Stock Review: Opto Circuits

 

Medical device maker Opto Circuits was adversely impacted by its December 2010 acquisition of Cardiac Science in the US. Due to the buyout, the company's fourth quarter results are not comparable with the same period a year ago. With three acquisitions in the fiscal, Opto Circuits' overall performance for FY11 is also not comparable with that of the previous year.

Consolidated net sales, for the quarter ended March 2011, rose by 63% and the operating profit grew by 12.5%. Operating profit margin dropped to 22% from the over 30% levels seen in earlier quarters. This is primarily because of Cardiac Science that earned a net profit margin of 9% during the four months of its inclusion in the company's financials.

Cardiac Science's issues with the US FDA have been resolved and Opto is undertaking corrective measures for the acquired entity. Opto Circuits has been steadily growing in both its base business segments of non-invasive and invasive products. Non-invasive medical devices segment, contributing to over three-fourths of the company's revenues, has been growing steadily, especially in North America.

Revenues from the invasive segment , largely from Europe, have also grown at a healthy rate. Acquisitions are not new for Opto Circuits, which has grown through inorganic expansion. However, because of the latest acquisitions, the company's debt has risen to . 883 crore. The debt – largely dollar-dominated — has been taken at lower interest rates between 6% and 10% and for a longer duration of four to five years. Given the company's strong cash flows, servicing of this debt should not be difficult if the company stays away from making any further acquisitions. The company is shifting production from the US to India in a phased manner to achieve substantial savings on costs. It is also setting up manufacturing facilities in Mysore and Malaysia for which the management has guided a capex of . 150-200 crore in the current fiscal.

Although the firms that it acquired are expected to perform well, the company has provided a very conservative guidance of 22-25% growth in consolidated revenues for FY12. This is a very low growth rate compared to the company's earlier rates of more than 30%. Operating profit margins may not recover to earlier levels immediately. The market has not reacted positively and the stock closed 5.7% lower on Wednesday.