17 August 2012
1QFY13 Results Update | Sector: Healthcare
Opto Circuits
BSE SENSEX
S&P CNX
17,657
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1,6,12 Rel. Perf. (%)
M.Cap. (INR b)
M.Cap. (USD b)
5,363
OPTC IN
242.3
225/133
-9/-33/-39
34.7
0.6
CMP: INR143
TP: INR173
Neutral
Opto Circuits' 1QFY13 performance was above our estimates.
Key highlights:
Net sales were up 37% to INR7.15b (vs est of INR6.2b), EBITDA up 33% to INR1.9b (vs est of INR1.6b) and EBITDA
margins were at 26.6% vs our est of 26%. A favorable currency has partly driven topline growth with constant
currency growth at 18-20%. Topline growth was led primarily by non-invasive segment which reported growth
of 38% YoY to INR5.8b. Invasive business reported 33% revenue growth to INR1.25b. PAT was up 18.6% to
INR1.38b (vs our est of INR1.24b).
Management has retained it topline growth guidance of 15-20% (excl benefits of favorable currency) and
EBITDA margins at 26-27%. Management is targeted a reduction in overall working capital by 10 days from the
current 180 days. R&D accounting policy has changed with future R&D expenses being routed through the P&L
compared to the previous practice of capitalizing them.
OPTC has delivered strong revenue and earnings growth over the last few years coupled with 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), high working capital requirements leading
to high debt, inadequate free cash flow generation remain our major concerns. We note that management is
targeting reduction in working capital. We believe it is imperative for the company to deliver this without diluting
the overall growth for the business. Potential fund raising in Eurocor could dilute earnings, with the commensurate
benefits from the equity dilution accruing only over the long-term (since the funds are likely to be utilized for
financing clinical trials for key products which could be time-consuming). Based on our revised EPS estimates, the
stock trades at 6.4x FY13E and 5.7x FY14E EPS. We maintain
Neutral
with target price of INR173 (7x FY14E EPS).
Nimish Desai
(NimishDesai@MotilalOswal.com); +91 22 39825406
Investors are advised to refer through disclosures made at the end of the Research Report.
1

Opto Circuits
Non-invasive business drives revenue growth
OPTC 1Q results were above est with net sales up 37% to INR7.15b (vs est of INR6.2b),
EBITDA up 33% to INR1.9b (vs est of INR1.6b) and EBITDA margins at 26.6% vs our est of
26%. A favourable currency has partly driven topline growth with constant currency
growth at 18-20%.
Topline growth was led primarily by non-invasive segment which reported growth of
38% YoY to INR5.8b (above our est of INR4.9b). Invasive business reported 33% revenue
growth to INR1.25b (in-line with est). PAT was up 18.6% to INR1.38b (vs our est of
INR1.24b). PAT growth is lower than EBITDA growth due to: 1) A 72% increase in interest
costs, 2) A 55% decline in other income and 3) A more than 100% increase in effective
tax rate at 9.7% compared to 4.7% for 1QFY12.
Revenue Trend (INR m)
EBITDA Trend (INR m)
Source: Company, MOSL
Key highlights from 1QFY13 conference call
FY13 Guidance:
Management has retained it topline growth guidance of 15-20% (excl
benefits of favourable currency) and EBITDA margins at 26-27%. Topline growth will
be led by the invasive business which is expected to grow faster than the non-invasive
part. It has increased its tax rate guidance to 8-10% while capex guidance has been
retained at USD40-50m. Management has targeted a reduction in overall working
capital by 10 days from the current 180 days. Given its past track record of high working
capital, we take a conservative stance and hence are not factoring-in any working
capital savings as of now and will wait for the company to deliver on this.
FY13E Guidance
Business
Guidance
Overall Topline Growth (%) 15-20
EBITDA Margins (%)
Tax rate (%)
Capex (INR b)
26-27
8-10
2.5
FY12 Performance Remarks
49.0
We are budgeting for 23% growth
in revenues
26
Mgmt. has indicated that it would
maintain the margins
Tax write-back We are budgeting for 10% tax rate
3.4
Capex mainly directed towards
capacity expansion of existing
facilities
Source: Company, MOSL
2
17 August 2012

Opto Circuits
Change in R&D accounting:
Management has indicated that it has changed its
accounting policy for R&D expenses. From FY13 onwards, it will be expensing its R&D
expenses through the P&L as compared to the previous practice of capitalizing it. For
1Q, it has expensed R&D costs of INR200m and has guided for annual R&D costs of
USD15-17m. We view this as a positive step.
No further acquisitions:
Management also indicated that it does not plan any inorganic
initiatives in the near future as it tries to optimize the assets acquired in the past 2-3
years.
Eurocor fund raising:
The company has been targeting fund raising in its subsidiary -
Eurocor - for some time now, but unfavourable market conditions has acted as a
hindrance. It continues to plan for fund raising but has not given any indication of the
timeline for the same.
Clarification on ICRA rating downgrade:
ICRA has recently downgraded its rating on
OPTC's debt from AA- to B citing stretched liquidity conditions which is resulting in
slippages in debt servicing. OPTC management clarified that there is no slippage in
debt servicing except for a few days delay for one payment resulting out of exchange
rate fluctuations. It has also indicated that it had disengaged ICRA's services in Jul'12
and had appointed CRISIL as the new rating agency (CRISIL's rating will be out in next
few weeks). We await further clarity on this development.
Outlook and valuation
OPTC has delivered strong revenue and earnings growth over the last few years coupled
with 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), high working
capital requirements leading to high debt, inadequate free cash flow generation
remain our major concerns.
We note that management is targeting reduction in working capital. We believe it is
imperative for the company to deliver this without diluting the overall growth for the
business. Potential fund raising in Eurocor could dilute earnings, with the
commensurate benefits from the equity dilution accruing only over the long-term
(since the funds are likely to be utilized for financing clinical trials for key products
which could be time-consuming). Based on our revised EPS estimates, the stock trades
at 6.4x FY13E and 5.7x FY14E EPS. We maintain
Neutral
with target price of INR173 (7x
FY14E EPS).
17 August 2012
3

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.
High debt and goodwill on the books.
Product approvals in regulated markets and product
acceptance especially in the invasive segment is
difficult and time consuming.
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 15% CAGR
over FY12-14.
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
FY12-14.
Opto has delivered strong growth in revenues and
earnings in the past few years. It has consistently
maintained its high return ratios.
Recent developments
ICRA has downgraded its rating on Opto's debt from
AA- to B.
Valuation and view
OPTC is likely to report almost flat earnings CAGR of
3% over FY12-14 impacted due to high base created
due to negative tax rate.
The stock trades at 6.4x FY13 EPS of INR22.3 and 5.7x
FY14E EPS of INR25. Maintain
Neutral
with TP of
INR173 (7x FY14E EPS).
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.
EPS: MOSL forecast v/s consensus (INR)
MOSL
forecast
22.3
25.0
Consensus
forecast
23.8
28.4
Variation
(%)
-6.3
-11.9
Target price and recommendation
Current
Price (INR)
143
Target
Price (INR)
173
Upside
(%)
21.0
Reco.
Neutral
FY13
FY14
Stock performance (1 year)
Shareholding pattern (%)
Jun-12
Promoter
Domestic Inst
Foreign
Others
17 August 2012
28.2
1.7
43.5
26.7
Mar-12
28.1
1.1
45.4
25.3
Jun-11
28.1
1.3
46.6
24.1
4

Opto Circuits
Financials and Valuation
17 August 2012
5

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Opto Circuits
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