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Opto Circuits (India) Ltd's 3QFY11 results were above our estimates. Key highlights:
Opto Circuits reported 62.5% YoY revenue growth in 3QFY11 to Rs4.18b (against our estimate of Rs3.95b), 39.4%
YoY EBITDA growth to Rs1.23b (against our estimate of Rs949m) and 46% YoY growth in adjusted PAT to Rs961m
(against our estimate of Rs736m).
Top-line growth was led mainly by the acquisition of CSC (Cardiac Science Corp) which reported revenues of Rs640m.
Ex-CSC, Opto's topline grew by 37.6% YoY to Rs3.54b led by a 153% YoY jump in invasive business segment
revenues due to new product launches by Eurocor, Opto's European subsidiary. Ex-CSC, non-invasive business
reported muted growth of 9% YoY at Rs2.3b.
EBITDA grew 39.4% YoY to Rs1.23b, while EBITDA margins contracted 490bp to 29.4% due to higher staff costs
and other expenses related to the CSC acquisition.
Adjusted PAT grew 46% YoY to Rs961m, boosted by higher other income of Rs105m, led by forex gains. CSC
reported PAT of ~Rs22m (~3.5% of revenue).
Opto delivered strong revenue and earnings growth over the past few years and consistently maintained high return
ratios. Despite rapid growth, the company remains a marginal player in the global medical devices industry, which gives
Opto the opportunity to sustain its high revenue growth rate for the next couple of years. We believe Opto is likely to grow
strongly in the invasive and non-invasive businesses due to a large market opportunity, expanding distribution network
and geographical spread, new product launches and a low base. However, an delayed financial turnaround at CSC, large
goodwill and debt on its books remain concerns. Based on our revised estimates, the stock trades at 14.5x FY11E EPS,
12.5x FY12E EPS and 9.5x FY13E EPS. We maintain Neutral with a revised target price of Rs274 (up from Rs241
earlier).
Invasive business drives revenue growth
Opto Circuits reported 62.5% YoY revenue growth in 3QFY11 to Rs4.18b (against our
estimate of Rs3.95b), 39.4% YoY EBITDA growth to Rs1.23b (against our estimate of
Rs949m) and 46% YoY growth in adjusted PAT to Rs961m (against our estimate of
Rs736m).
Topline growth was led mainly by the acquisition of CSC (Cardiac Science), which reported
revenues of Rs640m. However, CSC revenues were boosted by bunching of orders during
the year-end and this level of revenues may not continue in the future. Ex-CSC, Opto's
topline grew by 37.6% YoY to Rs3.54b led by a 153% YoY jump in the invasive business
segment revenue due to new product launches by Eurocor, Opto's European subsidiary.
Ex-CSC, non-invasive business reported muted growth of 9% YoY at Rs2.3b.
EBITDA grew by 39.4% YoY to Rs1.22b
The company reported EBITDA growth of 39.4% YoY to Rs1.22b (against our estimate
of Rs949m) and EBITDA margins contracted by 490bp to 29.4%. EBITDA growth was
muted compared with top-line growth because of higher staff costs and expenses related
to the CSC acquisition.
Adjusted PAT grew 46% YoY to Rs961m, boosted by higher other income of Rs105m, led
by forex gains. CSC reported PAT of ~Rs22m (~3.5% of revenue).
The management guided for 35% CAGR in the invasive segment, ~20% CAGR in the
non-invasive segment and 22-28% CAGR in overall revenue over the next couple of
years.
Acquires CSC for US$85m; expands portfolio, offers distribution leverage
After the acquisition of Cardiac Science, USA (CSC) and the subsequent open offer and
top-up option, CSC has become a 100% subsidiary of Opto, which acquired all the
outstanding shares of CSC at US$2.3/share, which values the company at ~US$60m.
However, besides this consideration, Opto will have spend US$25m on employee severance
packages and other factors, taking the total cost of the acquisition to US$85m. About 80%
of the consideration for this acquisition will be funded through debt, which will increase
the interest cost for Opto.
CSC makes and markets advanced diagnostic and therapeutic cardiology devices and
systems, including automated external defibrillators (AED), electrocardiogram devices
(ECG), cardiac stress treadmills and systems, diagnostic workstations, Holter monitoring
systems, hospital defibrillators, vital signs monitors, cardiac rehabilitation telemetry systems,
and cardiology data management systems (informatics), electronic medical record (EMR),
and other information systems. It has operations in North America, Europe, and Asia and
the acquisition will help to expand Opto's product portfolio in the non-invasive segment,
which is essential to get access to large distributors.
Opto will add products like automated external defibrillators and cardiac treadmills to its
non-invasive product portfolio. Opto can access CSC's access to large hospitals in the US
through its distributors to market its own non-invasive product portfolio. Opto can also
leverage its distribution network in Europe and RoW to sell CSC's products where CSC
has little presence. Opto will sell CSC products in India and other emerging markets from
February 2011. Opto expects CSC to generate revenues of US$35m-40m on a quarterly
basis, going forward.
US FDA issues expected to be resolved by June; no provisioning expected
Between November 2009 and July 2010, CSC had to recall 26,000 automated external
defibrillators (AEDs) and consequently the US FDA sent CSC a warning letter. The
company has provided for US$33m as charges for the recall and related field software
upgrades. The management indicated that, as per the plan submitted to the US FDA,
13,000 AEDs had been recalled and the rest were expected to be recalled by June 2011.
No further losses/provisions are expected due to the product recalls.
Management guides for 10-15% EBITDA margins for CSC over 12 months,
we find the guidance aggressive
As a result of the product recalls, CSC's financial health has deteriorated as it incurred
operating losses of US$34m in CY09 (which is ~46% of Opto's FY10 EBITDA) and net
loss of US$77m. Intangible assets on the books were US$28m as on 31 December 2009
after it took a US$108m write-off due to impairment of business value in CY08. In the
9mCY10, CSC posted EBITDA loss of US$22m and net loss of US$33m (including a
one-time write-off of US$11m). The management said CSC would turn EBITDA neutral
in 4QFY11 and achieve EBITDA margins of 10-15% over 12 months. It expects the
turnaround to be led by a cut in SG&A costs, rationalization of manpower, cross-selling of
products and services and one-time savings due to de-listing of the company (it will not be
required to comply with mandatory regulatory requirements for a listed entity). Resumption
of growth in CSC's Japanese operations (expected from mid-CY11) is also likely to aid
recovery as the company has tied up with a new distributor in Japan after its break-up
with the previous distributor, which impacted revenue. However, we expect gradual progress
in CSC's turnaround as it would take 6-9 months to transfer the production to Indian and
Malaysian facilities and reduction in manpower will be gradual over one year. We expect
EBITDA break-even by FY12 against management guidance of 10-15% EBITDA margin.
High debt, goodwill on books remain concerns
Opto raised ~Rs3b in long-term debt to finance the CSC acquisition. The total debt on
Opto's books is ~Rs7.5b, which translates into 0.65x D/E ratio. We believe Opto will have
to raise more debt to fund its higher growth guidance, which will impact its P&L. Goodwill
on the company's books is Rs5.3b, which is ~50% of its net worth. Deterioration in market
dynamics leading to intangible write-off may impact Opto's financials.
Upgrading FY11 EPS estimates by 10%, 13% for FY12, 3% for FY13
Based on the 3QFY11 result and guidance by the management, we are raising our top-line
and EPS estimates by 3-4% and 3-13% respectively. We have raised our EPS estimate
for FY11 by 10% to Rs18.1, FY12 estimate by 13% to Rs21 and FY13 estimate by 3% to
Rs27.6.
Outlook and valuation
Opto delivered strong revenue and earnings growth over the past few years and consistently
maintained high return ratios. Despite rapid growth the company remains a marginal player
in the global medical devices industry, which gives Opto an opportunity to sustain its high
revenue growth for the next couple of years. We believe Opto is likely to grow strongly in
invasive and non-invasive businesses due to a large market opportunity, expanding distribution
and its geographical spread, new product launches and a low base. However, early financial
turnaround of CSC, large goodwill and debt on books are concerns. Based on our revised
estimates, the stock trades at 14.5x FY11E EPS, 12.5x FY12E EPS and 9.5x FY13E
EPS. We maintain Neutral with a revised target price of Rs274 (up from Rs241 earlier).
Company description
Opto Circuits (India) Ltd is the largest medical device maker
from India. The company started its business as a supplier
of sensors to large OEMs and has developed into a full
fledged producer and supplier of patient monitoring devices
in the non-invasive segment and stents in the invasive
segment, led by acquisitions. The company has 1,300
distributors in over 50 countries.
Key investment arguments
Opto's core business of non-invasive devices is
strengthening due to favorable market dynamics,
diversified product offerings, cost competitiveness and
expanding distribution. The non-invasive business
segment is expected to grow 51% CAGR over FY10-
12.
The invasive business is a key long-term growth driver
due to its large market opportunity, new product launches
and increasing product awareness. This business is
expected to grow 32% CAGR over FY10-12.
Opto has delivered strong revenue and earnings growth
over the past few years and consistently maintained
high return ratios.
Key investment risks
Opto has not generated adequate free cash-flow
because its high working capital eats into its profits.
Product approval in regulated markets and product
acceptance especially in the invasive segment is difficult
and time consuming.
Higher-than-expected rupee appreciation could hurt
future earnings.
Technological advancement, especially in the invasive
segment, may reduce the size of the opportunity to
enhance the profitability of acquired companies that
currently have low margins.
Recent developments
Acquired Cardiac Science Corp (manufacturer of noninvasive
medical devices) in the US.
Valuation and view
Stable profitability and working capital days are likely
to sustain high return ratios. The company is likely to
post 25.3% earnings CAGR over FY10-12.
The stock trades at 14.5x FY11E EPS, 12.5x FY12E
EPS and 9.5x FY13E EPS.. Maintain Neutral.
Sector view
The global patient monitoring device market size is
estimated at US$5.7b in 2011, up from US$2.8b in 2002,
representing 6.6% CAGR. The size of the global
coronary stent market is estimated at US$7b with the
top-four players accounting for 85% of the market.
Market growth will be driven by emerging markets in
future
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Opto Circuits (India) Ltd's 3QFY11 results were above our estimates. Key highlights:
Opto Circuits reported 62.5% YoY revenue growth in 3QFY11 to Rs4.18b (against our estimate of Rs3.95b), 39.4%
YoY EBITDA growth to Rs1.23b (against our estimate of Rs949m) and 46% YoY growth in adjusted PAT to Rs961m
(against our estimate of Rs736m).
Top-line growth was led mainly by the acquisition of CSC (Cardiac Science Corp) which reported revenues of Rs640m.
Ex-CSC, Opto's topline grew by 37.6% YoY to Rs3.54b led by a 153% YoY jump in invasive business segment
revenues due to new product launches by Eurocor, Opto's European subsidiary. Ex-CSC, non-invasive business
reported muted growth of 9% YoY at Rs2.3b.
EBITDA grew 39.4% YoY to Rs1.23b, while EBITDA margins contracted 490bp to 29.4% due to higher staff costs
and other expenses related to the CSC acquisition.
Adjusted PAT grew 46% YoY to Rs961m, boosted by higher other income of Rs105m, led by forex gains. CSC
reported PAT of ~Rs22m (~3.5% of revenue).
Opto delivered strong revenue and earnings growth over the past few years and consistently maintained high return
ratios. Despite rapid growth, the company remains a marginal player in the global medical devices industry, which gives
Opto the opportunity to sustain its high revenue growth rate for the next couple of years. We believe Opto is likely to grow
strongly in the invasive and non-invasive businesses due to a large market opportunity, expanding distribution network
and geographical spread, new product launches and a low base. However, an delayed financial turnaround at CSC, large
goodwill and debt on its books remain concerns. Based on our revised estimates, the stock trades at 14.5x FY11E EPS,
12.5x FY12E EPS and 9.5x FY13E EPS. We maintain Neutral with a revised target price of Rs274 (up from Rs241
earlier).
Invasive business drives revenue growth
Opto Circuits reported 62.5% YoY revenue growth in 3QFY11 to Rs4.18b (against our
estimate of Rs3.95b), 39.4% YoY EBITDA growth to Rs1.23b (against our estimate of
Rs949m) and 46% YoY growth in adjusted PAT to Rs961m (against our estimate of
Rs736m).
Topline growth was led mainly by the acquisition of CSC (Cardiac Science), which reported
revenues of Rs640m. However, CSC revenues were boosted by bunching of orders during
the year-end and this level of revenues may not continue in the future. Ex-CSC, Opto's
topline grew by 37.6% YoY to Rs3.54b led by a 153% YoY jump in the invasive business
segment revenue due to new product launches by Eurocor, Opto's European subsidiary.
Ex-CSC, non-invasive business reported muted growth of 9% YoY at Rs2.3b.
EBITDA grew by 39.4% YoY to Rs1.22b
The company reported EBITDA growth of 39.4% YoY to Rs1.22b (against our estimate
of Rs949m) and EBITDA margins contracted by 490bp to 29.4%. EBITDA growth was
muted compared with top-line growth because of higher staff costs and expenses related
to the CSC acquisition.
Adjusted PAT grew 46% YoY to Rs961m, boosted by higher other income of Rs105m, led
by forex gains. CSC reported PAT of ~Rs22m (~3.5% of revenue).
The management guided for 35% CAGR in the invasive segment, ~20% CAGR in the
non-invasive segment and 22-28% CAGR in overall revenue over the next couple of
years.
Acquires CSC for US$85m; expands portfolio, offers distribution leverage
After the acquisition of Cardiac Science, USA (CSC) and the subsequent open offer and
top-up option, CSC has become a 100% subsidiary of Opto, which acquired all the
outstanding shares of CSC at US$2.3/share, which values the company at ~US$60m.
However, besides this consideration, Opto will have spend US$25m on employee severance
packages and other factors, taking the total cost of the acquisition to US$85m. About 80%
of the consideration for this acquisition will be funded through debt, which will increase
the interest cost for Opto.
CSC makes and markets advanced diagnostic and therapeutic cardiology devices and
systems, including automated external defibrillators (AED), electrocardiogram devices
(ECG), cardiac stress treadmills and systems, diagnostic workstations, Holter monitoring
systems, hospital defibrillators, vital signs monitors, cardiac rehabilitation telemetry systems,
and cardiology data management systems (informatics), electronic medical record (EMR),
and other information systems. It has operations in North America, Europe, and Asia and
the acquisition will help to expand Opto's product portfolio in the non-invasive segment,
which is essential to get access to large distributors.
Opto will add products like automated external defibrillators and cardiac treadmills to its
non-invasive product portfolio. Opto can access CSC's access to large hospitals in the US
through its distributors to market its own non-invasive product portfolio. Opto can also
leverage its distribution network in Europe and RoW to sell CSC's products where CSC
has little presence. Opto will sell CSC products in India and other emerging markets from
February 2011. Opto expects CSC to generate revenues of US$35m-40m on a quarterly
basis, going forward.
US FDA issues expected to be resolved by June; no provisioning expected
Between November 2009 and July 2010, CSC had to recall 26,000 automated external
defibrillators (AEDs) and consequently the US FDA sent CSC a warning letter. The
company has provided for US$33m as charges for the recall and related field software
upgrades. The management indicated that, as per the plan submitted to the US FDA,
13,000 AEDs had been recalled and the rest were expected to be recalled by June 2011.
No further losses/provisions are expected due to the product recalls.
Management guides for 10-15% EBITDA margins for CSC over 12 months,
we find the guidance aggressive
As a result of the product recalls, CSC's financial health has deteriorated as it incurred
operating losses of US$34m in CY09 (which is ~46% of Opto's FY10 EBITDA) and net
loss of US$77m. Intangible assets on the books were US$28m as on 31 December 2009
after it took a US$108m write-off due to impairment of business value in CY08. In the
9mCY10, CSC posted EBITDA loss of US$22m and net loss of US$33m (including a
one-time write-off of US$11m). The management said CSC would turn EBITDA neutral
in 4QFY11 and achieve EBITDA margins of 10-15% over 12 months. It expects the
turnaround to be led by a cut in SG&A costs, rationalization of manpower, cross-selling of
products and services and one-time savings due to de-listing of the company (it will not be
required to comply with mandatory regulatory requirements for a listed entity). Resumption
of growth in CSC's Japanese operations (expected from mid-CY11) is also likely to aid
recovery as the company has tied up with a new distributor in Japan after its break-up
with the previous distributor, which impacted revenue. However, we expect gradual progress
in CSC's turnaround as it would take 6-9 months to transfer the production to Indian and
Malaysian facilities and reduction in manpower will be gradual over one year. We expect
EBITDA break-even by FY12 against management guidance of 10-15% EBITDA margin.
High debt, goodwill on books remain concerns
Opto raised ~Rs3b in long-term debt to finance the CSC acquisition. The total debt on
Opto's books is ~Rs7.5b, which translates into 0.65x D/E ratio. We believe Opto will have
to raise more debt to fund its higher growth guidance, which will impact its P&L. Goodwill
on the company's books is Rs5.3b, which is ~50% of its net worth. Deterioration in market
dynamics leading to intangible write-off may impact Opto's financials.
Upgrading FY11 EPS estimates by 10%, 13% for FY12, 3% for FY13
Based on the 3QFY11 result and guidance by the management, we are raising our top-line
and EPS estimates by 3-4% and 3-13% respectively. We have raised our EPS estimate
for FY11 by 10% to Rs18.1, FY12 estimate by 13% to Rs21 and FY13 estimate by 3% to
Rs27.6.
Outlook and valuation
Opto delivered strong revenue and earnings growth over the past few years and consistently
maintained high return ratios. Despite rapid growth the company remains a marginal player
in the global medical devices industry, which gives Opto an opportunity to sustain its high
revenue growth for the next couple of years. We believe Opto is likely to grow strongly in
invasive and non-invasive businesses due to a large market opportunity, expanding distribution
and its geographical spread, new product launches and a low base. However, early financial
turnaround of CSC, large goodwill and debt on books are concerns. Based on our revised
estimates, the stock trades at 14.5x FY11E EPS, 12.5x FY12E EPS and 9.5x FY13E
EPS. We maintain Neutral with a revised target price of Rs274 (up from Rs241 earlier).
Company description
Opto Circuits (India) Ltd is the largest medical device maker
from India. The company started its business as a supplier
of sensors to large OEMs and has developed into a full
fledged producer and supplier of patient monitoring devices
in the non-invasive segment and stents in the invasive
segment, led by acquisitions. The company has 1,300
distributors in over 50 countries.
Key investment arguments
Opto's core business of non-invasive devices is
strengthening due to favorable market dynamics,
diversified product offerings, cost competitiveness and
expanding distribution. The non-invasive business
segment is expected to grow 51% CAGR over FY10-
12.
The invasive business is a key long-term growth driver
due to its large market opportunity, new product launches
and increasing product awareness. This business is
expected to grow 32% CAGR over FY10-12.
Opto has delivered strong revenue and earnings growth
over the past few years and consistently maintained
high return ratios.
Key investment risks
Opto has not generated adequate free cash-flow
because its high working capital eats into its profits.
Product approval in regulated markets and product
acceptance especially in the invasive segment is difficult
and time consuming.
Higher-than-expected rupee appreciation could hurt
future earnings.
Technological advancement, especially in the invasive
segment, may reduce the size of the opportunity to
enhance the profitability of acquired companies that
currently have low margins.
Recent developments
Acquired Cardiac Science Corp (manufacturer of noninvasive
medical devices) in the US.
Valuation and view
Stable profitability and working capital days are likely
to sustain high return ratios. The company is likely to
post 25.3% earnings CAGR over FY10-12.
The stock trades at 14.5x FY11E EPS, 12.5x FY12E
EPS and 9.5x FY13E EPS.. Maintain Neutral.
Sector view
The global patient monitoring device market size is
estimated at US$5.7b in 2011, up from US$2.8b in 2002,
representing 6.6% CAGR. The size of the global
coronary stent market is estimated at US$7b with the
top-four players accounting for 85% of the market.
Market growth will be driven by emerging markets in
future
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