Buy Opto Circuits; target of Rs 280: Dolat Capital

“Opto’s growth is likely to be driven by the non-invasive segment in the near to medium term. This shall be led by new product launches (low cost monitors in particular) and scale up in revenues from AED segment in Japan. On the invasive side, increased penetration in Emerging Markets (EMs) and new launches shall aid revenue growth. The management appears confident of attaining revenues of USD 100mn during FY12E. Opto is seeking partnerships/alliances to facilitate its breakthrough in US Stent market (characterized by strong lobbying).”

“The company plans to raise ` 6bn – 10bn through an IPO of Opto Eurocor Healthcare Ltd. (OEHL) and dilute 25% stake in the process. This implies a pre-money valuation of OEHL at ` 30bn (on the higher band appears expensive - 9x FY11 sales). The management aims to utilize the proceeds over the next 3-4 years towards a) funding R&D initiatives (trials, product development costs) and b) developing in-house manufacturing capabilities (alternative to contract manufacturing which is currently done). The management guides for 20% revenue growth in FY13E and anticipates EBITDA margins in range of 27-28% of sales. High leverage and goodwill (related to Cardiac Science (US) acquisition) along with working capital stress on balance sheet remain key concerns.”

“We estimate 29% revenue CAGR and 19% earnings CAGR over FY11-13E. We also expect CSC to showcase better operating efficiencies on the back of Opto’s aggressive cost-cutting measures. However, rising overheads related to promotional activities and planned manpower addition at the Malaysian and Vizag facilities will restrict margin expansion. Increased revenues from new product launches and entry into newer markets are key growth drivers. Dilutive growth plans, high leverage and increased goodwill acts as a dampener on valuations. At CMP of Rs 200, the stock trades at 8.5x FY12E and 7.1x FY13E earnings. We maintain our Buy recommendation and revise our target price downwards to Rs 280 (10x FY13E EPS),” says Dolat Capital research report.

Public holding more than 90% in Indian cos

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