization of the product line. These and other teething troubles which could happen to any company and in any line of business are always a risk and could delay optimum production and working.

Group Perception

EML has another listed entity namely Euro ceramics Limited. This company entered the capital market with a public issue in February March 2007. The existing business was vitrified and ceramic tiles and the objects of the issue were to enter the business of sanitary ware and agglomerated marble. The global slowdown of 2008 hit Euro Ceramics badly as the launch of sanitary ware and agglomerated marble coincided with the slowdown and the company incurred losses in the financial year 2008-2009 and the first quarter of the current year 2009-2010. Things are improving and it should be a few quarters away before one finds that this company has again returned to the black. The promoters are in business for a very long time and are known to have turned around businesses in the past as well. 

Valuation

The stock is expensive considering net profit of Rs 1.84 crs for the year ended March 2009, EPS of just about Rs 1.23 and a P.E. of 61. Very clearly as mentioned above the current business does not warrant investment in. It is the new business which is interesting and has the potential to deliver results and make the company an interesting prospect. Even assuming teething troubles in the first full year of operation, a top line of about Rs 270 crs and a Pat of 10% should see a fully diluted EPS of Rs 11 to Rs 12. The same in the following year 2011-2012 is likely to see a top line of about Rs 400 crs and a PAT of Rs 48 crs, resulting in an EPS of Rs 20. The PE based on these earnings would be just about 3.75 on FY 12 earnings, which makes the share a steal. Like I mentioned investing is risky and as long as there is risk, only then can there be reward.

Conclusion

The present business is tough and does not generate interest to invest. The new line of PV cells is certainly very interesting, exciting, profitable and a sunrise industry. It has some built in risks due to stabilization risks. The first full year of operation will be 2010-2011. If you do not want to invest when there are risks today, wait for the share to fall after listing before investing. This is a great stock for FY 11-12 but needs to be bought when production has stabilized.