In my opinion Opto Cirtuits (OCIL) at CMP 58 is a very good purchase.
Investor Expectation in the stock has taken a severe beating: TTM PE 2.50; an all time low. Upon a closer look, the EPS is 24 and CMP is 58; Meaning, the share price has tanked, but EPS is on the higher side. Plus it is now trading below its BV; P/BV is 0.83 !!
This appears to be an opportunity because nothing majorly negative has happened.OCIL is the same old risky undertaking.It attracts investors of a very particular risk appetite thatinvest in a company of occasional high debt and negative cash flows, which in this case is due to:
a) uncollected payments from consumers/debtors due to low bargaining power or
b) managements tolerance due to a need to increase sales each year, easy availability of funds and high margins.
Other negatives :
1). It often takes on debt to make acquisitions. Debt to Equity goes as high as 1.06. However, on the back of strong gross profits OCIL has swiftly normalized the debt twice before. Point in case, the year 2005-06 D/E was 0.98 and back to 0.30 the next year. Again in 2008-09. Shows ample confidence of the management.
2). It currently has negative Free Cash Flow due to high Capex and not cuz of low Operating Income, which is steadily rising. It probably arranged for additional loans. It can afford paying this interest cuz it has comfortable margins.
3). It gives good dividends. Avg of 10 yrs is more than Rs.3; At CMP of 60, DY = 5% !! Better than any savings account.
In conclusion, this industry is an ever growing one. You can see it in Opto's increase Sales Revenue. It has been on an up, up and up since 2001, not a single faltering year. Opto is clearly in a leadership position. With the health-care industry on a growth, Opto's future is safe.
I have not seen the valuations, could someone help me with that?
(Check out the attachment for Snap Shot of the decade.)
Final note:Such a low PE is not strange. The speculative investors/traders are now disenchanted. The reason for this dis-allure is in the drop of RoE from 50% Plus levels from 2005 to 2009 to sub 30% levels. Since, 2010 the price is being beaten down like there won't be a tomorrow, now PE is 2.5... to an all time low !!
The price may further correct 50%, i.e. Rs.25, but the upside is around Rs.300, which is when and if it catches investor's fancy again. And it ought to, with its increasing Market Cap, stable RoE, Div history and increasing Sales there is no escaping it.