8 February 2012
3QFY12 Results Update | Sector: Healthcare
Opto Circuits
BSE SENSEX
S&P CNX
17,622
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1,6,12 Rel. Perf. (%)
M.Cap. (INR b)
M.Cap. (USD b)
5,335
OPTC IN
186.4
310/183
19/-8/11
48.7
1.0
CMP: INR261
TP: INR249
Neutral
Opto Circuits' 3QFY11 results were above our estimates. Key highlights of the results:
Opto Circuits' revenue grew 46% YoY to INR6.1b (v/s est of INR5.8b), EBITDA grew 39% YoY to INR1.7b (v/s est
of INR1.6b) while EBITDA margins contracted by 140bp to 28% (v/s est of 27%). Adjusted PAT grew 30% YoY to
INR1.25b (v/s est INR980m) led by better operational performance.
Topline growth was led primarily by acquisition of CSC. Ex-CSC, OPTC's topline is estimated to have grown 25%
YoY led by non-invasive segment which is estimated to have reported growth of 27%. Invasive business
reported healthy revenue growth of 24.5% YoY.
EBITDA growth was 39% YoY to INR1.7b (v/s est. of INR1.57b) while EBITDA margins contracted by 140bp to
28%. EBITDA growth was muted compared to topline growth because of higher staff cost and other expenses
related to CSC acquisition.
Adjusted PAT recorded 30% YoY growth to INR1.25b (v/s est INR980m), in line with strong operational
performance but tempered down by higher interest cost and forex losses.
OPTC has delivered strong revenue and earnings growth over the last few years. It has consistently maintained its
high return ratios. Despite rapid growth, the company still remains a marginal player in the global medical
devices industry, which gives OPTC the opportunity to sustain its high revenue growth rate for the next couple of
years. However, large accumulated goodwill in the books on account of past acquisitions, increasing working
capital requirements thereby rapidly rising debt and very low free cash flow generation remain our major concerns.
Further, the company is planning to raise money through equity dilution in one of its subsidiaries, which may lead
to sizable EPS dilution going forward. Based on our revised EPS estimates, the stock trades at 10.6x FY12E and 8.4x
FY13E EPS. We maintain
Neutral
with target price of INR249 (8x FY13E EPS).
Amit Shah
(Amit.Shah@MotilalOswal.com) + 91 22 3982 5423
Nimish Desai
(NimishDesai@MotilalOswal.com); Tel: +91 22 3982 5406

Opto Circuits
Non-invasive business drives revenue growth on the back of CSC acquisition
Opto Circuits' revenue grew 46% YoY to INR6.1b (v/s est of INR5.8b), EBITDA grew 39%
YoY to INR1.7b (v/s est of INR1.6b) while EBITDA margins contracted by 140bp to 28%
(v/s est of 27%). Adjusted PAT grew 30% YoY to INR1.25b (v/s est INR980m) led by
better operational performance.
Topline growth was led primarily by acquisition of CSC. Though the management has
not disclosed CSC revenues, we estimate it at INR1.7b. Management has guided for
revenues of USD140m/INR6.8b for FY12.
Ex-CSC, OPTC's topline is estimated to have grown by 24.8% YoY to INR4.41b led by
non-invasive segment which is estimated to have reported growth of 27.2% YoY to
INR3.1b (above est). Invasive business reported healthy revenue growth of 24.5% YoY
to INR1.3b (above our est).
Revenue Trend (INR M)
Net Revenues
YoY Cha nge (%)
78.4
62.5
26.7
29.6
62.8
69.6
46.4
1Q
2Q
FY11
3Q
4Q
1Q
2Q
FY12
3Q
Source: Company/MOSL
EBITDA grew by 39.3%YoY to INR1.71b
EBITDA growth was 39% YoY to INR1.7b (v/s est. of INR1.57b) while EBITDA margins
contracted by 140bp to 28%. EBITDA growth was muted compared to topline growth
because of higher staff cost and other expenses related to CSC acquisition. EBITDA
was above our estimates due to better than estimated EBITDA margins led by lower
than estimated Staff cost.
Trend in EBITDA margins (INR M)
EBITDA
33.2
31.9
29.4
21.8
Ma rgi ns (%)
27.5
27.5
28.0
1Q
2Q
FY11
3Q
4Q
1Q
2Q
FY12
3Q
Source: Company/MOSL
8 February 2012
2

Opto Circuits
Adjusted PAT recorded 30% YoY growth to INR1.25b (v/s est INR980m), in line with
strong operational performance but tempered down by higher interest cost and forex
losses.
OPTC aims at USD1b annual revenue by FY15; Guidance of 20-25% top-line
growth
The management aims at annual revenue of USD1b by FY15 and has guided topline
growth of 20-25% CAGR over the medium term. The FY15 revenue target looks tough,
as it entails over 25% revenue CAGR after FY12. The management has revised its FY12
revenue growth guidance from 40% to 45% due to better than expected performance
in 9MFY12. The 45% growth guidance is partly led by consolidation of its newly acquired
US company, Cardiac Science Corp (CSC). Excluding this acquisition, growth of the
other businesses is indicated at 25% in FY12. For CSC, the management has guided
revenue of USD140m in FY12. Growth will be led mainly by the invasive segment due
to the large size of the opportunity, increasing penetration, brand building efforts
and low base.
The management expects the invasive business to post over 30% CAGR in the medium
term. Growth in the non-invasive segment will come from increased penetration in
various markets, leveraging the distribution network of acquired companies and new
product launches.
Equity dilution in subsidiary on the cards; May lead to sizeable EPS dilution
The management proposes to raise up to INR10b through an initial public offering
(IPO) of Opto Eurocor Healthcare Limited (OEHL), a wholly owned subsidiary in the
invasive segment. The funds raised will be used for clinical trials and on OEHL's
marketing and distribution activities. OPTC is looking to dilute at least 25% of OPTC's
stake in OEHL. The management hopes to get a ~USD800m valuation for OEHL, which
appears stiff, in our view. A market cap of USD800m values OEHL at ~8x FY11 revenue
and ~40x FY11 PAT. The management may look to dilute stake in other subsidiaries in
future to achieve its target of USD1b in revenue by FY15.
High debt, goodwill and deteriorating working capital remain concerns
We estimate INR13b loan on the books of the OPTO by the end of FY12 up from
INR8.8b reported in FY11. This will translate into a debt/equity ratio of 0.8x. We believe
that OPTC will have to raise further debt to fund its higher growth guidance, which
will push interest cost higher. Also, goodwill on the company's books stands at
INR4.45b, which is ~35% of its net worth. Any deterioration in market dynamics leading
to intangible write-offs may impact OPTC's financials.
Further, its working capital cycle deteriorated in FY11, with INR3.7b increase in non-
cash net current assets. We expect further deterioration in working capital as OPTC's
inventory days and debtor days had increased sharply during the year. As of 31st Dec
2011, the Net Working Capital of the company stands at 251days. We are estimating
working capital at 254days by the end of FY12.
8 February 2012
3

Opto Circuits
Upgrading EPS estimates by 5%
Post the better than estimates 3QFY12 results, we are upgrading our earnings
estimates. We are upgrading our EBITDA estimates for FY12 and FY13 by 3% and 2.5%
respectively to budget increased revenue guidance and better than estimated EBITDA
margins for the quarter. Further, we are revising our earnings estimates upwards for
FY12 and FY13 by 5.5% respectively led by better operational performance, lower
than estimated depreciation & tax rate and higher interest cost. We now estimate
EPS at INR24.7 (up 25.6%) for FY12 and at INR31.1 (up 26%) for FY13
Outlook and valuation
OPTC has delivered strong revenue and earnings growth over the last few years. It
has consistently maintained its high return ratios. Despite rapid growth, the company
still remains a marginal player in the global medical devices industry, which gives
OPTC the opportunity to sustain its high revenue growth rate for the next couple of
years. However, large accumulated goodwill in the books on account of past
acquisitions, increasing working capital requirements thereby rapidly rising debt and
very low free cash flow generation remain our major concerns.
Further, the company is planning to raise money through equity dilution in one of its
subsidiaries, which may lead to sizable EPS dilution going forward. Based on our
revised EPS estimates, the stock trades at 10.6x FY12E and 8.4x FY13E EPS. We maintain
Neutral
with target price of INR249 (8x FY13E EPS).
8 February 2012
4

Opto Circuits
Opto Circuits: an investment profile
Company description
Opto Circuits is the largest medical device maker from
India. The company started its business as a supplier of
sensors to large OEMs. Over the years, Opto catapulted
itself into a full fledged producer and supplier of patient
monitoring devices in the non-invasive segment and
stents in the invasive segment, led by acquisitions. The
company has a strong distribution network of 1300
distributors across more than 50 countries.
Product approvals in regulated markets and product
acceptance especially in the invasive segment is
difficult and time consuming.
Higher than expected rupee appreciation could
adversely impact future earnings.
Technological advancement especially in the
invasive segment may reduce the size of
opportunity significantly to enhance profitability of
acquired companies which currently have lower
margins.
Key investment arguments
Opto's core business of non-invasive devices is
getting stronger due to favorable market dynamics,
diversified product offerings, cost competitiveness
and expanding distribution reach. The non-invasive
business segment is expected to grow 36% CAGR
over FY11-13.
The invasive business is a key long term growth
driver due to large market opportunity, new product
launches and increasing product awareness. This
business is expected to grow 22% CAGR over FY11-
13.
Opto has delivered strong growth in revenues and
earnings in the past few years. It has consistently
maintained its high return ratios.
Recent developments
Acquired Cardiac Science Corporation (manufacturer
of non-invasive medical devices) in US.
T ied up with Omron to distribute Automated
External Defibrillators (AED) in Japan
Valuation and view
Valuations Stable profitability and working capital
days are likely to sustain the high return ratios. It is
likely to report 26% earnings CAGR over FY11-13.
The stock trades at 10.6x FY12E EPS of INR24.7 and
8.4x FY13E EPS of INR31.1.
Sector view
Key investment risks
High working capital eats away large portions of the
company's profits. Therefore the company has not
generated adequate free cash-flows.
The global patient monitoring device market size is
estimated at USD5.7b in 2011, up from USD2.8b in
2002 representing a CAGR of 6.6%. The size of the
global coronary stent market is estimated at USD7b
with top-4 players accounting for 85% of the market.
Market growth will be driven by emerging markets
in the future.
Current
Price (INR)
261
Target
Price (INR)
249
Upside
(%)
-5.0
Reco.
Neutral
EPS: MOSL forecast v/s consensus (INR)
MOSL
forecast
24.7
1.1
Consensus
forecast
24.7
30.3
Variation
(%)
0.0
2.8
Target price and recommendation
FY12
FY13
Stock performance (1 year)
320
Opto Ci rcui ts
Sens ex - Reba s ed
Shareholding pattern (%)
Dec-11
Promoter
Domestic Inst
Foreign
Others
8 February 2012
28.1
1.2
45.2
25.5
Sep-11
28.1
1.3
46.0
24.7
Dec-10
27.4
2.2
45.0
25.4
285
250
215
180
Feb-11
Ma y-11
Aug-11
Nov-11
Feb-12
5

Opto Circuits
Financials and Valuation
8 February 2012
6

Opto Circuits
N O T E S
8 February 2012
7

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Opto Circuits
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