Motilal Oswal neutral on Opto Circuits India

Motilal Oswal has maintained neutral rating on Opto Circuits India with a target of Rs 173, in its August 17, 2012 research report.

“Opto Circuits India, 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),” says Motilal Oswal research report.   

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