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Opto Circuits: The acquisition kicker - Views on News from Equitymaster

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Opto Circuits: The acquisition kicker
Nov 10, 2011

Opto Circuits has announced its September quarter results. The company has reported a 70% growth in consolidated topline and a 57% YoY growth in profits. Here is our analysis of the results.

Performance summary
  • Consolidated topline grows by 70% YoY during the quarter, led by acquisition of a firm which was not there during same quarter last year
  • Operating margins contract by more than 4% as higher staff costs and admin expenses take toll
  • Bottomline grows by 57% YoY, lower than the topline growth, mainly on account of margin contraction and rise in interest expenses

Financial performance: A snapshot
(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Net sales 3,314 5,620 69.6% 6,234 10,829 73.7%
Expenditure 2,257 4,074 80.5% 4,206 7,850 86.7%
Operating profit (EBDITA) 1,057 1,547 46.3% 2,028 2,979 46.9%
EBDITA margin (%) 31.9% 27.5%   32.5% 27.5%  
Other income (82) (51) -37.6% 12 (2)  
Interest (net) 62 138 123.8% 114 247 117.8%
Depreciation 115 109 -4.8% 205 259 26.2%
Profit before tax 799 1,248 56.2% 1,721 2,471 43.5%
Extraordinary items (1) 0   3 0  
Tax 23 33 42.5% 115 91 -21.4%
Profit after tax/(loss) & before MI 775 1,216 56.8% 1,609 2,380 48.0%
Minority Interest (MI) (1) (5) 247.9% (4) (4) 0.0%
Profit after tax/(loss) 774 1,211 56.5% 1,605 2,376 48.1%
Net profit margin (%) 23.4% 21.6%   25.8% 22.0%  
No. of shares (m) 183.3 186.4   183.3 186.4  
Diluted earnings per share (Rs)*         23.8  
Price to earnings ratio (x)*         10.2  
(* on trailing twelve months earnings)

What has driven performance in 2QFY12?
  • The impressive 70% growth in consolidated topline was driven by the segment of medical equipment and consumables as revenues from the same nearly doubled. This was mainly on account of acquisition of a firm called as Cardiac Science Corporation which was not there during the previous quarter. This firm also entered into a distribution agreement in Japan, thus giving its future revenues a good boost. The other division of interventional devices and tools managed to grow its revenues by just 7% YoY and thus its contribution to overall topline shrunk to 17% from 27% during the year ago period. On the growth for the rest of the year, the company expects the strong pace to continue with revenues clocking in a growth rate of 25%-30% during the medium term.

    Cost break-up...
    (Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
    Manufacturing expenses 1,820 2,969 63.1% 3,462 5,726 65.4%
    % sales 54.9% 52.8%   55.5% 52.9%  
    Staff cost 182 503 176.7% 304 948 211.9%
    % sales 5.5% 9.0%   4.9% 8.8%  
    Other expenditure 255 602 136.4% 440 1,176 167.5%
    % sales 7.7% 10.7%   7.1% 10.9%  

  • On the costs front, margins have taken a hit to the tune of 4.4%. While manufacturing expenses have come down (on a percentage of sales basis), they have been more than compensated by the huge jump witnessed in both staff costs as well as admin expenses. The company's subsidiary, Cardiac Science, did not have a very good profitability at the time of acquisition. Hence, the margins could be lower on account of the same. However, the company has expressed confidence of a turnaround in the same and the overall margins to touch 30% in the forthcoming quarters

  • With depreciation charges and other income witnessing favorable movement, PBT growth improved further to 56% YoY. Interest expenses however, more than doubled over corresponding previous quarter. This is on account of debt taken to fund its recent acquisitions. Net profit growth for the quarter has come in at 56% YoY. This is in line with the growth in PBT.

  • Net profit growth for the quarter has come in at 56% YoY. This is in line with the growth in PBT.

What to expect?
At the current price of Rs 244, the stock trades at a multiple of around 9 times its expected FY14 earnings per share. It should be noted that for the purpose of cost effectiveness and operational efficiency, the company has undertaken a restructuring initiative whereby investments in three US subsidiaries have been transferred to a wholly owned subsidiary of the company. Also, two more subsidiaries have been transferred to another wholly owned subsidiary. We believe that the company is well on track to meeting our projections for FY14 and hence, we maintain our positive view on the stock.

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