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Opto Circuits: Margins under pressure - Views on News from Equitymaster
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Opto Circuits: Margins under pressure
May 19, 2011

Opto Circuits has announced its March quarter results. The company has reported a 63% growth in topline whereas the bottomline has grown by 68% YoY for the quarter ended March 2011 on a consolidated basis. Here is our analysis of the results.

Performance summary
  • Topline grows by 63% YoY during the quarter
  • Operating profits manage a growth of only 7% YoY for the quarter as expenses jump 90% YoY
  • Net profits grow an impressive 68% YoY, thanks mainly to significantly higher other income and a drastic fall in taxes
  • Full year profits grow 41% YoY on the back of a 47% growth in topline
  • Announces a dividend of Rs 4.5 per share (yield of 1.6%)

(Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
Net sales 3,345 5,445 62.8% 10,776 15,856 47.1%
Expenditure 2,235 4,255 90.4% 7,107 11,409 60.5%
Operating profit (EBDITA) 1,110 1,190 7.3% 3,669 4,446 21.2%
EBDITA margin (%) 33.2% 21.9%   34.0% 28.0%  
Other income (23) 188   (76) 304  
Interest (net) 71 119 66.9% 382 321 -16.1%
Depreciation 99 150 50.9% 278 508 82.7%
Profit before tax 917 1,110 21.0% 2,933 3,922 33.7%
Extraordinary income/(expense) (52) 14   (32) 12  
Tax 204 6 -96.9% 299 249 -16.7%
Minority interest 0 6   1 13 1144.5%
Profit after tax/(loss) 661 1,111 68.0% 2,601 3,672 41.2%
Net profit margin (%) 19.8% 20.4%   24.1% 23.2%  
No. of shares (m) 182.9 186.4   182.9 186.4  
Diluted earnings per share (Rs)*         19.7  
Price to earnings ratio (x)*         13.9  
(* annualised)

What has driven performance in FY11?

  • Revenues for the full year were up 47% YoY. However, the numbers are not strictly comparable as the company made three acquisitions during the fiscal and hence, financials for the full year also includes their contribution. Cardiac Science, the biggest acquisition for the company during the year, added around Rs 2.3 bn in terms of revenues during the four months that it has been part of Opto Circuits. What more, Cardiac Science also turned profitable, recording EBITDA margins in the region of 12%. While non-invasive business contributed 78% to the company's total revenues during the fiscal, contribution from the invasive segment came in at 20%. Going forward, the company expects the invasive segment to grow in the region of 35-40% whereas the non-invasive business to grow around 15-20%. Given the high growth rates achieved in the past, the target does not look all that stiff.

    Cost break-up...
    (Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
    Manufacturing expenses 1,881 3,179 69.0% 5,995 8,948 49.2%
    % sales 56.2% 58.4%   55.6% 56.4%  
    Staff cost 115 457 296.1% 497 1,103 121.9%
    % sales 3.4% 8.4%   4.6% 7.0%  
    Admin & Marketing expenses 239 620 159.8% 615 1,358 121.0%
    % sales 7.1% 11.4%   5.7% 8.6%  

  • On the margins front, both the quarterly as well as the full year operating margins have taken a hit. Erosion has been more in quarterly margins as the same have come down by more than 11%. Full year margins have been knocked down in the region of 6%. This is due to rise in all the major cost heads as a percentage of sales. The most adverse impact has been caused by admin and marketing expenses, with the same going up by 121% for the full year. It should be noted that there were some onetime expenses to the tune of Rs 450 m during the fiscal and to that extent, the margins should see an improvement going forward.

  • Consolidated PBT for the full year has come in higher by 34% YoY. This has been more than the growth in operating profits on account of strong other income and fall in interest expenses. Sales of few assets and forex benefits has led to the other income coming in robust whereas fall in interest expense has been on account of the company replacing some of the high cost rupee loans with low cost foreign loans. Furthermore, with the tax rate falling from 10% to 6%, net profit growth at 41% has been even better than the growth in PBT. The company expects tax rates to remain in the region of 6%-10% going forward as well.

What to expect?
At the current price of Rs 273, the stock trades at around 10 times its expected FY13 earnings per share. The company's performance has come along expected lines and while there are no major worries as of now, any more sizeable increase in debt and the debt to equity ratio of the company will reach levels that we may not be comfortable with. Till such time we believe there isn't a major need to revise our estimates for the company and we maintain our positive view on the stock.

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