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Buy OPTO CIRCUITS Early turnaround of CSCX a positive surprise
Impressive quarter; healthy top-line growth
Opto Circuits (OPTC) reported impressive Q3FY11 numbers, which included 100%
consolidation of December 2010 financials of its latest acquisition Cardiac Science
(CSCX). Ex-CSCX, while revenue grew ~6.7% Q-o-Q to INR 3.5 bn, EBITDA
margin improved ~270 bps to ~34.5%. Invasive segment revenues jumped 36%
sequentially to INR 1.05 bn, including 16% rise in Eurocor revenues. Non-invasive
segment revenues (ex-CSCX) at INR 2.36 bn were a tad disappointing as they
declined ~9.6% Q-o-Q. On consolidated basis, OPTC reported revenue of INR 4.2
bn and net profit of INR 957 mn. Ex-CSCX, net profit stood at INR 934 mn (up
20.7% Q-o-Q) and included ~INR 52 mn of forex gain.
Early turnaround of CSCX a positive surprise
CSCX’s financials surprised positively on all counts. It reported impressive
revenue of INR 640 mn in December 2010, thus implying full quarter revenue of
INR 1.92 bn/USD 42.7 mn, a 23.5% sequential jump. Management attributed
strong Q3FY11 revenue growth to seasonality and guided to normalised revenue
run rate of USD 35-40 mn/quarter. Importantly, within two months of acquisition
by OPTC, CSCX reported net profit of ~INR 23 mn/USD 0.5 mn (vis-à-vis net
losses of USD 6.5 mn-8.5 mn in the past four quarters prior to acquisition)
indicating a surprisingly swift turnaround. OPTC’s management highlighted that it
has undertaken several cost cutting measures primarily on SG&A costs initially.
This will be followed by rationalisation of manufacturing costs as it gradually shifts
production to low-cost locations (likely India) in the next 2-3 months. Overall, it
expects to reduce CSCX’s opex by ~20-25% through various cost-cutting
measures over the next few quarters and expects normalised EBITDA margin of
~10-15% once all cost rationalisation measures are implemented. Management
highlighted that it expects no further liability on the AED product recall/update.
Outlook and valuations: Attractive; maintain ‘BUY’
We are positively surprised by the swift turnaround of CSCX, which we had
expected was atleast two quarters away. Management guidance suggests that
CSCX is expected to be marginally earnings accretive in FY12 itself. We have
incorporated CSCX in our FY11-13 estimates (refer table 2 for details), but there
is no material change to our consolidated earnings estimates for FY11-12 owing to
the acquisition funding costs and higher consolidated tax rate (management
guided to 8-9% consolidated tax rate versus ~6% earlier). At INR 260, the stock
is trading at attractive valuations of 11.4x FY12E and 9.2x FY13E PE. Given the
strong earnings CAGR of ~26.5% over FY11-13E and healthy return ratios, we
maintain ‘BUY’ recommendation on the stock.
Key updates
• Cardiac Science
• AED product recall/update: CSCX has set aside ~USD 32 mn for the same, of
which ~50% was spent in 2010 and the balance is expected to be spent in 2011.
Management highlighted that it expects no further liability on this account and
all the voluntary corrective action activities are expected to be completed by
June-July 2011.
• Management expects to reduce CSCX opex by ~20-25% through various costcutting
measures over the next few quarters.
• Management highlighted its focus to aggressively grow CSCX’s topline by:
Marketing CSCX products outside US, particularly in emerging markets to
improve volumes.
Revival of sales in Japan through its tie up with a new Japanese AED
distributor.
Management cited favourable regulations could also be a key demand
driver for AEDs (e.g., Italian Senate will make AEDs mandatory for 40,000
pharmacies).
• OPTC’s consolidated debt was INR 7.5 bn at the quarter-end, with cash position of
INR 960 mn. This includes INR 3.5 bn debt raised for CSCX acquisition. Management
indicated overall cost of debt at ~5%.
Company Description
OPTC designs, develops, manufactures, and distributes devices that use light to detect
and sense, and medical monitoring equipment. Its non-invasive product profile includes
SPo2, multi-parameter monitors, pulse oxy-meters, digital thermometers, and fluid
warmers. OPTC also operates in the invasive segment through its 100% subsidiary
EuroCor, which specialises in research, development, and manufacture of interventional
cardiology products. Following the recent acquisition of Criticare, OPTC has successfully
expanded the non-invasive products portfolio. The acquisition will expand OPTC’s
noninvasive product portfolio by adding gas monitors and central monitoring stations,
which already have USFDA and CE approvals.
Investment Theme
OPTC’s growth is likely to be driven by non-invasive businesses in the medium term. We
expect the non-invasive segment to be the key revenue growth driver over FY11-13E.
Including CSCX, we expect ~34% CAGR in consolidated revenues and ~26.5% CAGR in
net profit over FY11-13E. We expect the non-invasive segment to continue to dominate
revenue mix, with its FY13 revenue share expected at ~83%. OPTC has been trying to
get the US FDA approval for its invasive products which if it comes could be a rerating
factor for the stock.
Key Risks
Product liability claim
The medical products of OPTC exposes them to any potential product liability claim if
their use causes or results in any death, injury personal injury or adverse effects. Certain
companies in the group maintain limited product liability insurance.
Changes in technology
The medical device industry is characterized by rapid changes resulting from
technological and scientific discoveries. The success of the company will depend on
ability to identify, develop and commercialize products in a timely and cost effective
manner.
Regulatory risk
Delay in new product launches due to hurdles in obtaining approvals from regulatory
authorities could affect revenues and profitability
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Buy OPTO CIRCUITS Early turnaround of CSCX a positive surprise
Impressive quarter; healthy top-line growth
Opto Circuits (OPTC) reported impressive Q3FY11 numbers, which included 100%
consolidation of December 2010 financials of its latest acquisition Cardiac Science
(CSCX). Ex-CSCX, while revenue grew ~6.7% Q-o-Q to INR 3.5 bn, EBITDA
margin improved ~270 bps to ~34.5%. Invasive segment revenues jumped 36%
sequentially to INR 1.05 bn, including 16% rise in Eurocor revenues. Non-invasive
segment revenues (ex-CSCX) at INR 2.36 bn were a tad disappointing as they
declined ~9.6% Q-o-Q. On consolidated basis, OPTC reported revenue of INR 4.2
bn and net profit of INR 957 mn. Ex-CSCX, net profit stood at INR 934 mn (up
20.7% Q-o-Q) and included ~INR 52 mn of forex gain.
Early turnaround of CSCX a positive surprise
CSCX’s financials surprised positively on all counts. It reported impressive
revenue of INR 640 mn in December 2010, thus implying full quarter revenue of
INR 1.92 bn/USD 42.7 mn, a 23.5% sequential jump. Management attributed
strong Q3FY11 revenue growth to seasonality and guided to normalised revenue
run rate of USD 35-40 mn/quarter. Importantly, within two months of acquisition
by OPTC, CSCX reported net profit of ~INR 23 mn/USD 0.5 mn (vis-à-vis net
losses of USD 6.5 mn-8.5 mn in the past four quarters prior to acquisition)
indicating a surprisingly swift turnaround. OPTC’s management highlighted that it
has undertaken several cost cutting measures primarily on SG&A costs initially.
This will be followed by rationalisation of manufacturing costs as it gradually shifts
production to low-cost locations (likely India) in the next 2-3 months. Overall, it
expects to reduce CSCX’s opex by ~20-25% through various cost-cutting
measures over the next few quarters and expects normalised EBITDA margin of
~10-15% once all cost rationalisation measures are implemented. Management
highlighted that it expects no further liability on the AED product recall/update.
Outlook and valuations: Attractive; maintain ‘BUY’
We are positively surprised by the swift turnaround of CSCX, which we had
expected was atleast two quarters away. Management guidance suggests that
CSCX is expected to be marginally earnings accretive in FY12 itself. We have
incorporated CSCX in our FY11-13 estimates (refer table 2 for details), but there
is no material change to our consolidated earnings estimates for FY11-12 owing to
the acquisition funding costs and higher consolidated tax rate (management
guided to 8-9% consolidated tax rate versus ~6% earlier). At INR 260, the stock
is trading at attractive valuations of 11.4x FY12E and 9.2x FY13E PE. Given the
strong earnings CAGR of ~26.5% over FY11-13E and healthy return ratios, we
maintain ‘BUY’ recommendation on the stock.
Key updates
• Cardiac Science
• AED product recall/update: CSCX has set aside ~USD 32 mn for the same, of
which ~50% was spent in 2010 and the balance is expected to be spent in 2011.
Management highlighted that it expects no further liability on this account and
all the voluntary corrective action activities are expected to be completed by
June-July 2011.
• Management expects to reduce CSCX opex by ~20-25% through various costcutting
measures over the next few quarters.
• Management highlighted its focus to aggressively grow CSCX’s topline by:
Marketing CSCX products outside US, particularly in emerging markets to
improve volumes.
Revival of sales in Japan through its tie up with a new Japanese AED
distributor.
Management cited favourable regulations could also be a key demand
driver for AEDs (e.g., Italian Senate will make AEDs mandatory for 40,000
pharmacies).
• OPTC’s consolidated debt was INR 7.5 bn at the quarter-end, with cash position of
INR 960 mn. This includes INR 3.5 bn debt raised for CSCX acquisition. Management
indicated overall cost of debt at ~5%.
Company Description
OPTC designs, develops, manufactures, and distributes devices that use light to detect
and sense, and medical monitoring equipment. Its non-invasive product profile includes
SPo2, multi-parameter monitors, pulse oxy-meters, digital thermometers, and fluid
warmers. OPTC also operates in the invasive segment through its 100% subsidiary
EuroCor, which specialises in research, development, and manufacture of interventional
cardiology products. Following the recent acquisition of Criticare, OPTC has successfully
expanded the non-invasive products portfolio. The acquisition will expand OPTC’s
noninvasive product portfolio by adding gas monitors and central monitoring stations,
which already have USFDA and CE approvals.
Investment Theme
OPTC’s growth is likely to be driven by non-invasive businesses in the medium term. We
expect the non-invasive segment to be the key revenue growth driver over FY11-13E.
Including CSCX, we expect ~34% CAGR in consolidated revenues and ~26.5% CAGR in
net profit over FY11-13E. We expect the non-invasive segment to continue to dominate
revenue mix, with its FY13 revenue share expected at ~83%. OPTC has been trying to
get the US FDA approval for its invasive products which if it comes could be a rerating
factor for the stock.
Key Risks
Product liability claim
The medical products of OPTC exposes them to any potential product liability claim if
their use causes or results in any death, injury personal injury or adverse effects. Certain
companies in the group maintain limited product liability insurance.
Changes in technology
The medical device industry is characterized by rapid changes resulting from
technological and scientific discoveries. The success of the company will depend on
ability to identify, develop and commercialize products in a timely and cost effective
manner.
Regulatory risk
Delay in new product launches due to hurdles in obtaining approvals from regulatory
authorities could affect revenues and profitability
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