Tuesday, July 26, 2005

Moschip Semiconductor (listed on BSE)

My friend had asked me to do some research on this company. I think I finally somewhat understood how off balance sheet activities can make the financials look better or worse than they actually are. For this company, the entire income is off the income statement.. And in the process, I found this section on moneycontrol website where one can search for block deals for any scrip..

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· Company Description: The company is in ASIC (application specific integrated circuits) space. It has a wholly owned subsidiary: Moschip USA. The product design and software development is done by MosChip India. The software is licensed to MosChip USA, which subcontracts the manufacturing and sells the chip through its distribution network. The entire revenue from sale of products is thus in MosChip USA. MosChip USA pays a license fee to MosChip India, which is linked to the gross margin on the products designed and developed by MosChip India.

· Complicated Capital Structure and Reported Financials: The capital structure of the company is complicated. The company acquired Moschip USA and Varsity using its shares. On the balance sheet, these acquisitions are accounted of as investments. The financials on BSE are for Moschip India. As such, the sales, income and share count associated with the investments is not on the BSE reported financials. So we don’t really know the consolidated financials of the company, which is critical, as all the sales are recorded by Moschip US. Economically though, as the subsidiaries were acquired using Moschip shares, any economic benefit from these subsidiaries will accrue to Moschip shareholders at some point of time.

· Critical drivers of stock price: Seems like there are two critical drivers of the company’s performace: (a) How fast does the company topline grow overall? (b) What is the revenue and profit sharing mechanism between the US subsidiary and its Indian counterpart? While this does not impact the financial outlook of the consolidated company, a higher royalty payment to the Indian subsidiary would increase the EPS reported to BSE.

Relied on prospectus filed in Feb 04 to get some of the numbers like cash and debt.

Valuation:
· Share count. Before the offer last year 30.64 million. After the offer, additional 3.34 million. GDR listing, additional 9.5 million shares. Total today should be about 43.5 million shares


· EV: 43.5 mn shares * 45 = Rs. 1957.5 mn market cap. As of 1Q:04 Moschip US has 30 mn. debt. Moschip India had 14 mn cash, Moschip US had 3 mn cash. So Enterprise value = Rs 1970.5 mn.
· Revenues: Don’t know Moschip US revenues. Need to approximate.

Method 1: Consolidated sales for 9 months ended 31/12/03 were Rs 94.6 million. Annualizing the consolidated sales, we come up to Rs 120 million in sales in the year ended 31/03/04. Moschip India sales were 3.8 mn during the 9 month period. (Business Standard article says the company’s revenues were Rs 12.63 crore in 2004 – pretty close).

Between the year ended 31/03/04 and 31/03/05, Moschip India sales went up 5.03 times. If it was all due to increased sales by Moschip US, and not increase in royalty payment rates from Moschip US to Moschip India, then sales companywide grew 5.03 times. This would imply consolidated 31/03/2005 sales were 120*5.03 = Rs 603 million

1Q:06 revenues for Moschip India grew 129%. If this is again companywide, and assuming similar growth throughout the year. FY 2006 sales would be around Rs 1200 million.

So EV/Sales would be 1970.5/1200= 1.64x
Risk: We don’t know whether Moschip India revenues are increasing because of increased sales companywide, or increased payments by Moschip US to Moschip India on the same revenue base.

Method 2: Sales increase in 2004 were 20%. In 2003, it was 25%. If it was 25% for FY2005, sales were 120mn*1.25 = 150 mn. If it is same for FY06E, sales next year would be 150*1.25 = Rs 187.5 mn. On that EV/sales = 1970.5/187.5 = 10.5x

· Conclusion: Blended EV/sales by the two methods is (10.5+1.64)/2 = 6.07x. For a company growing at 25%, this would be steep multiple to pay. For a company growing at 100%, this would be a bargain. I don’ t know what the growth rate is for this company.

Positives:
· Company is saying that they will become cash positive this qtr, and EPS positive by year-end – that is great. It is these kinds of companies whose shares run up.
· The company has survived for a long time, including the telecom bust.
· The commitment of the management seems to be there – same CEO since inception.
· The company is hiring - http://www.assureconsulting.com/indiajobs/showjob.php?id=1426, 4 software engineers and ASIC engineers. Engineering strength in 2004 prospectus is 57.

Negatives:
· This company doesnt seem to have any patent. That is very surprising. Prospectus says – “The company is in product development, initially it was in IP”.
· These type of companies are very order driven – no predictability in revenues. There might be substantial variation in revenues from one quarter to next. Because revenues were so high in 1Q:06, they might be depressed in the next qtr.
· No clue about how good the technology of the company is, and who its customers are. As such, we are clueless really to what might be happening.
· About 100 employees – still a small company. But it has great ambitions. Acquired two companies in last 5 years through stock issuance.

Issues:
· The company issued GDR? Listed at Luxembourg exchange? WHY – This is a very small company? Who bought this GDR?
· What is the profit sharing fundamental between the company and its subsidiary in the US?
· Many bulk deals for Moschip in the last week or so. Why this sudden interest in the scrip? Marshall Wace is a hedge fund – holding period typically less than 7 days – they will sell the stock soon. My former boss (Mike Seargent) is the CEO of its US operations. http://news.moneycontrol.com/stocks/marketstats/blockdeals_query.php

Other:
· Got R RamMohan Rao as director on June 4, 2003 – IIM-B ex Chairman.

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