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Monday, December 18, 2006

From Research Desk - Opto Circuits (India) Limited


Opto Circuits (India) Ltd (OCIL), an established player in a niche segment of medical electronic devices and medical monitoring products is expected to witness revenue CAGR of 63% to Rs3.7bn over FY06-08. While the core business is expected to record 30% plus revenue CAGR to Rs2bn over FY06-08 driven by continuous demand for its products, EuroCor (OCIL’s 100% subsidiary) is on track to expand its geographical coverage of stents to 36 countries by end 2006 and contribute at least 30% to profitability by FY08. However, net margins for EuroCor may be subdued in the short term on account of heavy advertising and promotional expenditure. OCIL’s products have started gaining preference with cardiologists who have attended various seminars, conferences and live workshops conducted by the company. Appointment of Dr. O’Neill on board is likely to expedite the process for USFDA approval, but it is still 18-24 months away.

OCIL’s proposed acquisition of a European company is likely to be a good strategic fit for the company. OCIL is likely to acquire this company which is into design and manufacturing of a wide range of balloon catheter assemblies and related products for coronary, renal and other applications for a consideration of Rs0.72bn. The target company is likely to generate revenue of Rs0.8-1bn for 2007. While we await further details about the acquisition, which is likely to be closed over the next 4-6 weeks, the acquisition enables EuroCor to achieve backward integration, which would cut costs. These savings can then be passed on to the customer, which would increase penetration. In addition, OCIL is also looking at conducting certain low-end manufacturing operations for EuroCor in India, which will not only cut costs but boost net margins as OCIL is under 100% EOU till 2009-10.

We are confident that the company is on track to witness earnings CAGR of 61.1% to Rs1bn over FY06-08 excluding the potential from the proposed acquisition. At Rs305, the stock is trading at 28.8x FY07E EPS of Rs10.4 and 18.4x FY08E EPS of Rs16.3. We maintain BUY with a target price of Rs326. Closure of the proposed acquisition and disclosure of financial details by the management may lend further upsides to the stock.