Opto Circuits (India) Limited (OCIL): Maintain BUY - Investment Update
Opto Circuits India Limited (OCIL) recorded another strong quarterly performance with standalone sales witnessing a growth of 71.4% to Rs552mn. Economies of scale, cost cutting measures and better product mix has led to 250bps jump in OPM to 35.3% for the quarter. Healthy topline growth and strong margin expansion has led to a 98% growth in profitability to Rs198mn for the quarter. Consolidated sales recorded a growth of 88% to Rs628mn driven by increasing volumes in the base business and growing acceptance and wider penetration of EuroCor’s stents. OPM declined by 210bps to 32.5% for consolidated results due to lower margins for AMDL (60% subsidiary, sales Rs106mn, OPM 6%), a domestic distribution company for OCIL’s products. PAT increased by 90% to Rs200mn, translating into an annualized EPS of Rs13.
We like OCIL’s business model and believe the model would be difficult to replicate. OCIL is witnessing very strong volumes on its base business (SpO2 sensors & pulse oxymeters) which are estimated to witness revenue CAGR of 31% over FY06-08. EuroCor’s stents are witnessing wider geographical penetration and increasing acceptance amongst cardiologists which should enable it to contribute at least 30% to the total revenue and profitability by FY08. By moving low end stents manufacturing to India, OCIL would keep its margins intact by leveraging on India’s low cost advantage as well as tax benefits under 100% EOU. Strong operational performance every quarter vindicates our belief that OCIL would achieve our EPS estimates of Rs11.3 for FY07 and Rs17.8 for FY08.
OCIL is undergoing a financial and legal due diligence on a European Medical Equipment Company that designs and manufactures a wide range of balloon catheter assemblies and related products for coronary, renal and other applications. The acquisition estimated at Rs720mn is likely to close out over the next few weeks. We believe this acquisition will be a huge strategic fit for the company as it would enable OCIL to achieve backward integration thereby improving operational performance and profitability. We maintain BUY on the stock.