>OPTO CIRCUITS INDIA LIMITED(HDFC SECURITIES)

Background
Incorporated in 1992, Mr. Vinod Ramnani promoted Opto Circuits India Ltd. (OCIL) is engaged in the design, development, manufacture & marketing of Medical Electronic Devices and health care products, in both invasive and non-invasive segments. Its range of products includes Digital Thermometers, Pulse Oximeters, Fluid Warmers, Patient monitoring systems, Medical sensors, cardiac stents and catheter systems.

Triggers
■ OCIL has a strong presence in Medical Equipment industry with diverse range of critical care & tertiary care medical devices. The industry is relatively insulated from any economic slowdown as these are non-discretionary spends. As per World Health Organisation (WHO), the industry, which has been growing in excess of 15% p.a, is expected to grow 10% p.a. over next decade. This will lead to medical equipment market size of USD 428 bn by CY2013. OCIL, being one of the leading players in the industry is expected to capitalise on the growing opportunities.

■ Acquisitions & alliances have enabled OCIL to expand its product & client base & to strategically segment itself into the invasive & non-invasive markets. In the last nine years, OCIL has made eight successful acquisitions of which Eurocor & Criticare acquisitions have been major turning points. Eurocore is a pioneer in the field of invasive cardiology while Criticare has established product & technological leadership in anesthetic gas monitoring, vital signs monitoring, gas & agent analysis. These two acquisitions are expected to be the major catalyst for OCIL’s future growth.

■ OCIL constantly launches new & innovative products every year both under the invasive & non-invasive categories, which are expanded aggressively in new markets. OCIL has a very strong marketing & distribution network, which enables it to improve its brand image & boost the sales. OCIL’s 59.7% subsidiary, Advance Micronic devices, has been a medical equipment distributor in India for approximately three decades, while its 100% US subsidiary Mediaid distributes its medical devices internationally. Further, for promoting its products, OCIL uses alternate channels like conducting various seminars & summits & inviting cardialogists to participate.

■ The new launches expected this fiscal (gas bench module, modular patient monitoring system & patient monitoring system with networking capability) under the non-invasive category & Eurocor’s unique invasive products viz; ‘Magical’ (which is a combination of a drug-eluting balloon with a bare metal stent) & Cobalt Chromium stent are expected to add to OCIL’s revenue going forward. Also the strategic technology sharing agreement entered into by OCIL recently with US based Micell Technologies for jointly developing new stent & balloon systems for world markets would enable OCIL to further enhance its revenue by addressing additional market opportunities.

■ OCIL holds 35 patents through its subsidiaries, which enables it to change product design & configuration. IPR can also be rented to third party, which generates royalty.

■ To lower the production costs, OCIL has taken steps to transfer traditionally outsourced manufacturing by its US operations to its facilities in India. OCIL has shifted nearly 35% assemblies, sub-assemblies & testing practices of Criticare Inc to Bangalore. This is expected to improve consolidated operating margins. Also, two of the OCIL’s five manufacturing facilities in Bengaluru are currently registered as 100% EOUs, which enjoy tax-free status. OCIL has also set up a subsidiary ‘OCI Infrastructure Ltd’ for setting up an SEZ. In case EOU benefit is not extended beyond FY11, OCIL could shift its operation there & avail of continued tax exemption. This coupled with the expected reduction in interest liability due to repayment of loan taken for Criticare acquisition (Rs. 2040 mn) out of the recently raised QIP funds of Rs. 4000 mn is expected to keep the PAT margins on a higher side.

■ OCIL is an investor friendly company, which has a good track record of paying consistent dividends since FY01. Going forward, we expect OCIL to continue enriching its shareholders wealth with healthy dividend payouts.

■ OCIL’s consolidated turnover & PAT have grown at a CAGR of 80.2% & 75.5% respectively over FY06-09. Over FY09-11, we expect turnover & PAT to grow at CAGR of 26.5% & 28.1% respectively, which is likely to be driven by both invasive & non-invasive segment. The new products to be launched under both segments are expected to add to OCIL’s turnover & profits. However, the CAGR growth estimated is lower than that achieved over FY06-09 mainly on account of higher base & lack of contribution from inorganic acquisitions over the next two years.

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