12 October 2011
C
orner
O
ffice
Interaction with the CEO
the
Healthy growth visible but concerns persist
Goodwill, debt, low FCF, high working capital remain challenges
We interacted with Opto Circuits' Chairman and Managing Director
Mr Vinod Ramnani. He spoke about business strategy, growth targets,
profitability and issues related to the balance sheet.
Opto Circuits
OPTC aims at USD1b annual revenue by FY15
Opto Circuits' (OPTC) management aims at annual revenue of USD1b by FY15
and medium-term top-line growth guidance is 20-25% CAGR. We believe that
the FY15 revenue target looks tough and entails revenue CAGR of over 25%.
Expects profit to improve to pre-CSC acquisition level
Mr Vinod Ramnani
Chairman and Managing Director
Mr Vinod Ramnani
co-founded
Opto Circuits India in 1992. Since then,
he has spearheaded the company's
ascent. He has been successful in
integrating product lines and acquired
companies across the globe. His
hands-on management style ensures
that processes and operations are in
tandem with the group's ambitious
plans and goals.
He holds a Bachelors degree in
Mechanical Engineering from Manipal
Engineering College. He worked with
electronic products companies before
The management expects to improve OPTC's profitability to pre-CSC acquisition
levels (EBITDA margin of 30%) over the next two years. It said EBITDA margins
would not contract from current levels of 25%.
Shifting gears: Focus on consolidation, no big-ticket acquisitions
OPTC's management indicated that after the acquisition of CSC, the focus shifted
to consolidating the business and organic growth. The management said it would
not look at big-ticket acquisitions in the medium term.
The USD1b revenue target by FY15 will be achieved mainly through organic
growth. OPTC may make small acquisitions to fill gaps in its product portfolio.
OPTC expects to raise up to INR10b in the short term
The management said OPTC proposed to raise up to INR10b through an Initial
starting Opto Circuits.
Public Offering of Opto Eurocor Healthcare Ltd (OEHL), a wholly owned subsidiary,
in the invasive segment.
Further, the management may consider dilution in other subsidiaries in future to achieve USD1b in revenues by FY15.
High working capital requirement unlikely to decline
High working capital requirement is a key concern for OPTC (232 days). However, the management believes high
working capital is intrinsic to the business model and unlikely to decline in the near term.
Valuation and view
We believe that OPTC might see strong growth in the invasive and non-invasive businesses due to a large market
opportunity, an expanding distribution network and geographical spread, new product launches and a low base.
However, large goodwill and debt on the books along with high working capital requirements are concerns.
Based on our estimates, the stock trades at 10.7x FY12E EPS and 8.2x FY13E EPS. The company has proposed
raising INR10b through a separate listing of its subsidiary OEHL. Pending clarity on such a large fund raising, we
maintain
Neutral.
Financial and valuation summary
227
Year
End
03/10A
03/11A
03/12E
03/13E
Net Sales PAT
EPS
EPS
(INR M) (INR M) (INR) Gr. (%)
10,776
15,856
22,513
26,435
2,452
3,661
3,957
5,131
13.2
19.6
21.2
27.5
55.0
49.3
8.1
29.7
P/E
(X)
-
11.6
10.7
8.2
P/BV
(X)
-
3.1
2.6
2.1
RoE
(%)
33.9
30.4
25.9
27.9
RoCE
(%)
28.5
24.1
19.6
21.6
EV/
EV/
Sales EBITDA
-
3.1
2.3
1.9
-
11.0
9.2
7.2
Stock Info
CMP (INR) - 11 Oct 2011
Bloomberg
OPTC IN
Equity Shares (m)
186.4
52-Week Range (INR) 324/187
1,6,12 Rel. Perf. (%) -11/-7/-8
M.Cap.(INR b)/(USD b)
42/1
Amit Shah
(Amit.Shah@MotilalOswal.com); +91 22 3982 5423
Nimish Desai
(NimishDesai@MotilalOswal.com); +91 22 3982 5406

C
orner
O
ffice
OPTC aims at USD1b annual revenue by FY15; Guidance of 20-25%
top-line growth in the medium term
The management expects
the invasive business to
post over 30% CAGR in
the medium term
the
OPTC's management aims at annual revenue of USD1b by FY15 and top-line growth
guidance 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's FY12 revenue growth guidance of 40% is due to a year of
consolidation of its newly acquired US company, Cardiac Science Corp (CSC). Excluding
this acquisition, growth of the other businesses is indicated at 20% in FY12. The
management guidance is at USD140m revenue for CSC in FY12.
The growth will be led mainly by the invasive segment due to the large size of the
opportunity, increasing penetration, brand building efforts and a 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.
Segmental revenue (INR m)
Grow th (%)
Non Invasive
Invasive
Others
20,090
Revenue scale-up
Revenue (INR B)
80.0
86.1
74.9
17,291
11,589
47.1
31.7
42.0
6,133
8,017
17.4
2.5
FY07
4.7
FY08
8.2
FY09
10.8
FY10
15.9
FY11
22.5
FY12E
26.4
FY13E
3,325
1,080
276
FY08
1,883
169
FY09
2,426
333
FY10
3,939
331
FY11
4,924
298
FY12E
6,048
298
FY13E
Source: Company/MOSL
OPTC expects profit to improve to pre-CSC acquisition levels over two
years, EBITDA margins not to fall below current level of ~25%
OPTC has undertaken
business restructuring to
improve its profitability, a
long-term positive
The management expects to improve OPTC's profitability to pre-CSC acquisition levels
(EBITDA margins of 30%) over two years and its guidance is EBITDA margins will not
fall below current levels of 25%.
OPTC has undertaken business restructuring to improve its profitability. Accordingly,
investments in three US-based subsidiaries, CSC, Criticate and Unetix were transferred
to a new 100% owned subsidiary, Opto Cardiac Care Ltd. Investments of two subsidiaries,
Eurocor Gmbh and NS Remedies were transferred to a new 100% owned subsidiary,
Opto Eurocor Healthcare Ltd.
We believe the restructuring exercise is a long-term positive for OPTC as it helps to
leverage the distribution infrastructure of its subsidiaries and will help to reduce their
operational overheads in future.
12 October 2011
2

C
orner
O
ffice
EBITDA margins and trend
EBITDA (INR m)
31.6
34.0
28.0
25.3
26.9
EBITDA Margin (%)
the
29.3
7,123
5,686
2,591
3,669
4,446
1,372
2008
2009
2010
2011E
2012E
2013E
Source: Company/MOSL
OPTC to raise up to INR10b in the short term; Not to dilute promoter
stake
Funds raised through the
IPO will be used for clinical
trials and on OEHL's
marketing and distribution
The management said OPTC proposed to raise up to INR10b through an Initial Public
Offering of Opto Eurocor Healthcare Ltd (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 Opto'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.
Equity dilution in the past
Date
19/04/06
14/07/07
15/09/09
Instruments
FPO
Preferential Issue
QIP
Equity Cap
(INR m)
308
628
1,829
No of Shares
(m)
31
63
183
Dilution
(%)
15
2
13
Price*
(INR)
53
141
186
Amount raised
(INR m)
1,083
418
3,986
Source: Company/MOSL
* Price adjusted for bonus issues
Shifting gears: Focus on consolidation, no big-ticket acquisitions
OPTC might consider small
acquisitions to fill gaps in
its product portfolio
OPTC's management indicated that after the acquisition of CSC, OPTC's focus shifted to
the consolidation of the business and organic growth. The management said it would
not consider big-ticket acquisitions in the medium term.
The USD1b revenue target by FY15 will be achieved mainly through organic growth.
OPTC might consider small acquisitions to fill gaps in its product portfolio.
Acquisitions were key growth drivers for OPTC in the past. OPTC acquired 11 companies
over the past 10 years.
The management said it had been necessary make acquisitions in the past to gain
access to products approved by regulators since the approval process was lengthy. The
management also said OPTC's acquisitions helped it to gain access to distributors in
different territories. Without the acquisitions, it would have taken years for OPTC to
develop the distribution network it now has.
12 October 2011
3

C
orner
O
ffice
OPTC's acquisitions
Year
2001
Target
AMDL
Description
AMDL is engaged in distribution of medical equipment in India.
It is also in the business of IT consulting, global positioning
systems and electronic design automation services in India
2002
Monitoring
division of Palco
Lab (Mediaid)
Thermometer
division of
Unilever India
Altron
Eurocor
Devon
Innovations Pvt
Ltd
Ormed Medical
Technology
Criticare
Distributes patient monitoring products in the US, Latin America
and Europe
Manufacturer of digital thermometers
50
~50
Enabled forward integration as a
manufacturer of patient monitoring
systems
Consideration Rationale
(INR m)
NA
To get a strong foothold in the
growing Indian medical device market
the
2003
2004
2006
2007
Assembling and production of electronic goods which the
company uses for some of its products
German company focused on developing interventional
cardiovascular products like stents and catheters
Designing and manufacturing of catheters, stone graspers,
stone baskets and dilators for specialized applications mainly
in the areas of urology, gastroenterology and gynacology
Manufactures and markets orthopedic and trauma products
Leading medical device company specializing in non-invasive
patient monitors and anesthetic gas benches
Leading manufacturer of non-invasive equipment for detection
of peripheral arterial disease (PAD) in the US
Has advanced facility for stent manufacturing, research and
development
Manufactures and markets advanced diagnostic and
therapeutic cardiology devices and systems, including
automated external defibrillators (AED), electrocardiograph
devices (ECG), cardiac stress treadmills and systems and
diagnostic workstations. Has operations in North America,
Europe and Asia
Source: Company/MOSL
600
31
Entry into the invasive product
segment
To enhance the invasive product
basket
2007
2008
9
2,804
To increase the distribution reach in
the US and expand its product
portfolio
To increase the distribution reach in
the US and expand its product
portfolio
To acquire stent manufacturing
capabilities and reduce dependence
on external agencies
To increase the distribution reach in
US and expansion of product
portfolio
2010
Unetixs
460
2010
NS Remedies
60
2010
Cardiac Science
3,910
High working capital requirement unlikely to decline; High debt,
goodwill on books are concerns
OPTC will have to raise
more debt to fund its
growth guidance, which
will impact its bottom-line
OPTC's high working capital requirement is a key concern for us (232 days). However,
the management believes that high working capital is intrinsic to the business model
and is unlikely to decline in the near term. Since OPTC does not have very strong brand
equity to compete with bigger rivals like Philips and GE, it has to offer higher credit to
distributors to get business.
The total debt on OPTC's books is ~INR8.84b, which translates into 0.7x D/E ratio. We
believe OPTC will have to raise more debt to fund its growth guidance, which will
impact its bottom-line.
Goodwill on OPTC's books is INR5.95b, which is ~45% of its net worth. Deterioration in
market dynamics, leading to an intangible write-off, may impact OPTC's financials.
12 October 2011
4

C
orner
O
ffice
Prolonged working capital cycle here to stay
Debtor Days
239
172
153
185 194 181
149
114
103
75
156
100
150
80
150
75
14.0
2,374
431
2,374
22.9
5,952
the
Goodwill remains very high
Goodw ill (INR m)
46.0
(%) of net w orth
43.4
Inventory Days
233
Working Capital Days
232
241
236
212
FY07
FY08
FY09
FY10
FY11
FY12E
FY13E
FY08
FY09
FY10
FY11
Source: Company/MOSL
Valuation and view
We maintain
Neutral
rating pending clarity on a
proposed INR10b fund
raising through the listing
of OPTC's subsidiary
OPTC delivered strong revenue and earnings growth over the past few years and has
consistently maintained high return ratios.
Despite rapid growth, OPTC remains a marginal player in the global medical devices
industry, which gives OPTC the opportunity to sustain high revenue growth over the
next couple of years.
We believe OPTC might see strong growth in the invasive and non-invasive businesses
due to a large market opportunity, expanding distribution and geographical spread,
new product launches and low base.
However, the large goodwill, debt on books, high working capital requirements and very
low free cash flow generation remain concerns.
Based on our estimates, the stock trades at 10.7x FY12E EPS and 8.2x FY13E EPS. The
company has proposed raising INR10b through a separate listing of its subsidiary OEHL.
Pending clarity on such a large fund raising, we maintain
Neutral.
12 October 2011
5

C
orner
O
ffice
Financials and Valuation
Income Statement
Y/E March
Net Sales
Change (%)
EBITDA
Margin (%)
R&D Adjustment
Adjusted EBITDA
Margin (%)
Depreciation
EBIT
Int. and Finance Charges
Other Income - Rec.
PBT before EO Expense
Extra Ordinary Expense/(Income)
PBT after EO Expense
Current Tax
Deferred Tax
Tax
Tax Rate (%)
Reported PAT
Less: Mionrity Interest
Adj PAT
2009
8,185
74.9
2,591
31.6
558
2,032
24.8
138
2,452
537
288
2,203
35
2,168
77
-2
75
3.5
2,093
6
1,582
2010
10,776
31.7
3,669
34.0
200
3,469
32.2
278
3,391
382
-76
2,933
32
2,901
298
-1
296
10.2
2,604
1
2,452
2011
15,856
47.1
4,446
28.0
0
4,446
28.0
508
3,938
321
304
3,922
-12
3,934
249
0
249
6.3
3,685
13
3,661
the
(INR Million)
2012E
22,513
42.0
5,686
25.3
0
5,686
25.3
804
4,882
565
0
4,317
0
4,317
432
0
432
10.0
3,886
15
3,957
2013E
26,435
17.4
7,123
26.9
0
7,123
26.9
964
6,158
565
0
5,593
0
5,593
559
0
559
10.0
5,034
15
5,131
Balance Sheet
Y/E March
Equity Share Capital
Total Reserves
Net Worth
Minority Interest
Deferred liabilities
Total Loans
Capital Employed
Gross Block
Less: Accum. Deprn.
Net Fixed Assets
Capital WIP
Investments
Curr. Assets
Inventory
Account Receivables
Cash and Bank Balance
Loans & Advances
Curr. Liability & Prov.
Account Payables
Provisions
Net Current Assets
Misc Expenditure
Appl. of Funds
E: MOSL Estimates
2009
1,615
3,551
5,166
134
3
5,379
10,682
5,035
666
4,369
172
3
9,843
2,305
4,060
913
2,565
3,709
2,510
1,198
6,134
3
10,682
2010
1,829
8,615
10,444
135
2
2,328
12,909
5,948
853
5,095
261
3
10,886
2,213
4,396
1,223
3,054
3,395
1,782
1,613
7,491
59
12,909
2011
1,864
11,911
13,775
235
234
8,844
23,087
13,473
3,110
10,363
252
0
19,265
4,324
6,793
2,342
5,806
6,860
5,164
1,696
12,405
68
23,087
(INR Million)
2012E
1,864
14,423
16,287
235
234
10,969
27,725
15,352
3,913
11,439
172
0
22,765
4,934
9,252
1,178
7,401
6,719
5,129
1,590
16,046
68
27,725
2013E
1,864
17,974
19,838
235
234
9,969
30,275
16,852
4,878
11,975
172
0
25,967
5,432
10,864
980
8,691
7,906
6,001
1,905
18,061
68
30,275
12 October 2011
6

C
orner
O
ffice
Financials and Valuation
Ratios
Y/E March
Basic (INR)
EPS
Cash EPS
BV/Share
DPS
Payout (%)
Valuation (x)
P/E
Cash P/E
P/BV
EV/Sales
EV/EBITDA
Dividend Yield (%)
Return Ratios (%)
RoE
RoCE
Working Capital Ratios
Accumulated Dep/Gross Block (x)
Asset Turnover (x)
Fixed Asset Turnover (x)
Debtor (Days)
Inventory (Days)
Working Capital Turnover (Days)
Leverage Ratio (x)
Current Ratio
Debt/Equity
2009
8.5
13.8
32.0
4.0
36.1
2010
13.2
15.8
56.8
4.5
36.8
2011
19.6
22.4
73.5
4.5
26.6
2012E
21.2
25.1
87.0
6.2
35.0
2013E
27.5
32.1
106.1
6.7
29.2
the
11.6
10.1
3.1
3.1
11.0
2.0
10.7
9.1
2.6
2.3
9.2
2.7
8.2
7.1
2.1
1.9
7.2
3.0
51.7
37.4
33.9
28.5
30.4
24.1
25.9
19.6
27.9
21.6
0.1
0.8
3.1
181
103
233
0.1
0.8
2.3
149
75
212
0.2
0.7
2.1
156
100
232
0.3
0.8
2.1
150
80
241
0.3
0.9
2.3
150
75
236
2.7
1.1
3.2
0.2
2.8
0.7
3.4
0.7
3.3
0.5
Cash Flow Statement
Y/E March
Oper. Profit/(Loss) before Tax
Direct Taxes Paid
(Inc)/Dec in WC
CF from Operations
EO Expense / (Income)
CF fr. Oper. incl EO Exp.
(inc)/dec in FA
(Pur)/Sale of Investments
CF from Investments
Change in Net Worth
Inc/(Dec) in Debt
Interest Paid
Dividend Paid
CF from Fin. Activity
Inc/Dec of Cash
Add: Beginning Balance
Closing Balance
E: MOSL Estimates
2009
2,591
-77
-2,733
68
35
33
-3,981
0
-3,981
1,046
4,422
-537
-755
4,176
228
686
913
2010
3,669
-298
-1,047
2,248
32
2,216
-1,002
0
-1,002
3,487
-3,050
-382
-959
-904
310
913
1,223
2011
4,446
-17
-3,795
938
-12
950
-7,515
3
-7,512
2,367
6,616
-321
-981
7,681
1,119
1,223
2,342
2012E
5,686
-432
(INR Million)
2013E
7,123
-559
-2,213
4,350
0
4,350
-1,500
0
-1,500
-15
-1,000
-565
-1,468
-3,048
-198
1,178
980
-4,805
449
0
449
-1,800
0
-1,800
-15
2,125
-565
-1,359
187
-1,164
2,342
1,178
12 October 2011
7

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