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Opto Circuits' 1QFY12 results were better than our expectations. Key highlights are:
Opto Circuits reported 78% YoY growth in revenue to INR5.2b (in line with our estimate) and 47% YoY growth in
EBITDA to INR1.4b (v/s our estimate of INR1.19b). EBITDA margin contracted by 570bp to 27.5% (well above our
estimate of 22.9%). Adjusted PAT grew 40% YoY to INR1.16b (v/s our estimate of INR922m).
Topline growth was led partly by the acquisition of CSC. Ex-CSC, we estimate 30% YoY growth in Opto's topline, led
by 33% YoY growth in the non-invasive segment. The invasive business reported revenue growth of 25% YoY.
EBITDA grew 47.5% YoY to INR1.43b (v/s our estimate of INR1.19b) while EBITDA margin contracted by 570bp to
27.5% (well above our estimate of 22.9%).
Adjusted PAT grew 40.6% YoY to INR1.16b (v/s our estimate of INR922m), in line with operational performance but
impacted by 2x increase in interest cost.
Opto has delivered strong revenue and earnings growth over the last few years. Also, it has consistently maintained its
high return ratios. Despite rapid growth, the company remains a marginal player in the global medical devices industry,
which gives it the opportunity to sustain its high revenue growth rate for the next couple of years. We believe that Opto
is likely to see strong growth in both the invasive and non-invasive businesses on the back of large market opportunity,
expanding distribution network and geographical spread, new product launches and low base. However, early financial
turnaround of CSC, large goodwill and debt on books coupled with high working capital requirements and very low free
cash flow generation remain concerns. The stock trades at 13x FY12E and 10.4x FY13E EPS. We maintain Neutral
with target price of INR318 (12x FY13E EPS).
Non-invasive business drives revenue growth on the back of CSC
acquisition
Opto Circuits reported 78% YoY growth in revenue to INR5.2b (in line with our estimate)
and 47% YoY growth in EBITDA to INR1.4b (v/s our estimate of INR1.19b). EBITDA
margin contracted by 570bp to 27.5% (well above our estimate of 22.9%). Adjusted PAT
grew 40% YoY to INR1.16b (v/s our estimate of INR922m), led by better operational
performance.
Topline growth was led partly by the acquisition of CSC. Though the management has not
disclosed CSC revenue, we estimate it at INR1.4b, as the management has guided revenue
of USD140m/INR6.2b for FY12. Ex-CSC, we estimate 30% YoY growth in Opto's topline,
led by 33.3% YoY growth in the non-invasive segment to INR2.82b. The invasive business
reported revenue growth of 25.3% YoY to INR940m.
EBITDA grew 47.3% YoY to INR1.43b
EBITDA grew 47.5% YoY to INR1.43b (v/s our estimate of INR1.19b) while EBITDA
margin contracted by 570bp to 27.5% (well above our estimate of 22.9%). EBITDA
growth was muted compared to topline growth because of higher staff cost and other
expenses related to CSC acquisition. EBITDA was above our estimate due to better than
estimated EBITDA margin, led by lower than estimated SG&A expenditure.
Adjusted PAT grew 40.6% YoY to INR1.16b (v/s our estimate of INR922m), in line with
operational performance but impacted by 2x increase in interest cost.
The management has guided 20% growth in revenue (excluding CSC) for FY12. We note
that this guidance is lower than the earlier guidance of 22-25% given post 4QFY11 results.
Management undertakes business restructuring
During the quarter, the management has undertaken restructuring of various business
segments and subsidiaries to enhance cost effectiveness and operating efficiency.
Accordingly, it transferred investments of three US-based subsidiaries, viz. Cardiac Science
Corporation, Criticate and Unetix to a new 100% subsidiary of Opto Circuits, called Opto
Cardiac Care Limited. Further, investments of two subsidiaries, viz. Eurocor Gmbh and
NS Remedies were transferred to a new 100% subsidiary of Opto Circuits, called Opto
Eurocor Healthcare Limited. We believe that the restructuring exercise is a long-term
positive for the company, as it helps to leverage the distribution infrastructure of all the
subsidiaries. Also, it will help reduce operational overheads of these companies.
Upgrading estimates marginally
Despite the strong EBITDA growth in 1QFY12, our estimates for FY12 and FY13 have
seen only minor upgrades due to:
Lower organic revenue growth guidance given by the management for FY12. The
management has guided 20% revenue growth (ex-CSC) v/s its earlier guidance of 22-
25% growth given post 4QFY11 results.
Higher interest cost (we now estimate INR545m for FY12 and INR575m for FY13 v/
s our INR495m and INR523m respectively, earlier).
We have upgraded our EBITDA margin estimates for FY12 and FY13 from 23.9% and
26% earlier to 25.3% and 26.8%, respectively. However, we have downgraded revenue
estimates for FY12 and FY13 from INR22.87b and INR26.33b earlier to INR22.44b and
INR25.84b, respectively. Our EPS estimates for FY12 and FY13 have been upgraded by
3.4% and 0.5%, respectively.
High debt, goodwill and deteriorating working capital remain concerns
Currently, the total debt on Opto's book stands at ~INR8.84b, which translates into a D/E
ratio of 0.7x. We believe that Opto will have to raise further debt to fund its higher growth
guidance, which will push up interest cost. Also, goodwill stands at INR5.95b, ~45% of its
net worth. Any deterioration in the market dynamics leading to intangible write-off may
impact Opto's financials, going forward. Further, working capital cycle deteriorated in
FY11, with INR3.7b increase in non-cash net current assets. The company's inventory
days and debtor days increased sharply during the year. However, the management had
clarified that the increase in working capital was on account of shifting of production from
the US to its Indian and Malaysian facilities and has guided reduction in working capital
cycle, going forward.
Valuation and view
Opto has delivered strong revenue and earnings growth over the last few years. Also, it
has consistently maintained its high return ratios. Despite rapid growth, the company remains
a marginal player in the global medical devices industry, which gives it the opportunity to
sustain its high revenue growth rate for the next couple of years. We believe that Opto is
likely to see strong growth in both the invasive and non-invasive businesses on the back of
large market opportunity, expanding distribution network and geographical spread, new
product launches and low base. However, early financial turnaround of CSC, large goodwill
and debt on books coupled with high working capital requirements and very low free cash
flow generation remain concerns. The stock trades at 13x FY12E and 10.3x FY13E EPS.
We maintain Neutral with target price of INR318 (12x FY13E EPS).
Company description
Opto Circuits is the largest medical device maker from India.
The company started its business as a supplier of sensors
to large OEMs. Over the years, Opto catapulted itself 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 a
strong distribution network of 1,300 distributors across more
than 50 countries.
Key investment arguments
Opto's core business of non-invasive devices is getting
stronger due to favorable market dynamics, diversified
product offerings, cost competitiveness and expanding
distribution reach. We expect the non-invasive business
segment to grow at 30% CAGR over FY11-13.
The invasive business is a key long-term growth driver
due to large market opportunity, new product launches
and increasing product awareness. We expect this
business to grow at 22% CAGR over FY11-13.
Opto has delivered strong growth in revenue and
earnings in the past few years. It has consistently
maintained its high return ratios.
Key investment risks
High working capital eats away large portions of the
company's profits. Therefore, it has not generated
adequate free cash flows.
Product approvals in regulated markets and product
acceptance are difficult and time consuming, especially
in the invasive segment.
Higher than expected rupee appreciation could
adversely impact future earnings.
Technological advancement especially in the invasive
segment may reduce the size of opportunity to enhance
profitability of acquired companies significantly.
Recent developments
Acquired Cardiac Science Corporation (manufacturer
of non-invasive medical devices) in the US.
Valuation and view
Stable profitability and working capital days are likely
to sustain the high return ratios. Opto is likely to report
16.1% earnings CAGR over FY11-13.
The stock trades at 13x FY12E EPS of INR21.2 and
10.4x FY13E EPS of INR26.5.
Sector view
The global patient monitoring device market size is
estimated at USD5.7b in 2011, up from USD2.8b in
2002, representing a CAGR of 6.6%. The size of the
global coronary stent market is estimated at USD7b,
with top-4 players accounting for 85% of the market.
Market growth will be driven by emerging markets in
the future.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Opto Circuits' 1QFY12 results were better than our expectations. Key highlights are:
Opto Circuits reported 78% YoY growth in revenue to INR5.2b (in line with our estimate) and 47% YoY growth in
EBITDA to INR1.4b (v/s our estimate of INR1.19b). EBITDA margin contracted by 570bp to 27.5% (well above our
estimate of 22.9%). Adjusted PAT grew 40% YoY to INR1.16b (v/s our estimate of INR922m).
Topline growth was led partly by the acquisition of CSC. Ex-CSC, we estimate 30% YoY growth in Opto's topline, led
by 33% YoY growth in the non-invasive segment. The invasive business reported revenue growth of 25% YoY.
EBITDA grew 47.5% YoY to INR1.43b (v/s our estimate of INR1.19b) while EBITDA margin contracted by 570bp to
27.5% (well above our estimate of 22.9%).
Adjusted PAT grew 40.6% YoY to INR1.16b (v/s our estimate of INR922m), in line with operational performance but
impacted by 2x increase in interest cost.
Opto has delivered strong revenue and earnings growth over the last few years. Also, it has consistently maintained its
high return ratios. Despite rapid growth, the company remains a marginal player in the global medical devices industry,
which gives it the opportunity to sustain its high revenue growth rate for the next couple of years. We believe that Opto
is likely to see strong growth in both the invasive and non-invasive businesses on the back of large market opportunity,
expanding distribution network and geographical spread, new product launches and low base. However, early financial
turnaround of CSC, large goodwill and debt on books coupled with high working capital requirements and very low free
cash flow generation remain concerns. The stock trades at 13x FY12E and 10.4x FY13E EPS. We maintain Neutral
with target price of INR318 (12x FY13E EPS).
Non-invasive business drives revenue growth on the back of CSC
acquisition
Opto Circuits reported 78% YoY growth in revenue to INR5.2b (in line with our estimate)
and 47% YoY growth in EBITDA to INR1.4b (v/s our estimate of INR1.19b). EBITDA
margin contracted by 570bp to 27.5% (well above our estimate of 22.9%). Adjusted PAT
grew 40% YoY to INR1.16b (v/s our estimate of INR922m), led by better operational
performance.
Topline growth was led partly by the acquisition of CSC. Though the management has not
disclosed CSC revenue, we estimate it at INR1.4b, as the management has guided revenue
of USD140m/INR6.2b for FY12. Ex-CSC, we estimate 30% YoY growth in Opto's topline,
led by 33.3% YoY growth in the non-invasive segment to INR2.82b. The invasive business
reported revenue growth of 25.3% YoY to INR940m.
EBITDA grew 47.3% YoY to INR1.43b
EBITDA grew 47.5% YoY to INR1.43b (v/s our estimate of INR1.19b) while EBITDA
margin contracted by 570bp to 27.5% (well above our estimate of 22.9%). EBITDA
growth was muted compared to topline growth because of higher staff cost and other
expenses related to CSC acquisition. EBITDA was above our estimate due to better than
estimated EBITDA margin, led by lower than estimated SG&A expenditure.
Adjusted PAT grew 40.6% YoY to INR1.16b (v/s our estimate of INR922m), in line with
operational performance but impacted by 2x increase in interest cost.
The management has guided 20% growth in revenue (excluding CSC) for FY12. We note
that this guidance is lower than the earlier guidance of 22-25% given post 4QFY11 results.
Management undertakes business restructuring
During the quarter, the management has undertaken restructuring of various business
segments and subsidiaries to enhance cost effectiveness and operating efficiency.
Accordingly, it transferred investments of three US-based subsidiaries, viz. Cardiac Science
Corporation, Criticate and Unetix to a new 100% subsidiary of Opto Circuits, called Opto
Cardiac Care Limited. Further, investments of two subsidiaries, viz. Eurocor Gmbh and
NS Remedies were transferred to a new 100% subsidiary of Opto Circuits, called Opto
Eurocor Healthcare Limited. We believe that the restructuring exercise is a long-term
positive for the company, as it helps to leverage the distribution infrastructure of all the
subsidiaries. Also, it will help reduce operational overheads of these companies.
Upgrading estimates marginally
Despite the strong EBITDA growth in 1QFY12, our estimates for FY12 and FY13 have
seen only minor upgrades due to:
Lower organic revenue growth guidance given by the management for FY12. The
management has guided 20% revenue growth (ex-CSC) v/s its earlier guidance of 22-
25% growth given post 4QFY11 results.
Higher interest cost (we now estimate INR545m for FY12 and INR575m for FY13 v/
s our INR495m and INR523m respectively, earlier).
We have upgraded our EBITDA margin estimates for FY12 and FY13 from 23.9% and
26% earlier to 25.3% and 26.8%, respectively. However, we have downgraded revenue
estimates for FY12 and FY13 from INR22.87b and INR26.33b earlier to INR22.44b and
INR25.84b, respectively. Our EPS estimates for FY12 and FY13 have been upgraded by
3.4% and 0.5%, respectively.
High debt, goodwill and deteriorating working capital remain concerns
Currently, the total debt on Opto's book stands at ~INR8.84b, which translates into a D/E
ratio of 0.7x. We believe that Opto will have to raise further debt to fund its higher growth
guidance, which will push up interest cost. Also, goodwill stands at INR5.95b, ~45% of its
net worth. Any deterioration in the market dynamics leading to intangible write-off may
impact Opto's financials, going forward. Further, working capital cycle deteriorated in
FY11, with INR3.7b increase in non-cash net current assets. The company's inventory
days and debtor days increased sharply during the year. However, the management had
clarified that the increase in working capital was on account of shifting of production from
the US to its Indian and Malaysian facilities and has guided reduction in working capital
cycle, going forward.
Valuation and view
Opto has delivered strong revenue and earnings growth over the last few years. Also, it
has consistently maintained its high return ratios. Despite rapid growth, the company remains
a marginal player in the global medical devices industry, which gives it the opportunity to
sustain its high revenue growth rate for the next couple of years. We believe that Opto is
likely to see strong growth in both the invasive and non-invasive businesses on the back of
large market opportunity, expanding distribution network and geographical spread, new
product launches and low base. However, early financial turnaround of CSC, large goodwill
and debt on books coupled with high working capital requirements and very low free cash
flow generation remain concerns. The stock trades at 13x FY12E and 10.3x FY13E EPS.
We maintain Neutral with target price of INR318 (12x FY13E EPS).
Company description
Opto Circuits is the largest medical device maker from India.
The company started its business as a supplier of sensors
to large OEMs. Over the years, Opto catapulted itself 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 a
strong distribution network of 1,300 distributors across more
than 50 countries.
Key investment arguments
Opto's core business of non-invasive devices is getting
stronger due to favorable market dynamics, diversified
product offerings, cost competitiveness and expanding
distribution reach. We expect the non-invasive business
segment to grow at 30% CAGR over FY11-13.
The invasive business is a key long-term growth driver
due to large market opportunity, new product launches
and increasing product awareness. We expect this
business to grow at 22% CAGR over FY11-13.
Opto has delivered strong growth in revenue and
earnings in the past few years. It has consistently
maintained its high return ratios.
Key investment risks
High working capital eats away large portions of the
company's profits. Therefore, it has not generated
adequate free cash flows.
Product approvals in regulated markets and product
acceptance are difficult and time consuming, especially
in the invasive segment.
Higher than expected rupee appreciation could
adversely impact future earnings.
Technological advancement especially in the invasive
segment may reduce the size of opportunity to enhance
profitability of acquired companies significantly.
Recent developments
Acquired Cardiac Science Corporation (manufacturer
of non-invasive medical devices) in the US.
Valuation and view
Stable profitability and working capital days are likely
to sustain the high return ratios. Opto is likely to report
16.1% earnings CAGR over FY11-13.
The stock trades at 13x FY12E EPS of INR21.2 and
10.4x FY13E EPS of INR26.5.
Sector view
The global patient monitoring device market size is
estimated at USD5.7b in 2011, up from USD2.8b in
2002, representing a CAGR of 6.6%. The size of the
global coronary stent market is estimated at USD7b,
with top-4 players accounting for 85% of the market.
Market growth will be driven by emerging markets in
the future.
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