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Opto Circuits: Change in R&D policy curtails profits - Views on News from Equitymaster
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  • Aug 21, 2012 - Opto Circuits: Change in R&D policy curtails profits

Opto Circuits: Change in R&D policy curtails profits
Aug 21, 2012

Opto Circuits has announced its June quarter results. The company has reported a 36.1% YoY growth in consolidated topline and an 18.6% YoY growth in profits. Here is our analysis of the results.

Performance summary
  • Consolidated topline grows by 36.1% YoY during the quarter. About 10% of this growth came from rupee depreciation.
  • Operating margins contract by more than 1.6% as higher expenditure takes toll. The overall cost increased due to change in accounting policy related to R&D expenditure. Until now, the company used to capitalize the R&D expenditure. However, since 1QFY13 the same is treated as revenue expenditure and expensed in the income statement. This change in the policy dampened the current quarter profits by Rs 203.9 m.
  • Bottomline grows by 18.6% YoY due to strong performance at the operating level and rise in other income. However, a 70.7% YoY rise in interest cost impacted the profitability growth.


Consolidated financial snapshot
(Rs m) 1QFY12 1QFY13 Change
Income from operations  5,257 7,157 36.1%
Expenditure 3,776 5,251 39.1%
Operating profit (EBDITA) 1,481 1,906 28.7%
EBDITA margin (%) 28.2% 26.6%  
Other income - 21  
Interest  109 187 70.7%
Depreciation 150 196 30.7%
Profit before tax 1,222 1,544 26.4%
Extraordinary items - -  
Tax 57 150 160.1%
Profit after tax/(loss)& before MI 1,165 1,395 19.8%
Minority Interest (MI) (1) (15)  
Profit after tax/(loss) 1,164 1,380 18.6%
Net profit margin (%) 22.2% 19.5%  
No. of shares (m)   242.3  
Basic earnings per share (Rs)   5.7  
Price to earnings ratio (x)*   6.0  
(* on trailing twelve months earnings)

What has driven performance in 1QFY13?
  • The impressive 36.1% growth in consolidated topline was partially driven by rupee deprecation and to some extent by increasing contribution from the emerging markets. For 1QFY13, the medical equipments division contributed 82% to the top line while interventional devices contributed 18%. Almost 98% of the current quarter revenues came from the international markets.

    Cost break-up...
    (Rs m) 1QFY12 1QFY13 Change
    Cost of raw materials 2,378 3,454 45.3%
    % sales 45.2% 48.3%  
    Staff cost 445 533 19.8%
    % sales 8.5% 7.4%  
    Other expenditure 574 744 29.6%
    % sales 10.9% 10.4%  

  • On the costs front, operating margins have taken a hit to the tune of 1.6%. This is mainly due to a change in accounting policy related to R&D expenditure. Expensing the R&D expenditure as opposed to capitalizing the same impacted the profits by Rs 203.9m.

  • Net profit growth for the quarter has come in at 18.6% YoY. This was mainly due to strong operating performance and rise in other income. However, rise in interest cost by 70.7% YoY curtailed profitability growth to some extent. Interest cost increased due to increase in interest rate.

What to expect?
At the current price of Rs 147, the stock trades at a multiple of around 6 times its trailing twelve month earnings. The stock has been on a downward slide since the last six months or so due to debt concerns arising from acquisitions made in the past. Margin erosion and stretched working capital cycle also worried the investors. Going forward, management has guided for a topline growth of 15-20% in constant currency terms while EBITDA margins are likely to remain in the region of 25-26%. Capex is expected to be in the region of US$ 40-50 m.

Due to the concerns on rising working capital, declining return ratio's and negative cash flows we reduce our target multiple for the company from 15x to 12x. Based on this multiple our revised target stands at Rs 250 per share. We maintain our buy view on the company.

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