Maintain Buy on Opto Circuits - Motilal Oswal

OPTO CIRCUITS: Gets USFDA clearance for modular patient monitors; Huge opportunity including access to large hospitals; Buy

- Opto Circuits' (OPTC IN, Mkt Cap US$1.1b, CMP Rs282, Buy) US subsidiary Criticare Systems Inc (CSI) received USFDA clearance for a new modular multi-parameter patient monitoring system called eVision 9100. This is a high-end monitor which measures multiple physiological parameters of patients.

- This modular patient monitoring system will monitor parameters such as Non-Invasive Blood Pressure (NIBP), Invasive Blood Pressure (IBP), Temperature, Respiratory Gases, Anesthetic Agent Gases, Respiratory Rate, Pulse Oximetry, ECG, and Arrhythmia & ST Analysis of the ECG waveforms. The monitor will be used in critical care and preoperative units and during surgery and emergency care.

- Parameters can be removed or changed without interruptions to the operating system. The monitor also has an optional expansion rack providing up to 15 modular slots for an unlimited array of patient monitoring solutions. eVision 9100 has a touch-screen display and an interactive user interface that allows the base configurations to be easily upgraded. Physiological data, system alarms and patient data analysis are made available to the care providers from the monitor.

Huge market opportunity; facilitates expansion of customer base

- The global patient monitoring device market size is estimated at US$5.7b in 2011, up from US$2.8b in 2002. North America has been the largest market for patient monitoring devices so far and constitutes ~55% of the global demand. Further, the region has reported above average industry growth rate. Among patient monitors, multi-parameter monitors are the largest segment with the market size of ~US$2.25b (42% of overall market).

- Apart from adding one more product to Opto's product offerings, this approval gives Opto an opportunity to target large hospitals in the US which generally require these kinds of high-end patient monitoring devices. Further, USFDA clearance will help Opto boost sales of this product in other parts of the world on the back of enhanced brand equity.

- Opto's product is priced at US$15,000 and the company has guided for revenue of US$5m from this product in FY11.

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.

- Opto has rapidly enhanced its non-invasive product offerings over the years primarily on the back of acquisitions. It offers a wide product basket, which includes re-usable/disposable sensors, pulse oximeters, anesthetic gas monitors, multi-parameter monitors, digital thermometers, cholesterol monitors, fluid warmers, infra-red emitters, etc.

- 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.

- The company's cost competitiveness has helped it to sustain its margins over the years. One of the major reasons for its ability to grow rapidly is cost competitive product offerings. Further, Opto's backward integration is seen as an advantage by prospective buyers due to perception of stable sensor supplies.

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 huge market opportunity, lower competition, and successful product development by Opto.

- We expect Opto's invasive business to deliver strong CAGR of 24% over FY10-12, given its new product launches, increasing product awareness, and opening up of a few regulated geographies.

- Opto forayed into the invasive segment through the acquisition of Eurocor in Germany in year 2006. This acquisition benefited Opto in many ways. It opened a whole new rapidly growing, multi-billion dollar market to Opto. It was able to diversify its revenue stream, offer new products to its distributors, and leverage its existing distribution reach.

Valuation and view

- Opto has delivered strong revenue and earnings growth over the last few years. Also, it has consistently maintained its high return ratios. We believe that Opto is likely to see continued strong growth in both its businesses on the back of large market opportunity, expanding distribution network and geographical spread, new product launches and low base.

- We expect revenue CAGR of 23% over FY10-12 led by both Non-invasive and Invasive business segments. We estimate FY11 EPS at Rs18.4 (+39%) and FY12 EPS at Rs22.6 (+23%) leading to EPS CAGR of 30% over FY10-12. Strong earnings growth, improving cash flows, will favorably impact valuations.

- At current price, the stock trades at 15.3x FY11E and 12.5x FY12E earnings. Maintain Buy with a target price of Rs339, an upside of 20% (15x FY12E EPS).

Source : Equity Bulls

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