Opto circuits - An inorganic compounder

Opto Circuits (India) Ltd. is engaged in the development, manufacture, distribution and marketing of medical equipment and devices. The Company also provides ancillary and complementary services, such as after-sales services for its patient monitoring devices. In addition, the Company provides information technology consulting, global positioning systems and electronic design automation services in India. The Company's product range includes Pulse Oximeters, Pulse Oximeter Sensors, Fluid warmers, Cholesterol monitors and Stents. Its healthcare products include multiparameter monitors, digital thermometer and cholesterol monitors. Its opto electronics products include infrared emitters, infrared detectors, and photo sensor, detector and emitter assemblies. The services offered by the Company includes healthcare equipment, information technology and bankcard technology, strategic electronics and electronic design automation. In April 2008, the Company acquired Criticare Systems Inc. The company follows a policy of organic and inorganic growth to deliver value to its stajkeholders. Opto operates globally with six subsidiaries acquired over the last couple of years turning out to be EPS accretive.

Rewarding shareholders on a regular basis:

The company has an impressive history of rewarding shareholders through regular bonus issues albeit diluting the equity base by atleast 10x over the last 5 years. The promoters have also been increasing their stake in the company by infusing funds at regular intervals to fund Opto's inorganic growth ambitions. The active interest promoters have displayed over the years by regularly investing into the business coupled with the increasing equity base in the form of bonus issues shows their confidence in managing and creating stakeholder value and also the management's commitment to seeing opto gain traction and market share in the $200 billion medical devices market.

Steady financial performance
Opto has reported robust growth over the last 4 years in excess of 60% in revenue terms and 55% (CAGR) growth in net profit terms duly aided by profitable international acquisitions. These acquitions in the medical device market were funded through a mix of internal accruals, follow on public offer and preferential issue to promoters. Debt requirements have increased over the years largely to fund working capital constraints as the company receivable days are quite high at 6m and its international operations justify sizeable inventory holding throughout the year.
The debt protection ratios are pretty stable with interest coverage ratio in excess of 4x and debt/EBITA at less than 1x. Given the short term nature of borrowings, they are not expected to pose any threat to the financial profile of the company given the free cash flows the business generates on a continuos basis. Moreover the recent QIP issue is expected to clean up debt on the balance sheet resulting in opto becoming debt free by end of this fiscal. The domestic medical devices market (estimated $3 billion) is extremely fragmented and intensely competitive with the presence of both established and unorganised players(more than 700 players) vying with each other for the potential healthcare opportunity in India. Realising the pricing pressure that this scenario will have on Opto's financial profile and the huge external opportunity for medical equipments in the global mkt in terms of sheer market size, the company decided to focus on exports and today derives close to 95% of its income from geographies like US, Europe and Africa. The company has set up marketing and distribution offices across 55 countries and its prudent strategy to acquire medical device companies in the respective geographies of foray has only helped Opto establish strong relationships with hospitals, nodal healthcare agencies and manage costs better. Opto's management will redirect its focus on the Indian market only after certain regulatory hassles are eased out by the government for the sector. The company has been pressing the government to grant infrastructure status for the industry and unify the industry under a single regulator as against the multiple regulatory system at the centre and state level that's prevalent now. India's healthcare spend as a % of GDP and budgetary allocations also need marked improvement for Opto to withstand competition domestically. The company's export oriented focus has resulted in stable margins both at the Operating and PAT level of 35% and 25% respectively aided by

Valuation

We expect Opto circuits to report FY 10 EPS of 14.4x and FY 11 EPS of 17x (assuming no bonus issue or dilution) on the existing equity base of Rs.182.9 million. The CMP of Rs.211 discounts FY10 EPS by 14.5x and FY11 EPS by 12.4x indicating fair valuation at current levels. We expect the stock to be a reasonable compounder in the long run. We recommend a hold on the stock.