Having snapped up seven companies in as many years since 2001, medical devices company Opto Circuits is eyeing a $100 million European buy. The acquisition will add defibrillators to its product range that includes non-invasive (monitors, sensors) and invasive (stents) devices. The move to buy a European firm comes on the heels of the $68 million acquisition in April 2008 of Criticare Systems, an American manufacturer of patient monitoring devices.
To take advantage of lower cost of manufacturing in India, Opto Circuits plans to make India the outsourcing base for Criticare products, saving about 20 per cent in manufacturing costs. While sales for Opto Circuits have grown at an annual rate of about 36.80 per cent over the last four years, net profit has jumped 60 per cent over the same period. Future growth will be triggered by expansion into new geographies (the company markets its products in 40 countries currently), acquisitions and sales in the US market which constitutes 40 per cent of its current revenues.
The company is setting up an SEZ in Karnataka and will move its facilities to this zone as tax concessions on its EOU will cease from 2010. Despite a long debtor cycle, high operating and net profit margins have helped the company show healthy capital return ratios over the last few years.
In an interview to Ram Prasad Sahu, the company's chairman and managing director, Vinod Ramnani outlines the company's growth strategy and challenges facing the business. At the current market price of Rs 342, the stock is trading at a reasonable16 times its FY09 EPS estimate of Rs 21.
What is triggering the high growth rates for invasive and non invasive segments?
In the non-invasive segment, growth of about 30-35 per cent is achieved by rolling out new products and entering new markets. On the invasive side, where the growth is around 30 per cent, a key requirement is CE approval which allows you to market your product in various European countries.
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However, each country has a registration process which takes between 3-6 months. The reason for our confidence on our growth prospects stems from the market potential of the business we are in. Getting into new, low cost markets will help build volumes. Once the base expands, we will have to taper down our growth projections.
What is the potential and margins of invasive and non-invasive segments?
The invasive segment is worth $10 billion and we are addressing only 50 per cent of it as we don't have FDA approvals. US and Japan account for over half of the world's market for invasive therapies. Of the $5 billion market (Rs 20,000 crore), we have a small share with sales at about Rs 100-Rs 125 crore.
On the non-invasive side, the market is about $2 billion, and we have sales of about Rs 220 crore. Since our share is less than one per cent of the addressable non-invasive market, there is scope for growth. In invasive segment the gross margins are higher at about 60 per cent, but net margins are about the same as in the non-invasive segment at about 27-30 per cent.
The reason for the gap in the gross and net margins for invasive segment is due to costs associated with registration, clinical trials and in marketing of the products.
Are there significant entry barriers in the two segments?
In the invasive segment, registration and approval is a long drawn out process and the entry barriers are higher. It can take you a minimum of 24-36 months to get one product approved, get the CE and registrations.
Non-invasive segment is more fragmented and barriers are lower but we offer an integrated solution as well as after sales, which is critical especially in cities where large hospitals are key customers. New players have to know the market, have relevant products for various geographies, a good distribution setup and roll out new product designs.
You have to maintain relationships, have an excellent product quality record as well as the approvals before you can market your unit. Anybody can gain an entry, but to sustain the business is a difficult proposition.
What is the rationale for pursuing an inorganic strategy?
We cannot make these products ourselves and even if we did it will take time, so why not buy at a reasonable cost? We are trying to plug the product gap in our ICU range. We would like to be in a position where we can supply whatever a hospital's ICU may need.
We still have a couple of the products such as ventilators missing and are looking at completing it. To grow you need to have a complete package so that our customers can get a single window for their requirements. A large number of products in the critical care segment also help in diversifying our range and limiting product risk.
What are prerequisites to successfully integrate and improve the fortunes of acquired companies?
You should have detailed information of the company you seek to acquire. Knowledge of the product lines and the synergies will help you work out the cost savings you make after buying the company.
Except for the Eurocor acquisition, the products that we bought were familiar to us as most of these companies were our customers. Since we know the people, the markets and the products, it does not take much time to turn it around.
We are not jumping into an ocean without knowing what we are doing because if we acquire just about anything, we might get stuck.
What are the hurdles in acquiring so many companies?
At times we get stuck because of lack of management depth so we move to rectify the problem and hire people. Our focus will be to look at the base business while at the same time look at acquisitions.
Our strategy now is to acquire a certain size and grow quickly. Once you reach that level you tend to be less vulnerable and then you can decide a direction for the company. You have to make the foundation and then build on it.
Then you can take a call on various scenarios: whether you want to continue with your policy of acquisition or not, are we going in the right direction and how can we improve our profits.
What about your own innovation?
What we are doing is to buy companies and grow them, retain the R&D team and look at product improvements as well develop new product offerings.
We are doing R&D in India as well as the US and launching 2-3 products every year. But as of now an inorganic strategy will hold key to our growth.
Why are the debtor days (at around 200 days) high?
This is typical of the industry and the market trend. Customers (hospitals) take anywhere between 180 to 220 days. The manufacturing, shipping, distribution and stocking–all contribute to delays. For example, while hospitals might stock stents of various sizes, they pay us only when they are actually used.
