Concerns remain over Opto
MOTILAL OSWAL Posted: Saturday, May 21, 2011 at 0134 hrs IST
Opto Circuits reported 62.8% y-o-y growth in revenue at R544crore (in line with our estimate). EBITDA grew 7.3% y-o-y to R119crore (vs our estimate of R109crore); EBITDA margin contracted by 1,130bps to 21.9% (vs our estimate of 20%). Adjusted PAT grew 57.6% y-o-y to R110crore (vs our estimate of R74.8crore), boosted by other income of R18.8crore.
Top line growth was led primarily by acquisition of CSC, which reported revenue of R171crore.The management has guided $140m revenue for CSC in FY12, since the focus during the year will be to improve the companyas profitability through internal restructuring. It has also guided EBITDA margin of 10-12% for CSC in FY12, led by measures such as rationalisation of R&D, operational consolidation of all the three US subsidiaries (CSC, Criticare and Mediaid), rationalisation of marketing spend, and employee retrenchment. However, we expect gradual progress in CSCas turnaround, as it would take 6-9 months to transfer the production to Indian and Malaysian facilities and reduction in manpower will be gradual. We expect EBITDA margin of 8% for FY12 compared to management guidance of 10-12%.
The total debt in Optoas book stands at R884crore, which translates into a debt-equity of 0.7x. We believe that Opto will have to raise further debt to fund its higher growth guidance. Also, goodwill on the companyas books stands at R595crore, which is 45% of its net worth. Any deterioration in market dynamics leading to intangible write-off may impact Optoas financials. Further, the companyas working capital cycle deteriorated in FY11, with R370crore increase in non-cash net current assets.
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. Opto is likely to see strong growth in both the invasive and non-invasive businesses on large market opportunity, geographical spread, new product launches and low base. The stock trades at 14.4x FY12E EPS and 11.2x FY13E EPS. We maintain Neutral with a revised target price of R316 (12x FY13E EPS).