Opto Circuits has posted strong revenues and earnings growth over the last few years aided by acquisitions and new launches. Even in the current financial year, Opto posted a 74 per cent growth in revenue and 48 per cent rise in net profit in the six months to September. In line with its past trend, Opto last week announced that it will launch a technology-based solution that will enable remote monitoring of vital parameters of patients, by the start of 2012. This should aide growth of the monitoring devices business.
While the core business of monitoring devices, respiratory and anaesthesia care, accessories and consumables is growing well, a further impetus is provided by the acquisitions it made in the US in 2010. However, the acquisitions have come at a cost – the company had gross debt of Rs 1,080 crore in September (around Rs 450 crore term loans for acquisitions).
While the net debt-equity ratio is at a reasonable 0.62 times, Opto also enjoyed a repayment holiday on term loans for one year ending December. However, repayments will have to be made on a quarterly basis thereafter for four years. Analysts at Sharekhan add the repayment of term loans will not be a problem looking at the quarterly payment of $5 million (about Rs 26 crore) against a quarterly net profit of $24 million (Rs 125 crore).
| STEADY MARGINS | |||
| In Rs crore | FY2011 | FY2012E | FY2013E |
| Net sales | 1,585.6 | 2,156.0 | 2,498.1 |
| EBIDTA | 447.1 | 585.9 | 684.2 |
| EBIDTA (%) | 28.2 | 27.2 | 27.4 |
| Net profit | 366.1 | 456.0 | 516.9 |
| EPS (Rs ) | 19.6 | 24.5 | 27.7 |
| PE (x) | 10.1 | 8.1 | 7.1 |
| E: Estimates Source: Capitaline, analyst reports | |||
Also, working capital pressure should abate in two-three quarters as production at its new plants at Vishakhapatnam and Malaysia gather momentum. Though growth rates in FY13 look subdued, it is consequent to the high base (acquisition impact) in FY12. Most analysts remain positive on the stock.
Setting things in order
The medical equipment business (non-invasive products) contributing more than 80 per cent to revenues, is growing at an impressive pace. Even excluding the contribution of its acquisition – the US-based Cardiac Science, which makes automated external defibrillators (AED), electrocardiograph and other devices, the growth in the core business was a robust 24.3 per cent year-on-year.
Cardiac Science has a strong presence in the US with revenues of about $140 million in 2010, but its presence in Japan had been affected by some product recalls. Though the matter got resolved, it helped Opto acquire the company at a reasonable price of $90 million. After the acquisition, Opto is trying to inject operational efficiencies by shifting manufacturing to India and Malaysia. It has also re-launched the products in the Japanese market. Amol Rao at Antique Broking observes that this should yield gradual results over 18-24 months.
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Analysts at Standard Chartered Securities say the December quarter is generally strong in the US, given expiration of full year budgets and the company is confident of securing further orders. Opto has merged the Cardiac Science field force with its own field force in the US for synergistic results. Analysts estimate medical equipment sales of $185 million in the US during FY12.
The build-up of raw material inventory at new production facilities at Vishakhapatnam and Malaysia has led the working capital cycle increasing by 20 days in the first half of FY12 to 241 days. However, Valiveti Bhaskar, director-finance, Opto Group, says the working cycle should start easing once the new plants gain momentum.
Additional drivers
Interventional devices (invasive segment), which contribute less than 20 per cent to revenues, have strong prospects. The second half of FY12 is likely to see higher momentum led by better penetration in emerging markets leading to additional revenues of Rs 500 crore during FY12. Planning its entry into the highly regulated US market, Opto has partnered with Mycell, which is helping it in trials for CE and USFDA approvals. The company also plans to dilute about 25 per cent in Opto Eurocor Healthcare, a wholly-owned subsidiary, and invest the proceeds in R&D and to develop in-house manufacturing facilities.
Analysts at Bank of America-Merrill Lynch believe that Opto is benefiting from secular demand growth in the consumable segment of medical equipment, which forms the bulk of its revenues. They feel the stock is trading at attractive valuations (current price: Rs 188). The company’s growth is to be further aided by new product launches in Japan, and growth in the invasive segment. Bhaskar adds that Opto is also looking at launching low-cost variants of its existing products to tap emerging markets.