Opto Circuits – BUY @ 120 – 124 Medium Term Target 160 – 165

Author: admin | Date: August 24, 2012

Opto Circuits India Ltd.
BSE Code – 532391
Equity – 242.32 Cr
CMP – 121.20

On Thursday, August 23, Stocks of Opto Circuits India touched a 52-week low of Rs 118.70 mainly triggered by a rating downgrade by ICRA. The rating agency has downgraded the company’s debt facilities from AA to B, but things aren’t that bad….

Once upon a time, medical device maker Opto Circuits was favored by the investors as a play on the growing medical devices industry, but now the company is having tough times since February this year owing to concerns relating to high debt – a fall out of aggressive expansion, margin contraction after its latest buy out in the US and high capital expenditure.

Share of Opto Circuits stock has corrected by over 50 % over the last six months despite the improved show in the quarter to June this year.

The company’s management has debunked the rating agency while saying that it has appointed CRISIL as its new rating agency.

Opto Circuits is trading at a price to earnings valuation of 6.05 – significantly lower than global medical devices companies which are trading at an average P/E of 16 times. It has also been the worst performer in the BSE Healthcare Index during the last six months.

The company has completed 11 acquisitions between 2001 and 2010 – in the process piling up a net debt of Rs 1101 crore on its books. While it does not plan to buy out any more firms for now it still has projected a capital expenditure of Rs 220 crore towards setting up manufacturing facilities, which again will eat into a large part of its free cash flows this year.

Opto Circuits - 532391 Chart

Opto Circuits Q1 FY 2013 Results :

Recently company declared a good set of numbers for Q1 FY 2013, better than market expectations.

For the quarter ended 30th June 2012, Net sales of the company grew by 37% to Rs. 7.15 billion while EBITDA grew by 33% to Rs. 1.9 billion.

EBITDA margins of the company stood at 26.6% while PAT of the company grew by 18.6% to Rs. 1.38 billion.

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 Rs. 5.8 billion. Invasive business reported 33% revenue growth to Rs. 1.25 billion.

Management has retained it topline growth guidance of 15-20% (excl benefits of favorable currency) and EBITDA margins at 26-27%.

Management is also targeting a reduction in overall working capital by 10 days from the current 180 days.

In a recent interview after the rating downgrade, the company’s CMD Vinod Ramani assured investors about company’s fundamentals and advised people not to believe in the rumors and also suggested all to wait for Crisil rating.

Despite short term problems and all negative news and rumours, the long term prospects of this company are good and one can buy shares of Opto Circuits around 120 – 125 for a medium term target of 165 – 175. Don’t get panic if the share corrects further to 100 levels or so.

A word of caution – with lots of news surrounding the share, don’t buy in huge quantity, better to keep buying in small lots.

Disclosure : I hold no shares of Opto Circuits.

About Ankit Gala :

Mr. Ankit Gala have written many books on Investments namely –  Guide to Indian Mutual Funds, Guide to Indian Commodity Market, Guide to Day Trading, Guide to Future & Options, A Simplified Approach to Option Strategies, Everything About IPO’s, Foreign Exchange & Forex Trading and Investing and Trading in Gold & Silver and Investment Planning : Turn Your Money Into Wealth.

These books are published by Buzzingstock Publishing House –www.buzzpublishing.net.

Their books are available in English, Hindi, Gujarati and Marathi.

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