>OPTO CIRCUITS INDIA LIMITED(EDELWEISS)

■ Numbers in line with estimates; strong EBITDA growth
Opto Circuits (Opto) reported Q2FY10 consolidated sales of INR 2.56 bn, up 18% Y-o-Y. The non-invasive segment, at INR 2.08 bn (81% of overall sales), grew 24% Y-o-Y, while the invasive segment, at INR 474 mn (19% of overall sales), declined 3% Y-o-Y. Lower raw material costs and fall in other expenditure on account lower selling expenses saw EBITDA margins increase 367bps Y-o-Y, with EBITDA growing 32% Y-o-Y, to INR 908 mn. Higher tax rate has eroded gains made at the EBITDA level, resulting in lower net profit growth of 18% Y-o-Y.

■ Criticare to be growth driver; invasive growth to slow down
We note from Opto’s FY09 annual report that there has been a significant increase in intangibles of INR 750 mn (ex reclassification of miscellaneous expenditure and addition to intangibles due to Criticare acquisition). We also understand from the company that most of this expenditure is towards R&D, for new product launches and obtaining regulatory approvals in the non-invasive segment. We believe that lack of clarity on the FDA approval process, coupled with - (1) de-growing global stents market; (2) dominance by larger players; and (3) change in current product portfolio (on expected new product launches for attaining competitive edge) - could lead to lower–than-anticipated growth in the invasive segment. We believe the non-invasive segment, particularly Criticare, could be the growth driver for the company’s topline over the next two years.

Steady performance

■ QIP funds deployed against debt; impact on EPS neutral
Opto has raised INR 4 bn via a QIP in September 2009. We understand from the company that the entire amount raised has been used to reduce its debt burden, including cash credit. We expect interest cost to be minimal in the next two quarters. However, impact of lower interest cost remains EPS-neutral due to a similar increase in share capital for the company.

■ Outlook and valuations: Attractive; maintain ‘BUY’
At the CMP of INR 196, Opto is trading at 12.8x our FY10E consolidated EPS of INR 15.3 and 10x our FY11E consolidated EPS of INR 19.5. Given healthy growth rates in sales and profits over the next two years (at 26% and 32% respectively), attractive valuations and healthy return ratios, we maintain ‘BUY’ on the stock.

To read the full report: OPTO CIRCUITS