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Opto Circuits: Sales growth under pressure

Nov 22, 2012

Opto Circuits has announced its September quarter results. The company has reported 8.2% YoY growth in consolidated topline while its bottom line has declined by 4.0% YoY.

Performance summary
  • Consolidated topline grows by 8.2% YoY during the quarter. However, it declined 15% QoQ. Currency appreciation and delayed execution of shipments impacted the topline growth.
  • Operating margins were relatively flat during the quarter with operating profits growing by 7.5% YoY.
  • Bottomline declines by 4.0% YoY due to increase in interest and depreciation expenses. Expensing R&D expenditure to the tune of Rs 230 m also impacted the profitability growth in the quarter. It may be noted that the tax rate during the quarter was 5.1% compared to 2.7% in 2QFY12. The company pays lower tax as it enjoys tax exemptions.
  • Total capex incurred until 1HFY13 was Rs 630 m
  • The gross debt/equity stood at 0.54x as of September 2012.

Consolidated financial snapshot
(Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Income from operations 5,620 6,080 8.2% 10,829 13,237 22.2%
Expenditure 4,073 4,418 8.4% 7,850 9,669 23.2%
Operating profit (EBDITA) 1,547 1,662 7.5% 2,979 3,569 19.8%
EBDITA margin (%) 27.5% 27.3%   27.5% 27.0%  
Other income (51) (45)   (2) (25)  
Interest 138 186 35.0% 247 373 50.8%
Depreciation 109 196 79.8% 259 392 51.4%
Profit before tax 1,249 1,235 -1.1% 2,471 2,779 12.5%
Extraordinary items - -   - -  
Tax 33 63 91.1% 91 213 134.9%
Profit after tax/(loss) & before MI 1,216 1,171 -3.7% 2,380 2,566 7.8%
Minority Interest (MI) (5) (9)   (4) (24)  
Profit after tax/(loss) 1,211 1,162 -4.0% 2,376 2,543 7.0%
Net profit margin (%) 21.6% 19.3%   22.0% 19.4%  
No. of shares (m)         242.3  
Basic earnings per share (Rs)         10.49  
Price to earnings ratio (x)*         4.3  
* on trailing twelve months earnings

What has driven performance in 2QFY13?
  • In 2QFY13, topline grew by 8.2% YoY. For 2QFY13, the medical equipments division contributed 80% to the top line while interventional devices contributed 19%. Unfavorable currency impact, delayed execution of shipments and weak macroeconomic environment impacted the topline growth.

    Cost break-up...
    (Rs m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
    Cost of raw materials 2,969 3,411 14.9% 5,726 7,386 37.9%
    % sales 52.8% 56.1%   52.9% 55.8%  
    Staff cost 503 493 -2.0% 948 1,026 8.2%
    % sales 9.0% 8.1%   8.8% 7.7%  
    Other expenditure 602 514 -14.6% 1,175 1,257 7.0%
    % sales 10.7% 8.4%   10.9% 9.5%  

  • Operating margins were relatively flat at 27.3% during the quarter. While the cost of raw materials as a percentage of sales increased from 52.8% in 2QFY12 to 56.1% in 2QFY13 staff costs and other expenditure declined from 9% and 10.7% to 8.1% and 8.4% respectively (both as a percentage of sales).

  • Net profit declined by 4.0% YoY during the quarter. Increase in interest and depreciation expenses impacted profits. While the interest expenses increased 35.0% YoY deprecation expenses increased 79.8% YoY. Also, expensing R&D expenditure during the quarter impacted profitability growth.

What to expect?
At the current price of Rs 104, the stock trades at a multiple of around 4.3 times its trailing twelve month earnings. Concerns with respect to the debt repayment capacity amidst switch in rating provider had worried investors in the past. It may be noted that the company had decided to switch its rating provider from ICRA to CRISIL once the former downgraded its long term working capital facility. Also, there were concerns with respect to rising working capital cycle. However, both these issues are likely to be resolved. CRISIL, the new rating agency bound to rate the company's debt is likely to come out with its new report soon. Further, the gross debt of the company has declined marginally from Rs 11.7 bn in FY12 to Rs 10.8 bn in 1HFY13. The working capital cycle has also remained constant at 215 days compared to the 214 days that prevailed in FY12. Management expects revenue growth to be in the region of 20% for FY13 while margins are expected to be in the region of 26-27%. Thus, considering the improvement in financials (stable working capital and marginally lower debt), strong growth guidance and attractive valuations we maintain our BUY view on the stock.

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