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Opto Circuits
Monitoring healthy growth
Event
�� We initiate coverage on OPTC with an OP rating and TP of Rs325. We like
OPTC given its focus on the large global medical device market with high
entry barriers, its proficiency to turn around acquisitions by leveraging its wide
distribution network, and attractive valuation despite superior return ratios.
Impact
�� Riding global healthcare spending: With the ageing population, healthcarespending
is outpacing GDP growth globally. The global medical equipment
market is currently valued at ~ US$170b with OPTC still a marginal player
(
large product basket (invasive & non-invasive), wide distribution network and
cost competency, OPTC appears well-positioned to grow through market
share gains in the product lines where it operates.
�� Inorganic route to success: Opto’s sales and EPS CAGRs were 61% and
22% respectively in FY06-11, driven by its strategy of acquiring
underperforming businesses (it spent ~US$200m last decade on acquisitions)
and turning them around by reducing the cost base (by shifting manufacturing,
integrating the supply chain, deriving economies of scale) and cross-selling
products through its wide distribution network. Strong R&D/engineering set-up
with a focus on product development has helped it to sustain an edge in its
product lines.
�� Cardiac Science (CSCX) integration critical: OPTC acquired troubled US
based CSCX in Dec-10 at a total cost of US$85m (@ 0.6x EV/sales) to further
strengthen its non-invasive business (~80% of top-line) with the addition of
defibrillation & Cardiac monitoring. Opto expects significant synergies to drive
a turnaround at CSCX and initial signs are encouraging.
�� Invasive segment is key driver (~20% of sales) given the niche product
portfolio of coronary stents and catheters which have a large potential given
the limited competition. US launch (likely post FY14) is a long-term catalyst.
Earnings and target price revision
�� We initiate coverage with an Outperform rating and a TP of Rs325.
Price catalyst
�� 12-month price target: Rs325.00 based on a PER methodology.
�� Catalyst: 1) CSCX turnaround 2) Working capital improvement
Action and recommendation
�� OPTC is trading at 9.8x FY13E PER, at a significant discount to its
international peers, despite our 3yr EPS CAGR estimate of 19% and ROE of
26%. We value OPTC @ 12x FY13E earnings, in line with its historical mean.
In our view, CSCX’s turnaround & working capital improvement (FCF
generation) would be key valuation drivers for OPTC. Potential value
destroying acquisitions, a slowdown in healthcare spend and further working
capital deterioration would be the key risks on OPTC.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Opto Circuits
Monitoring healthy growth
Event
�� We initiate coverage on OPTC with an OP rating and TP of Rs325. We like
OPTC given its focus on the large global medical device market with high
entry barriers, its proficiency to turn around acquisitions by leveraging its wide
distribution network, and attractive valuation despite superior return ratios.
Impact
�� Riding global healthcare spending: With the ageing population, healthcarespending
is outpacing GDP growth globally. The global medical equipment
market is currently valued at ~ US$170b with OPTC still a marginal player
(
large product basket (invasive & non-invasive), wide distribution network and
cost competency, OPTC appears well-positioned to grow through market
share gains in the product lines where it operates.
�� Inorganic route to success: Opto’s sales and EPS CAGRs were 61% and
22% respectively in FY06-11, driven by its strategy of acquiring
underperforming businesses (it spent ~US$200m last decade on acquisitions)
and turning them around by reducing the cost base (by shifting manufacturing,
integrating the supply chain, deriving economies of scale) and cross-selling
products through its wide distribution network. Strong R&D/engineering set-up
with a focus on product development has helped it to sustain an edge in its
product lines.
�� Cardiac Science (CSCX) integration critical: OPTC acquired troubled US
based CSCX in Dec-10 at a total cost of US$85m (@ 0.6x EV/sales) to further
strengthen its non-invasive business (~80% of top-line) with the addition of
defibrillation & Cardiac monitoring. Opto expects significant synergies to drive
a turnaround at CSCX and initial signs are encouraging.
�� Invasive segment is key driver (~20% of sales) given the niche product
portfolio of coronary stents and catheters which have a large potential given
the limited competition. US launch (likely post FY14) is a long-term catalyst.
Earnings and target price revision
�� We initiate coverage with an Outperform rating and a TP of Rs325.
Price catalyst
�� 12-month price target: Rs325.00 based on a PER methodology.
�� Catalyst: 1) CSCX turnaround 2) Working capital improvement
Action and recommendation
�� OPTC is trading at 9.8x FY13E PER, at a significant discount to its
international peers, despite our 3yr EPS CAGR estimate of 19% and ROE of
26%. We value OPTC @ 12x FY13E earnings, in line with its historical mean.
In our view, CSCX’s turnaround & working capital improvement (FCF
generation) would be key valuation drivers for OPTC. Potential value
destroying acquisitions, a slowdown in healthcare spend and further working
capital deterioration would be the key risks on OPTC.
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