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JP Morgan:: Opto Circuits- Q3 Management Call: Clarity on Cardiac Science, Increase PT to Rs362
• More clarity on Cardiac Science acquisition, raise PT to Rs362: We
incorporate Cardiac Science (CSCX) acquisition and raise our FY11-FY13E
EPS estimates by 2%-5%. We accordingly increase our Sep-11 PT to Rs362
(from Rs350) on 15x FY12E P/E. Management has indicated a road map for
turning around CS and we are enthused by the management guidance. We
also believe that disclosures on CS will remove overhang on the Opto stock
and the recent de-rating (following CS acquisition) is likely to reverse.
Stock is up 17% over past 2-days, but still ~15% below the level when CS
acquisition was announced. We reiterate our OW rating on OPTC.
• CSCX: Roadmap to recovery: 1) Management has guided at revenue run
rate of USD35-40MM every quarter in 2011 and guided to 20% growth in
2012-13. EBITDA margin guidance of 10-15% from April’11 quarter. 2)
Cost reduction measures to drive USD25-30MM savings next year –
employee costs rationalized in Dec ’10, expect 20% savings on employee
costs, moving manufacturing from US to lower cost locations in India and
Malaysia, expect 20-25% reduction in manufacturing costs. R&D backend
being relocated to India; will reduce R&D costs by 30%-40%. 3) Looking to
market CSCX products in Asia, leveraging off Opto’s distribution. New
distributor appointed in Japan, where sales had stopped on account of
CSCX losing its old distributor 4) CSCX replaced 50% of AED recalls at
cost of US$18.5MM last year with the remaining expected to be replaced by
mid-2011.
• OPTC’s Malaysian plant ramping up, guidance reiterated: New plant in
Malaysia will ramp up over next 6-months and will aid margin improvement
for OPTC. Management have guided for 20% growth for OPTC’s noninvasive products and 30%-35% for invasive products over the next 2 years.
• Key risks: Key risks to our thesis include delay in turnaround in CSCX,
potential large ticket acquisitions, deterioration in working capital, product
obsolescence and adverse regulatory changes
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