Opto Circuits

Stock Opportunities Untested - but worth a good look
21

http://www.financialexpress.com/news/concerns-remain-over-opto/793678/0#

ANALYST CORNER

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).

22

Medical equipment maker Opto Circuits (India) today said its wholly-owned subsidiary Opto Eurocor Healthcare would raise about Rs 1,000 crore through initial public offering (IPO).

What may be the likely impact? I think a lot of debt may get retired.

23

Actually they want to fund two factories in India and one in Singapore, which is geared for future growth! Which still means no additional debt.

24

Why an opposite movement in stock despite an IPO announcement? Something concerning here?

25

Difficult to understand the share price fall in the last one month. It just keeps falling. Did not even take support at the 135-140 zone. The rupee-dollar maybe putting some pressure as a significant amount of the consolidated revenue is in dollars.

26

I was looking at Sep 11 balance sheet accompanying q2 results. When compared to March 31 2011 balance sheet the Goodwill balance at the end os Sep is less by 200 cr. Looks like there is an impairment of Goodwill and the company has directly adjusted it against reserves without passing through P&L. Worse thing is there is no mention of this anywhere. Anyone has any idea about this?

27

Huge fall today of around 12% today. Management says total debt is around 1000 crores so that makes the D/E less than 1…looks like ICRA wanted to harm the company because they had disengaged its services and gone to CRISIL.

Interview of CMD here:

Another doc from Stanchart:

http://www.optoindia.com/pdf/Letter-from-Standard-CharteredBank.pdf

HSBC has bought 12 lakh shares Thursday and has close to 4% stake in the company now:

http://www.stockexplain.com/2012/08/opto-circuits-added-by-hsbc-on-deep-fall-313.html

Would you guys rather wait for the CRISIL rating or is the current level attractive for a long term holding? Curious to know your thoughts…

28

Hi Nelson,

I have been a long term investor in opto circuits since many years.

Management has always seemed investor friendly and the return ratios were perfect.

My fingers are crossed with respect to the rating that the crisil will come out with.

If the rating is good, then the share should move back to its original value.

29

Hi Ravikanth,

Thanks for the reply. I know besides FII following Opto also has reasonable retail investor interest. I missed to mention one point. The CMD had stated in the clarification interview that Opto had made acquisitions of companies that were loss making and currently each of them is profitable at the operating level.

Since these acquisitions were loss making ones, would it not be safe to assume that they were bought near to book value. I am asking this because some members here had raised concerns over the high goodwill amount on the B/S. If they were bought close to BV how does one explain the accumulated goodwill aspect.

Maybe I am missing something here…

30

…looks

We should also consider the reverse possibility - that the management disengaged ICRA and switched to CRISIL, because ICRA downgraded their rating.

31

Hi,

The rating from ICRA came after they were disengaged by Opto. So it was an unsolicited rating and therefore the reason I made that statement.

32

Latest announcement::-

“Opto Circuits (India) Ltd has informed BSE that a meeting of the Board of Directors of the Company will be held on December 20, 2012, inter alia, to consider to issue of 20,00,000 convertible warrants to Mr. Vinod Ramnani at Rs. 145/- per warrant or the six month average price as on the relevant date, whichever is higher.”

Rare to see management alloting warrants at such a high premium to CMP.

Any views?

33

It is about 40% premium.While I am not sure whether it is high relative to other companies, it would be interesting to find out what is the initial contribution (usually 10% or 25%) which would get forfeited if warrants are not converted. Higher the initial contribution, less likely of the promoter wanting to forfeit it, unless he already holds earlier warrants at lower prices. @10%, the initial contribution is 2.9 cr which does not appear very high.Maybe it is intended only as a sentiment booster? The timing certainly seems to suggest so.

34

Maybe opto now qualifies as a short term pick. promoters have bought 1 lac shares @ 130-145, HSBC had bought abt 0.19 % stake @ 130.
Promoters issuing warrants @ 145.

Main point is the company has a good past record of increasing revenues and profits since 2004. If the company can improve its cash flow the stock can give good returns in short term.

35

The promoter’s actions are a bit confusing. Iam getting few queries on them. Probably those who held opto circuits or analysed it, can post what they feel. I already see a huge liquidity in the counter and probably algo based trading going on the counter with large FII holdings.

As a previous comment before stated, instead of paying 2.9 cr upfront for warrants and diluting(more liquidity),

(i)why havent the promoter bought the shares aggressively from the market.?

(ii) Bought back shares using the money and extinguished them.

I feel probably these would have established more trust and more price impact on the bourses. At a time when sales are dwinlding and profits are stagnating, why this dilution beats me? Probably some body can figure out, what I cant.

36

i also dont like warrants and i feel tough riders should be attached with them. i feel warrants should be issued atleast at 20 % premium and if the promoters dont exercise warrants the 25% upfront amount should be forfeited and distributed to remaining shareholders.

promoters are issuing warrants most likely to support the stock price. I dont consider opto promoters as very good n ethical but they have shown good growth in the past, they own lot of patents and if they can improve working capital management, the stock can give good returns.

37

from Capital Market:

Opto Circuits (India) net profit declines 0.38% in the December 2012 quarter
Sales rise 10.19% to Rs 187.92 crore
Net profit of Opto Circuits (India) declined 0.38% to Rs 60.18 crore in the quarter ended December 2012 as against Rs 60.41 crore during the previous quarter ended December 2011. Sales rose 10.19% to Rs 187.92 crore in the quarter ended December 2012 as against Rs 170.54 crore during the previous quarter ended December 2011.
Particulars Quarter Ended
Dec. 2012 Dec. 2011 % Var.
Sales 187.92 170.54 10
OPM % 40.68 42.06 -3
PBDT 63.55 61.95 3
PBT 61.55 60.78 1
NP 60.18 60.41 0
38
Conference Call from Capital Market
Opto Circuits
Revenue from medical equipment & consumables segment is up by 3%
Opto Circuits conducted conference call on 13 February 2013 to discuss results for the quarter ended December 2012. Vinod Ramnani â Chairman and Managing Director, Thomas Dietiker â Director, Jayesh Patel â Director and Bhaskar Valiveti â Group Head, Finance addressed the call.

Key highlights

  • Revenue grew by 1% YoY to Rs 619.25 crore in the quarter ended December 2012. Revenue from medical equipment and consumables segment (72% of total) grew by 3% to Rs 492 crore, interventional devices and tools segment revenue (26% of total) declined 3% to Rs 126 crore.
  • Revenue from medical equipment and consumables segment grew by 14.5% YoY for the nine months period ended December 2012, while interventional devices and tools segment revenue grew by 16% YoY.
  • Raw material cost has been stable.
  • AED business is slowly progressing.
  • The company has added twelve distributors in the Indian market.
  • Gross debt as on December 31, 2012 was Rs 1065 crore, cash & bank balances was Rs 91 crore. Net debt stood at Rs 973 crore. Borrowings in US dollar term were 1/3rd of total. Interest cost in US dollar has gone up by 125 bps. Long term debt is 1/3rd of to total debt.
  • Research & Development expenses incurred for the nine months period upto December 2012 was Rs 65.41 crore, of which Rs 22.37 crore was spent in Q3FY13.
  • For the YTD period upto December 2012, the capex spend was Rs 91.94 crore. Capex in Q3FY13 was Rs 28.94 crore. Capex has been deployed towards machinery and equipment in India and Malaysia.
  • Operating cycle increased by 10 days to 209 days on QoQ basis. Trade receivables increased by 5 days to 165 days on QoQ basis. Trade payables fell by 5 days to 39 days on QoQ basis.
  • US implements 2.5% medical device tax on all medical devices sold in the country.
  • Order book is around US dollar 60 billion.
  • Value addition is currently being performed in OEHL Malaysia production facility. 80% equipment received and is being installed. Remaining 20% is to be installed in the coming quarter.
  • Revenue grew by 1% YoY to Rs 619.25 crore in the quarter ended December 2012. Revenue from medical equipment and consumables segment (72% of total) grew by 3% to Rs 492 crore, interventional devices and tools segment revenue (26% of total) declined 3% to Rs 126 crore.
  • Revenue from medical equipment and consumables segment grew by 14.5% YoY for the nine months period ended December 2012, while interventional devices and tools segment revenue grew by 16% YoY.
  • Raw material cost has been stable.
  • AED business is slowly progressing.
  • The company has added twelve distributors in the Indian market.
  • Gross debt as on December 31, 2012 was Rs 1065 crore, cash & bank balances was Rs 91 crore. Net debt stood at Rs 973 crore. Borrowings in US dollar term were 1/3rd of total. Interest cost in US dollar has gone up by 125 bps. Long term debt is 1/3rd of to total debt.
  • Research & Development expenses incurred for the nine months period upto December 2012 was Rs 65.41 crore, of which Rs 22.37 crore was spent in Q3FY13.
  • For the YTD period upto December 2012, the capex spend was Rs 91.94 crore. Capex in Q3FY13 was Rs 28.94 crore. Capex has been deployed towards machinery and equipment in India and Malaysia.
  • Operating cycle increased by 10 days to 209 days on QoQ basis. Trade receivables increased by 5 days to 165 days on QoQ basis. Trade payables fell by 5 days to 39 days on QoQ basis.
  • US implements 2.5% medical device tax on all medical devices sold in the country.
  • Order book is around US dollar 60 billion.
  • Value addition is currently being performed in OEHL Malaysia production facility. 80% equipment received and is being installed. Remaining 20% is to be installed in the coming quarter.
    • 39

    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.

    4). <You Tell Me :))>

    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.

    40

    I think Opto circuits should be considered at current prices atleast for small allocation keeping in view its subsidaries. Any views from experts??