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Research
Buy Opto Circuits - Motilal Oswal
Posted On : 2010-08-09 09:36:48( TIMEZONE : IST )
Opto Circuits (OPTC IN; Mkt Cap USD1b, CMP Rs256, Buy)
Opto Circuits (Opto) operates in niche segments of the medical devices industry. The company is present in both invasive and non-invasive devices. It is expanding globally, with a wide distribution network across geographies. Its major products include patient monitoring devices, sensors and cardiac stents. Opto has delivered superior performance, with revenue CAGR of 54% and PAT CAGR of 65% over FY05-10, partially driven by inorganic initiatives.
Non-invasive business – getting stronger: Opto's core business of non-invasive devices is getting stronger. The company has forward integrated into patient monitoring devices. We believe Opto will be able to sustain 20%+ revenue growth on the back of favorable market dynamics, diversified product offerings, cost competitiveness, expanding distribution reach and low base.
Invasive business – at inflexion; offers immense potential: Opto's invasive business is its key long-term growth driver, in our opinion. The business has significant potential due to large market opportunity, lower competition, and successful product development by Opto. Given its new product launches, increasing product awareness, and opening up of a few regulated geographies, we expect Opto's invasive business to deliver strong CAGR of 24% over FY10-12.
Free cash flow generation essential: Opto generates very little free cash flows because of high investment in working capital. We think that low operating free cash flow generation is one of the reasons for the company's low valuation multiples. We believe that the company needs to control its working capital requirements to generate adequate free cash flows to grow without resorting to external financing.
Expect 30% earnings CAGR over FY10-12, with RoCE of 25%+: We expect 23% revenue CAGR, driven by both the invasive and non-invasive business. Healthy revenue growth and 30% EBITDA margins will enable Opto to post 30% earnings CAGR over FY10-12. The company should sustain, if not improve its high return ratios on the back of stable profitability and working capital requirements.
Valuation and view: We believe that Opto will see strong growth in both its invasive and non-invasive businesses on the back of large market opportunity, expanding distribution network and low base.The stock trades at 13.9x FY11E EPS of Rs18.4 and 11.3x FY12E EPS of Rs22.6. Given strong earnings growth and improving cash flows, coupled with reasonable valuations, we initiate coverage with a Buy rating and a target price of Rs339 (15x FY12E EPS) — 32% upside.
