Method in madness

At current levels, some excesses of the bull market are over

Just about a month ago, the Sensex was at its all-time high of 12671 points. But since then, it has fallen 28.7 per cent, which makes it a deep correction.

By one definition, it will become a bear market if it remains below 20 per cent of its high over at least a two-month period. So, it is still too early to call it a bear market.

When the Sensex hit the 10 per cent circuit filter as it fell on May 22, one reason for the fall was attributed to excessive long positions in the F&O segment.

But as the Sensex has fallen below those levels in the past few trading sessions, there is obviously a problem of confidence as long positions would have already been unwound.

At every rise, investors are exiting and new buyers are staying away, so what we are seeing is a problem of confidence.

The economy and the industry are still fine, and corporate earnings are not going to be too bad this year either, though growth rates may reduce. At current market levels, some excesses of the bull market are over.

Going forward, expectations of first quarter results and the monsoon will provide some direction. Markets may languish for a while, but there are opportunities now for the long term investor.

Matrix : R&D pinch

Matrix Laboratories has reported a 51 per cent fall in its consolidated operating profit (excluding other income and income from potential patent infringement suit) to Rs 83.64 crore in FY06 compared with 4.9 per cent growth in net sales to Rs 667.1 crore.

However, results of FY06 are not strictly comparable with those of the year earlier, given the company's recent acquisitions, including the Belgium-based DocPharma and Mchem Group, China.

Nevertheless, the merged entity saw its operating profit margin fall a staggering 1429 basis points y-o-y to 12.53 per cent in FY06.

The stock has fallen nearly 21.6 per cent over the past four months compared with 10.5 per cent dip in the Sensex.

Pressure on operating margins in the last financial year was owing to R&D expenditure expanding 95.3 per cent y-o-y to Rs 31.1 crore in FY06.

In addition, other expenditure grew 22.9 per cent y-o-y to Rs 118.1 crore, while pricing pressure in the US generics business continued. Exports grew 15.83 per cent y-o-y to Rs 395.9 crore in FY06, given 74 per cent growth in sales of medications for the HIV market.

But margins for medications in the HIV segment are typically very thin, add analysts. Meanwhile, operating profit margins in the March 2006 quarter fell 1129 basis points y-o-y to 12.95 per cent.

A key focus for the management would be on enhancing synergies with its recent acquisitions. The upside for the stock appears limited, given that it trades at about 18.3 times estimated FY07 earnings.

Opto Circuits: Mixed numbers

While FY06 was a good year for Opto Circuits, the medical electronics company, the March 2006 quarter was not as good. Sales rose 46.62 per cent for FY06 and at 23.46 per cent for Q4 FY06.

But the numbers at operating level are quite impressive. Operating profit margin increased almost 800 basis points to 38.87 per cent in Q4.

A manufacturer of medical equipment for monitoring patients used in operation theatres and ICUs, Opto Circuits received US FDA approval for its SPO2 sensors, which will enable its US subsidiary to gain access to the US Defence healthcare market. It also received the CE approval for drug-eluting stents and guide wires.

Now, Opto is integrating Eurocor, which it acquired in December 2005, with itself and this business could become a major growth driver.

Germany-based Eurocor manufactures of cardiac and peripheral stents, which are used in critical cardiac care in December 2005. The potential opportunity in the coronary stent market is expected to be $8 billion this year compared with$6 billion in 2004.

Though there are major players such as Johnson & Johnson, Boston Scientific and Medtronic globally, Opto Circuits plans leverage Eurocor's regulatory approvals in 26 countries across Europe, Asia and South America.

The stock has halved from its high last month, but investors who bought the FPO in April 2006 are still in the money.

The company repaid debt of about a third of its IPO proceeds and will invest the rest in R&D, capex and working capital. Given the size of the business opportunity, the stock trades at 24.5 times FY06 earnings.