Opto Circuits - Business...

Opto Circuits

Base ReportSECTOR: PHARMACEUTICALS

Beating to the opportunity

Nimish Desai ([email protected]); Tel: +91 22 3982 5406Amit Shah ([email protected]); Tel: +91 22 3982 5423

Opto Circuits

229 July 2010

Contents

Page No.

Business model .........................................................................................................4

Non-invasive business – getting stronger .......................................................... 5-8

Invasive business – at inflexion; offers immense potential ............................ 9-10

Inorganic growth – so far so good ....................................................................11-13

Free cash flow generation essential; will lead to re-rating ..................................14

Expect 30% earnings CAGR over FY10-12, with RoCE of 25%+ .............. 15-16

Valuation and view ........................................................................................... 17-18

Annexure 1: Medical devices .......................................................................... 19-20

Annexure 2: Patient monitoring devices ...............................................................21

Annexure 3: Coronary disease and use of stents .......................................... 22-24

Annexure 4: Promoters' background ....................................................................25

Financials and valuation .................................................................................. 26-29

STOCK DATA

52-W High/Low Range (Rs) 276/167

Major Shareholders (as of June 2010) (%)Promoter 27.4Domestic Inst 2.6Foreign 43.8Others 26.3

Average Daily TurnoverVolume ('000 shares) 918.0Value (Rs million) 188.01/6/12 Month Rel. Performance (%) 4/7/281/6/12 Month Abs. Performance (%) 6/14/47

KEY FINANCIALS

Shares Outstanding (m) 182.9Market Cap (Rs b) 46.8Market Cap (US$ b) 1.0Past 3 yrs. Sales Growth (%) 62.0Past 3 yrs. NP Growth (%) 55.0Dividend Payout (%) 32.9Dividend Yield (%) 1.6

Y/E MARCH 2009 2010 2011E 2012E

Net Sales (Rs m) 8,185 10,776 13,500 16,361

EBITDA (Rs m) 2,591 3,669 4,161 5,074

Adj. EBITDA (Rs m) 2,032 3,469 4,161 5,074

Adj. NP (Rs m) 1,582 2,426 3,367 4,130

EPS (Rs) 8.7 13.3 18.4 22.6

EPS Growth (%) 24.4 53.3 38.8 22.7

BV/Share (Rs) 32.0 59.6 72.7 88.6

P/E (x) 29.6 19.3 13.9 11.3

P/BV (x) 8.0 4.3 3.5 2.9

EV/EBITDA (x) 17.7 11.5 10.4 8.5

EV/Sales (x) 5.6 3.9 3.2 2.6

RoCE (%) 37.4 28.1 26.6 27.2

RoE (%) 51.7 32.4 27.8 28.0

STOCK PERFORMANCE (1 YEAR)

329 July 2010

Opto CircuitsRs256 Initiating Coverage: Buy

SECTOR: PHARMACEUTICALS

BSE SENSEX S&P CNX BLOOMBERG REUTERS17,992 5,409 OPTC IN OPTO.BO

Opto Circuits (Opto) operates in niche segments of the medical devicesindustry. The company is present in both invasive and non-invasivedevices. It is expanding globally, with a wide distribution network acrossgeographies. Its major products include patient monitoring devices,sensors and cardiac stents. Opto has delivered superior performance,with revenue CAGR of 54% and PAT CAGR of 65% over FY05-10,partially driven by inorganic initiatives.

Non-invasive business – getting stronger: Opto’s core businessof non-invasive devices is getting stronger. The company has forwardintegrated into patient monitoring devices. We believe Opto will beable to sustain 20%+ revenue growth on the back of favorable marketdynamics, diversified product offerings, cost competitiveness,expanding distribution reach and low base.

Invasive business – at inflexion; offers immense potential:Opto’s invasive business is its key long-term growth driver, in ouropinion. The business has significant potential due to large marketopportunity, lower competition, and successful product developmentby Opto. Given its new product launches, increasing product awareness,and opening up of a few regulated geographies, we expect Opto’sinvasive business to deliver strong CAGR of 24% over FY10-12.

Free cash flow generation essential: Opto generates very littlefree cash flows because of high investment in working capital. Wethink that low operating free cash flow generation is one of the reasonsfor the company’s low valuation multiples. We believe that the companyneeds to control its working capital requirements to generate adequatefree cash flows to grow without resorting to external financing.

Expect 30% earnings CAGR over FY10-12, with RoCE of25%+: We expect 23% revenue CAGR, driven by both the invasiveand non-invasive business. Healthy revenue growth and 30% EBITDAmargins will enable Opto to post 30% earnings CAGR over FY10-12.The company should sustain, if not improve its high return ratios onthe back of stable profitability and working capital requirements.

Valuation and view: We believe that Opto will see strong growth inboth its invasive and non-invasive businesses on the back of largemarket opportunity, expanding distribution network and low base.Thestock trades at 13.9x FY11E EPS of Rs18.4 and 11.3x FY12E EPS ofRs22.6. Given strong earnings growth and improving cash flows,coupled with reasonable valuations, we initiate coverage with a Buyrating and a target price of Rs339 (15x FY12E EPS) — 32% upside.

140

175

210

245

280

Jul-09 Oct-09 Jan-10 Apr-10 Jul-10

Opto Circuits Sensex - Rebased

Opto Circuits

429 July 2010

Business model

Since its inception in 1992, Opto Circuits has expanded its business rapidly and has emergedas the largest medical device maker from India. Founded by Mr Vinod Ramnani and MrThomas Dietiker, the company started its business as a supplier of sensors to large OEMs.Over the years, it has catapulted itself into a full-fledged producer and supplier of patientmonitoring devices in the non-invasive segment and stents in the invasive segment, led bystrategic acquisitions.

Opto is a niche player in the medical devices industry, which is dominated by large MNCslike J&J, GE, Abbott, Philips, etc. Initially, the company had a presence only in the non-invasive segment, with products like sensors and patient monitoring devices. It entered theinvasive segment through the acquisition of Eurocor in the year 2006.

Opto has steadily expanded its presence in several geographies including regulated marketslike US and Europe. The expansion of its distribution network has also been aided by itsvarious acquisitions. Currently, Opto sells its products in over 50 countries through a set of~1,300 distributors. It has manufacturing facilities in India, US and Germany. The companyis setting up its own SEZ in India and one manufacturing facility in Malaysia, with aninvestment of Rs1.2b-1.5b. Opto derives ~75% of its revenues from the non-invasivesegment and the remaining from the invasive segment.

NON-INVASIVE SEGMENT DOMINATES THE REVENUE MIX

PRODUCT PORTFOLIO

Source: Company/MOSL

Bare Metal Stent (BMS)

Drug Eluting Stent

Drug Eluting Balloon

BMS with Dilation Catheter

Peripheral Stenting

Opto Circuits

OEM Sensors

Pulse Oximeters

Brand Sensors

Compatible Sensors

Multiparameter Monitors

Anesthesia and Respiratory Monitors

Remote Monitoring Devices

Non Invasive Invasive


1,7783,325

6,1338,017

10,00312,104

487

3,7583,0812,4261,8831,080

251 499416333169276

FY07 FY08 FY09 FY10 FY11E FY12E

Non Invasive Invasive Others

EurocorAcquisition

CriticareAcquisition

Opto Circuits

529 July 2010

Non-invasive business – getting stronger

Opto’s core business of non-invasive devices is getting stronger. The company has forwardintegrated into patient monitoring devices. We believe Opto will be able to sustain 20%+revenue growth for this business on the back of favorable market dynamics, costcompetitiveness, diversified product offerings, expanding distribution reach and low base.

From sensor supplier to integrated patient monitoring device makerOpto Circuits started off as a manufacturer of pulse oximeter sensors, which it suppliedprimarily to large OEMs like Phillips, GE, etc. It forward integrated into manufacturingpulse oximeters and patient monitoring devices, with the acquisition of Palco Lab in theUS. The forward integration offered Opto benefits such as lower dependence on OEMs,diversified revenue stream, and creation of own brand identity.

Currently, Opto derives 75% of its revenues from the non-invasive segment. Of this,~35% is contributed by sensor supplies, largely to OEMs.

Lucrative market dynamics – large opportunity size; high entry barriersThe global patient monitoring device market size is estimated at US$5.7b in 2011, up fromUS$2.8b in 2002. The large market size offers Opto immense opportunity to grow. Wealso note that there are high entry barriers in the market – a strong network of distributorsand a large product basket is necessary to grow revenues.

PATIENT MONITORING DEVICE MARKET (US$ M): STEADY GROWTH CONTINUES


North America has been the largest market for patient monitoring devices so far andconstitutes ~55% of the global demand. Further, the region has reported above averageindustry growth rate. Currently, North America is Opto’s largest market for patientmonitoring devices. With rising standards of living, higher disposable incomes, growinghealthcare awareness, and rising penetration of healthcare services, we expect otheremerging markets also to turn into growth drivers for Opto.

2,811 2,982 3,145 3,346 3,560 3,770 4,022 4,290 4,5864,915

5,2825,691

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E

The size of the global patientmonitoring device market is

estimated at US$5.7b

CAGR of 6.6%

Opto Circuits

629 July 2010

Key players include Tyco Healthcare, GE Medical Systems, Philips, Siemens, Datascopeand Fukuda Denshi. Further, the overall market size for pulse oximeter sensors is estimatedat US$1b, with the US accounting for more than 60% of this market.

Despite being present in the business for long, and growing its revenues at over 30%CAGR for the last four years, Opto is still a marginal player in the US$6b industry, with amarket share of less than 3%. We believe that Opto is well placed to keep expandingrapidly in this segment on the back of expanding distributor network, supplying to newOEMs, expansion into newer geographies, etc. Also, with the acquisition of Criticare(refer pg 13&14 for acquisition details) in the US, Opto has expanded its distribution reachsignificantly, which will help it to grow its business rapidly in the regulated markets andleverage its large product basket.

Cost competitiveness and expanding distribution reachThe company’s cost competitiveness has helped it to sustain its margins over the years.One of the major reasons for its ability to grow rapidly is cost competitive product offerings.Further, Opto’s backward integration is seen as an advantage by prospective buyers dueto perception of stable sensor supplies.

Most of Opto’s products are manufactured using its proprietary technology and are CEand US-FDA certified. They are sold under the brand names of Mediaid and Criticare,and are distributed in most of the developed markets of the world. Opto sells its productsin over 50 countries. It has enhanced its distribution network from ~900 distributors in2008 to ~1,300.

Diversified product offeringsOpto has rapidly enhanced its non-invasive product offerings over the years primarily onthe back of acquisitions. It offers a wide product basket, which includes re-usable/disposablesensors, pulse oximeters, anesthetic gas monitors, multi-parameter monitors, digitalthermometers, cholesterol monitors, fluid warmers, infra-red emitters, etc.

The company has developed new and value-added products such as anesthetic gas benches,which we believe will be the next key growth drivers for this segment.

GLOBAL PATIENT MONITORING DEVICE MARKET


2000 (US$2.8b)

20% 50%

24%

1%5%

2006 (US$4b)

5% 1%

54%

23%

17%

2011E (US$5.7b)

22%

15% 56%

6%1%

NORTH AMERICA MIDDLEEAST & AFRICA

SOUTH & CENTRALAMERICA

ASIA PACIFICEUROPE

EUROPE

Opto is still a marginalplayer, with a market shareof just 3% – we believe that

the opportunity is huge

It sells its products in over50 countries…

…and offers a wideproduct basket

Opto Circuits

729 July 2010

PRODUCT DESCRIPTION

The Pulse Oximeter Sensors are used with Pulse Oximetersand with Multi-parameter monitors. These products are theinterface between the patient and the monitoring systems.Basically, a two-sided probe transmits infrared light throughbody tissue, usually a fingertip. Most light will be absorbedby the tissue between the probe. The small amount of lightthat is not absorbed is detected by sensors on the otherside of the probe, and this is used to measure oxygensaturation and heart rate.

A Pulse Oximeter is a patient monitoring system whichprovides continuous confirmation that the delivery of oxygento the tissues is adequate. It is used to measure the level ofoxygen saturation in the blood, the pulse rate. These areused in operation theatres as well as intensive care units.These have now been enhanced with added features likeconnectivity to the computer, nurse call back facility andfeatures like battery back-up.

These systems are used for monitoring the patient’s vitalsigns such as ECG, blood pressure, temperature, oxygenlevel saturations and heart rate. Multi-parameter Monitorsare used in intensive care units and specialty clinics. Theseare now enhanced with added features like connectivity tothe network and battery back-up.

Anesthetic gas monitors measure the amount of anestheticgas supplied to the patient in critical surgeries to ensure thepatient’s safety. Anesthetic gas monitors are primarily usedin hospitals and specialty clinics.

The conventional mercury-based thermometers are bannedin US and many other countries. This is mainly because theexposure to mercury is hazardous and unsafe. Digitalthermometers, which are very safe to use, come with amicroprocessor chip and thermistor for enabling quick andaccurate measurement of body temperature.


PULSE OXIMETER SENSOR

PULSE OXIMETER

MULTI PARAMETER MONITOR

ANESTHETIC GAS MONITOR

DIGITAL THERMOMETER

Opto Circuits

829 July 2010

Likely to grow revenues at CAGR of 23%Despite being present in the business for long, and growing its revenues at over 30%CAGR for the last four years, the company remains a marginal player in the US$6bindustry, with market share of less than 3%. We believe that the large market size offersOpto immense opportunities to grow rapidly on the back of tie-ups with large distributors,tie-ups directly with GPOs and hospital chains, expansion in newer geographies, etc. Withthe acquisition of Criticare in the US, Opto has expanded its distribution reach significantly,which will help it to grow its business rapidly in the regulated markets and leverage itslarge product basket. We expect Opto's non-invasive business to grow at 23% CAGR forFY10-12.

We expect Opto’s non-invasive business to grow at

23% CAGR over FY10-12

1,398 1,7783,325

6,133

8,017

10,003

12,104

FY06 FY07 FY08 FY09 FY10 FY11E FY12E

NON-INVASIVE SEGMENT REVENUE TREND


CAGR of 43% CriticareAcquisition

Opto Circuits

929 July 2010

Invasive business – at inflexion; offers immense potential

Opto’s invasive business is its key long-term growth driver, in our opinion. This businessconsists of stent and catheters. The business has significant potential for the company dueto large market opportunity, lower competition, and successful superior product developmentby Opto. Given its new product launches, increasing product awareness, and opening upof a few regulated geographies, we expect Opto’s invasive business to deliver strongperformance resulting in 24% CAGR for FY10-12.

Foray into invasive segment opened a whole new market for Opto CiruitsOpto forayed into the invasive segment through the acquisition of Eurocor in Germany inyear 2006. This acquisition benefited Opto in many ways. It opened a whole new rapidly-growing, multi-billion dollar market to Opto. It was able to diversify its revenue stream,offer new products to its distributors, and leverage its existing distribution reach.

Coronary stents – a US$7b market, with very few playersThe size of the global coronary stent market is estimated at US$7b. The market hasgrown significantly post the launch of drug-eluting stents (DES) in 2003. Since 2002,usage of stents in Percutanerous Transluminal Coronary Angioplasty (PTCA) has increasedby over 80%, worldwide.

USA is a major market for coronary stents and contributes ~37% to the global marketsize; Europe and Asia are also large markets. Top-4 players – J&J, Boston Scientific,Medtronics, and Abbott Vascular – account for 85% of the market for stents. There issignificant opportunity for a niche player like Opto that has CE-approved stents.

GLOBAL STENT MARKET HAS SEEN SIGNIFICANT EXPANSION POST DES LAUNCH (US$B)

0.691.04

1.55 1.86 2.15 2.34 2.37 2.413.25

4.67

6.08 6.285.54 5.82

6.366.99

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

E

Launch of Drug Eluting Stent

GLOBALLY STENTS ARE USED IN OVER 80% OF PTCA PROCEDURES (M NOS)


2.02.2

2.5 2.62.8 2.9

3.1 3.33.4

1.71.8

2.1 2.32.5 2.5 2.6 2.8

2.9

2002 2003 2004 2005 2006 2007 2008 2009 2010E

PTCA Procedures Stent Procedures

The size of the globalcoronary stent market is

estimated at US$7b…

… with the US constituting~37% of the global market

Usage of stents in PTCAprocedures has remained

high over the years

Opto Circuits

1029 July 2010

Successful new product development and launch to drive growth for OptoOpto (Eurocor) has developed various new products, with features that address drawbacksfound in currently marketed products. We discuss below few of its products.

Taxcor / Taxcor I: Launched in 2005, Taxcor and Taxcor I (second generation innovationof Taxcor) are key growth drivers in the invasive segment. Polymeric drug carriers coatedon stents are known to cause blood clot formations, also leading to late stage thrombosis.Eurocor’s drug-eluting coronary stent system uses a biodegradable carrier to deliver thedrug. In Taxcor I, the drug is loaded into micro-porous cavities (based on an open cellularfully carbonized stent surface). A protective layer of specific amino acid molecules avoidsrapid drug elution and within 20 days, it provides for a moderate drug release to thestented coronary artery lesion. Taxcor I reduces drug dosage from 1.0ìg/mm² to 0.5ìg/mm² and this in turn eliminates drug-related inflammation.

Dior: A drug-eluting balloon dilation catheter used in PTCA procedures, Dior is arevolutionary product. It is one of the prominent breakthroughs in interventional cardiology,since the development of coronary dilatation catheters and coronary stents. Eurocor hasCE certification for its drug eluting balloon catheters. Dior can be effectively used intreatment of coronary in-stent restenosis and for small-diameter coronary artery lesions.Restenosis is usually treated by placing another stent within the existing one, which attimes may exacerbate the condition. Using Dior is more favorable since the implant of asecond stent is eliminated.

Magical: This is a stent which falls in between a pure BMS and a DES. It is a ballooncombined with ultraflexible bare-metal stent. The balloon first elutes its drug to minimizecell re-growth and then the bare-metal stent is deployed to ensure that the vessel remainsclear. This device is a promising alternative to the DES currently dominating the market,effectively eliminating the potential for late thrombotic events in patients.

Increasing product awareness through conferences and seminarsOpto has been consistently promoting its products in various seminars and conferencesworldwide. Opto participates in these seminars / conferences to create awareness aboutits products among physicians. These events give Opto an opportunity to present variousclinical studies data for its invasive products, as it is essential to convince physiciansregarding the safety of the products to drive revenues.

Approval to sell in US can be a major growth driverSo far, Opto does not have approval to sell its stents in the world’s largest market, USA.Obtaining approval to sell stents in the US is a tedious and time-consuming affair, as theseare classified as Class-III products (refer to Annexure 1). To get pre-market approval forselling stents, the company needs to produce clinical data of usage over a long period.Though the process is time-consuming, we believe that approval to sell stents in the USwill be a major growth driver for the company, as the competition will be very limited.

Opto has developed variousnew products with featuresthat address drawbacks in

existing products

It has been consistentlypromoting its products inseminars and conferences

worldwide

If it obtains approval to sellstents in the US, it would be

a major boost for Opto

Opto Circuits

1129 July 2010

Inorganic growth – so far so good

The strong growth that Opto has been witnessing is partially driven by acquisitions. It hasacquired various companies based in India, US and Europe. The motive behind some ofthese acquisitions was to gain entry into different product segments (Eurocor, UnileverIndia’s digital thermometer business) or to increase the distribution footprint and expandthe product basket (Criticare, AMDL). Acquisitions have helped Opto to grow its size andpresence across markets rapidly. It has spent ~US$80m so far on acquisitions.

ACQUISITIONS AT A GLANCE

YEAR TARGET DESCRIPTION CONSIDERATION RATIONALE

(RS M)

2001 AMDL AMDL is engaged in distribution of medical To get strong foothold in growing Indianequipments in India. It is also in the business medical device marketof IT consulting, Global positioning systemand Electronic design automation services in india NA

2002 Monitoring division Distributes Patient Monitoring Products in US, NA Enabled forward integration asof Palco Lab (Mediaid) LA and Europe manufacturer of Patient monitoring

system2003 Thermometer division Manufacturer of digital Thermometer 50

of Unilever India2004 Altron Assembling and production of electronic goods which

the company uses for some of its products2006 Eurocor German company focussed on developing 600 Entry into invasive product segment

interventional cardiovascluar products like stentsand catheters

2007 Devon Innovations Designing and manufacturing of cathetres, stone 31 To enhance the invasive product basketPvt Ltd graspers, stone baskets and dilators for different

specialized applications mainly in the areas of Urology,Gastroenenterology and Gynecology

2007 Ormed Medical Manufactures and markets Orthopaedic and trauma products 9Technology

2008 Criticare Leading medical device company specilizing in non-invasive 2,804 To increase the distribution reach in USpatient monitors and anesthetic gas benches and expansion of product portfolio

2010 Unetixs Leading manufacturers of non-invasive equipments for 460 To increase the distribution reach in USdetection of peripheral arterial disease (PAD) in US and expansion of product portfolio


Brief profiles of major companies acquired by OptoMediaid: Mediaid Inc was incorporated in the US in 2002. Through the acquisition ofMediaid, Opto obtained access to a range of patient monitoring systems and veterinaryproducts. Mediaid’s global marketing and distribution network was strengthened furtherpost Opto’s acquisition of the patient monitoring division of Palco Laboratories, USA.Mediaid now has an established distribution network across US, Latin America and Europe.With the introduction of newer models in its product line-up and FDA approval for a rangeof pulse oximetry sensors, Mediaid has garnered higher market share. This has also helpedit to enter new markets and appoint more distributors for the range.

Eurocor: Eurocor Gmbh is a European life sciences technology corporation specializingin the research, development and manufacture of interventional cardiology products.Eurocor specializes in coronary stent technology and special cardiovascular devices.Eurocor’s stents have CE (Conformite European) approval and have found rapidacceptance worldwide. The company is in the process of applying for USFDA and other

Acquisitions have helpedOpto to rapidly grow its sizeand presence across markets

Opto Circuits

1229 July 2010

approvals necessary for selling in major global markets. Eurocor currently sells its productsin over 26 countries. Eurocor’s manufacturing and R&D facilities are based in Bonn, andit has marketing offices in France and Poland too. These complement Opto’s manufacturingfacilities in Bangalore and US subsidiary, Mediaid Inc.

Criticare Systems: Criticare Systems Inc (CSI) is an international medical devicescompany headquartered in Waukesha, Wisconsin. It has established product andtechnological leadership in anesthetic gas monitoring, vital signs monitoring, gas & agentanalysis, and central station monitoring systems. It has a well-established distributor networkacross the globe. CSI’s products address patient safety concerns and monitoring needs inanesthesia, critical care, respiratory care, transport, and outpatient care environments.CSI holds 10% market share in the respiratory and anesthetic gas monitoring industry. Ithas an installed base of 200,000 monitors.

Advanced Micronic Devices: Advanced Micronic Devices Limited (AMDL) is a listedcompany engaged in manufacturing and marketing of critical cardiac care and otherhealthcare equipment. Its manufacturing facilities are at Electronic City, Bangalore, India.It also has an R&D set-up with a full-fledged product design division. It has marketingoffices at all the important metropolitan cities in India. With about 60% stake in AMDL,Opto Circuits can leverage the company’s well established and widespread distribution/service network.

Unetixs Vascular Inc: Opto recently acquired Unetixs Vascular Inc. a US based companyengaged in manufacturing and marketing of non invasive equipments for diagnosis ofvascular disease. This acquisition adds one more product line to Opto's non-invasive businesssegment which manufacturers Patient Monitoring Devices and Sensors. Unetixs revenuesare at ~US$10m and it is a profit making company. The deal values Unetixs at 1x sales.

Unetixs designs, develops and markets USFDA-approved vascular diagnostic equipments.The products cover a wide range of applications from high-end vascular diagnostic systemsto fully self-contained low-cost diagnostic stations. Some of their key diagnostic productsare REVO 1100, MultiLab Series II LHS/IMG and MultiLab 2-CP. Unetixs is one of theleading manufacturers of non invasive equipments for detection of peripheral arterial disease(PAD) in US. The US peripheral vascular device market is worth US$2.8 billion withexpected growth to over $5.3 billion by 2016. Unetixs has very little presence outside USand currently most of the revenue comes from North America. Unetixs has 21 salesrepresentatives and ~50 distributors mostly in US. The company has applied for CE approvalfrom European authorities to sell its products in Europe. The approval is likely to come byend of 2010.

Good track record of turning around acquired entitiesOpto has a good track record of turning around acquired companies. At the time of acquisitionin FY07, Eurocor had revenues of Rs487m and PAT of Rs7m. In FY09, Eurocor postedrevenues of Rs1,038m and PAT of Rs276m.

Opto has a good trackrecord of turning around

acquired companies

Opto Circuits

1329 July 2010

However, large acquisitionsmay put a strain on its

profitability

When Opto acquired Criticare, it was making losses. However, Opto turned it aroundwithin a year through cost restructuring. In FY09, Criticare posted a profit of Rs261mdespite revenues being stagnant at Rs1.5b. The turnaround was achieved through transferof production to India, effective sourcing of raw material, reduction in manpower andintroduction of Criticare products to various new geographies.

Large acquisitions may strain profitability or lead to equity dilutionWe expect Opto to continue its inorganic growth strategy. Its current annual revenues areabout Rs10b. Also, it has high working capital requirements due to which it generates lowcash flows. Hence, if Opto acquires fairly large companies, it will have to raise funds. Ifit chooses the debt option, it will put pressure on profitability (as was the case post theacquisition of Criticare). Historically, Opto’s cost of debt has been high (10-12%) owningto the nature of its business. If Opto does not raise debt, it will have to dilute equity.

EQUITY DILUTION IN THE PAST

DATE TYPE EQUITY CAP NO OF DILUTION PRICE AMOUNT

(RS M) SHARES (M) (%) (RS) RAISED (RS M)

19/04/06 FPO 308 31 15 270 1,08314/07/07 Preferential Issue 628 63 2 360 41815/09/09 QIP 1,829 183 13 286 3,986


Opto Circuits

1429 July 2010


We think that low operating free cash flow generation is one of the reasons for thecompany’s low valuation multiples. We believe that the company needs to control itsworking capital requirements to generate adequate free cash flows to grow without resortingto external financing. This will also lead to a re-rating of the stock.

Major reasons for high working capitalNature of business: The nature of Opto’s business is such that it has to maintain highinventory. Take for instance, sensors. There is a large variety of pulse oximeters availablein the market and Opto has to stock sensors compatible with each kind. Similarly, thecompany has to maintain an inventory of stents with different lengths and diameters tosuits the requirement of different patients. If Opto does not maintain adequate inventory,it runs the risk of loss of sales and reputation.

Competition with large and established players: Medical devices industry is dominatedby large and established players like GE, J&J, Philips, Boston Scientific, etc. Smallcompanies like Opto have to extend some benefits to distributors to push their products.These benefits come in the form of higher margins to distributors and/or extended creditperiods, which put pressure on working capital.

Quest for rapid revenue growth: We believe that one of the reasons for Opto’s highdebtor days is its quest for rapid revenue growth. It pushes sales by providing liberal creditterms to its distributors.

Long shipping time: One of the reasons for higher inventory days is the long shippingtime required to carry the products from India to the US, a major end market for Opto.

Free cash flow generation essential; will lead to re-rating

Opto generates very little free cash flows because of high investment in working capital.Its working capital cycle is as long as 233 days, which eats away almost all its profits.There has been some improvement in FY10, with the working capital cycle on incrementalsales declining to 229 days.

LITTLE FREE CASH FLOW GENERATION DESPITE HIGH PAT

200 374 6511,272 1,582

2,426

3,3674,130

-422-1,148

1,417

431772

37836111

FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E

PAT (Rs m) Free Cash Flow s (Rs m)

Low operating free cash flowgeneration may be one of the

reasons for Opto’s lowvaluation multiples

Very little free cash-flowgenerated so far

Opto Circuits

1529 July 2010

Expect 30% earnings CAGR over FY10-12, with RoCE of25%+

We believe that healthy revenue growth and operating margins will enable Opto to post30% earnings CAGR over FY10-12. We expect the company to sustain, if not improve itshigh return ratios on the back of stable profitability and working capital requirements.

Revenue growth to be driven by both segmentsWe believe that both the invasive and non-invasive segments will show healthy growth. Inthe invasive segment, growth will be driven by new product launches, geographic expansion.In the non-invasive segment, growth will be driven by new product launches and expansionof distributor network.

REVENUE MIX (RS M)

FY07 FY08 FY09 FY10 FY11E FY12E FY10-12

CAGR (%)

Non invasive 1,778 3,325 6,133 8,017 10,003 12,104 22.9Criticare 0 0 1,451 1,860 2,306 2,791 22.5Base Business 1,778 3,325 4,682 6,157 7,696 9,313 23.0

Invasive 487 1,080 1,883 2,426 3,081 3,758 24.5Others 251 276 169 333 416 499 22.5Total Sales 2,516 4,681 8,185 10,776 13,500 16,361 23.2


Profitability to be maintained at ~30%Opto has been improving its profitability consistently over the last three years, owing tobetter scale, low cost manufacturing, improved product mix and capitalization of expensesrelated to clinical trials. We believe that the company will see a contraction in EBITDAmargins to 30%, down from current levels of 34%, partially due to possible implementationof IFRS, which will not allow it to capitalize clinical trial expenses.

EBITDA MARGINS TO SUSTAIN AT 30%


1,37

2

2,59

1

3,66

9

4,16

1

5,07

4

34.0

31.6

29.3

30.8 31.0

2008 2009 2010 2011E 2012E

EBITDA (Rs m) EBITDA Margin (%)

We expect healthy revenuegrowth in both segments

EBITDA margins couldcontract from the current

34% to 30%

Margins to besustained at 30% levels

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1629 July 2010

PAT margin, RoCE and RoE to sustain at 25%+We believe that sustenance of high operating margins, debt reduction and low tax rates(setting up manufacturing facilities in tax-free zone) will enable Opto to improve its PATmargins and maintain its high return ratios. Further, any improvement in its working capitalcycle will enhance return ratios. However, if Opto acquires a large company in the regulatedmarkets, where the average profitability is lower than Opto’s, it would adversely impactboth profitability and return ratios.

IMPROVING PROFITABILITY

Return ratios shouldsustain at over 25%

ROCE AND ROE TO SUSTAIN AT 25%+

43.1

37.4

28.1 26.6 27.2

51.351.7

32.427.8 28.0

2008 2009 2010 2011E 2012E

RoCE (%) RoE (%)

Sustainable on theback of stable

profitability andworking capital

651

1,27

2

1,58

2

2,42

6 3,36

7

4,13

0

25.2

19.3

27.225.922.5

24.9

FY07 FY08 FY09 FY10 FY11E FY12E

Adjusted Profits (Rs m) Margins (%)


Improvement ledby lower tax and

interest

Opto Circuits

1729 July 2010

Valuation and view

Opto has delivered strong growth in both revenues and earnings in the last few years. Ithas consistently maintained its high return ratios. Further, despite rapid growth, the companystill remains a marginal player in the global medical devices industry. We believe this givesOpto the opportunity to sustain its growth rate for the next couple of years. However, thecompany has not been able to generate enough free cash flow due to high working capitalintensity.

We believe that Opto is likely to see strong growth in both its businesses on the back oflarge market opportunity, expanding distribution network and geographical spread, newproduct launches and low base. Strong earnings growth, improving cash flows, will favorablyimpact valuations. The stock trades at 13.9x FY11E EPS of Rs18.4 and 11.3x FY12EEPS of Rs22.6. Historicaly, the stock has traded at one year forward P/E of 15x. Weinitiate coverage with a Buy rating and a target price of Rs339 (15x FY12E EPS) – anupside of 32%.

Very few medical device companies are listed in India and all of these are too small to becompared with Opto. That is the reason why we have compared Opto’s valuations withits international peers. Though these international companies are much bigger in size thanOpto, they all compete in the same product categories and geographies. Currently, Optotrades either at par with or at discount to its international peers.

COMPARATIVE VALUATIONS

EPS P/E (X) EV/EBITDA (X)

FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E

Opto Circuits (Rs) 13.3 18.4 22.6 19.3 13.9 11.3 11.5 10.4 8.5Medtronics (US$) 3.2 3.5 3.8 11.2 10.3 9.4 7.6 7.4 6.9Boston Scientific (US$) 0.5 0.3 0.4 11.2 17.8 12.5 6.3 7.4 6.8Johnson & Johnson (US$) 4.6 4.8 5.2 12.6 12.3 11.5 7.8 7.6 7.2

Source: Bloomberg/MOSL

13.0

0

11

22

33

44

Mar

-04

Apr-

05

May

-06

May

-07

Jun-

08

Jun-

09

Jul-1

0

Average of 14.8x

Peak of 36.2x

Bottom of 3.2xMedian of 13.0x

OPTO CIRCUIT: P/E (X)

We initiate coveragewith a Buy rating

Opto Circuits

1829 July 2010

Key risks and concernsHigh working capital requirements: Opto’s working capital requirements are high.High working capital requirements often compel companies to raise capital frequentlyeither through equity dilution or debt. As Opto’s cost of debt is high, raising more debtmight put pressure on its profitability.

HIGH WORKING CAPITAL DAYS


Difficult to gain product approvals and acceptance: Opto’s success is partiallydependent on continuous new product introductions. Obtaining approvals, especially forinvasive products in regulated markets is not easy. Opto has been trying to obtain US-FDA approval to market its stents in the US for the last 3-4 years. Further, productacceptance becomes another issue. As invasive products like stents are critical to humanlife, patients and physicians prefer products of more established players. Opto has beenraising awareness about its products by participating in global seminars and conferences.

Capitalization of clinical development expenses: Opto capitalizes its clinical trialexpenditure for invasive business. This inflates EBITDA margins and operating cash flowestimates.

CAPITALISATION OF CLINICAL DEVELOPMENT EXPENSES

131 19

4

172

185

181

150

160

163

134

10317

0 243

208

153

114

103

100

101

253

239

194 23

3

229

232

FY05 FY06 FY07 FY08 FY09 FY10 FY11E FY12E

Debtor Days Inventory Days Working Capital Days


Product liability: Opto operates in the area of critical medical devices. In regulatedmarkets like US and Europe, any adverse health impact due to these products can resultin large monetary liabilities and can negatively impact the company’s reputation.

Technology shift: There is risk of technological advancement, especially in invasivebusiness segment. In the past, post the launch of stents, market for bypass surgerieswitnessed significant decline. In the same manner if new technology is invented to treatblockage of coronary arteries, then the market size for stents could see significant reduction.

92 55

558

200

32.829.3 31.6 34.0

29.2 28.124.8

32.2

FY07 FY08 FY09 FY10

Intangible assets created (Rs m) Reported EBITDA margin (%)Adjusted EBITDA margin (%)

EBITDA boosted bycapitalization of clinicaldevelopment expenses

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1929 July 2010

Annexure 1: Medical devices

A medical device is a product that is used for medical purposes in patients for diagnosis,therapy or surgery. If applied to the body, the effect of the medical device is primarilyphysical, in contrast to pharmaceutical drugs, which exert a biochemical effect. Medicaldevices include a wide range of products varying in complexity and application. Examplesinclude tongue depressors, medical thermometers, blood sugar meters, total artificial hearts,fibrin scaffolds, stents and x-ray machines. Medical devices are classified broadly intothree categories as follows.

TYPES OF MEDICAL DEVICES

HIGH RISK DEVICES MEDIUM RISK DEVICES LOW RISK DEVICES

Anesthesia units ECG Electronic thermometerAnesthesia ventilators Endoscopes Breast pumpsApnea monitors Ultrasound sensors Surgical microscopeCardiac difibrillator Surgical drill and saws Ultrasonic nebulizerExternal pacemaker Phototherapy units X-Ray diagnostic equipmentsFetal monitors Phonocardiographs Temperature monitorIncubatorsVentilatorStent


The USFDA has recognized three classes of medical devices based on the level of controlnecessary to assure safety and effectiveness.

Class-I: General controlsClass-I devices present minimal potential for harm to the user and are often simpler indesign than Class-II or Class-III devices. These devices are subject only to general controls.General controls cover such issues as manufacturer registration with the USFDA, goodmanufacturing techniques, proper branding and labeling, notification of the USFDA beforemarketing the device, and general reporting procedures (most Class-I devices are exemptfrom good manufacturing practices and/or USFDA notification regulations.) These controlsare deemed sufficient to provide reasonable assurance of the safety and effectiveness ofthe device; or the device is not life-supporting or life-sustaining and does not present areasonable source of injury through normal usage.

Devices in this category include tongue depressors, bedpans, elastic bandages, most hand-held dental instruments, examination gloves, and hand-held surgical instruments and othersimilar types of common equipment. Depending on the “stated/purported use” of a device,it may be necessary to obtain a pre-market approval or 510K for the device, which isotherwise classifiable as a Class-I device. Such devices are referred to as “reserveddevices”. The electrically-powered arthroscope (which is really an endoscope poweredelectrically) is a case in point. While endoscopes are Class-I devices, the electrically-powered arthroscopes need a pre-market notification (510K) though the manualarthroscopes do not. Pre-market notified devices are marketed as “at least as safe andeffective, that is, substantially equivalent to a legally marketed device.”

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2029 July 2010

Class-II: General controls with special controlsClass-II devices are those for which general controls alone are insufficient to assuresafety and effectiveness, and additional existing methods are available to provide suchassurances. Therefore, Class-II devices are also subject to special controls in addition tothe general controls of Class-I devices. Special controls may include special labelingrequirements, mandatory performance standards, and post-market surveillance. Devicesin Class-II are held to a higher level of assurance than Class-I devices, and are designedto perform as indicated without causing injury or harm to patient or user. Devices in thisclass are typically non-invasive and include: x-ray machines, PACS, powered wheel chairs,infusion pumps, surgical drapes, surgical needles and suture material, and acupunctureneedles.

Class-III: General controls and pre-market approvalA Class-III device is one for which there is insufficient information to assure safety andeffectiveness solely through the general or special controls. Such a device needs pre-market approval, a scientific review to ensure the device’s safety and effectiveness, inaddition to the general controls of Class-I. Class-III devices are described as those forwhich “insufficient information exists to determine that general controls are sufficient toprovide reasonable assurance of its safety and effectiveness or that application of specialcontrols would provide such assurance and if, in addition, the device is life-supporting orlife-sustaining, or for a use which is of substantial importance in preventing impairment ofhuman health, or if the device presents a potential unreasonable risk of illness or injury”.Examples of Class-III devices that require a pre-market approval include replacementheart valves, silicone gel-filled breast implants, implanted cerebral stimulators, andimplantable pacemaker pulse generators.

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2129 July 2010

Annexure 2: Patient monitoring devices

Patient monitoring devices are used to monitor patient parameters in inpatient and outpatientconditions. This includes wireless ambulatory telemetry, multi-parameter patient monitors,non-invasive blood pressure monitors and the recent technologies of remote patientmonitoring and micro-electro mechanical systems (MEMS). Monitors specific to respiratoryand anesthesia fields such as spirometers and pulse oximeters, and glucose monitors arecovered in their respective markets. Cardiovascular monitoring devices such as ECG,stress testing and Holter monitoring devices are covered in the cardiovascular market.

Wireless and ambulatory monitoring: Wireless and ambulatory monitoring devicesare used to monitor individuals during transport in hospitals, in ambulances or at homefollowing a major surgery, such as the coupling of a monitor with a pacemaker. Wirelessambulatory telemetry includes monitors specific for hospital ambulatory and cardiacrehabilitation.

Multi-parameter patient monitoring: Multi-parameter patient monitoring devices areused to monitor more than one patient parameter such as blood pressure, temperature,ECG, oxygen saturation, etc. These are used in critical care, perioperative units, duringsurgery and any emergency care.

Remote patient monitoring: Remote patient monitoring devices are used to remotelycollect and send patient data to monitoring stations for interpretation. These applicationsmight include a specific vital sign, such as blood glucose or heart ECG or a variety ofindicators for homebound patients.

Non-invasive blood pressure monitors: Non-invasive blood pressure monitors includeexternal devices used to measure blood pressure.

Micro-electromechanical systems: Micro-electromechanical systems are pressuresensors. These devices generally range in size from a micrometer (a millionth of a meter)to a millimeter (thousandth of a meter). This category does not include pacemakers, in-vitro diagnostics and hearing aids.

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2229 July 2010

Source: MOSL

Until the late 1970s, the primary means of treating coronary artery disease was the coronaryartery bypass graft (CABG). This procedure involved opening the chest of the patient,removing a length of vein from the patient’s thigh, and surgically looping the venous materialaround the blockage in the coronary artery, producing a “bypass.” One or more coronaryarteries could be treated this way in a single surgical procedure. The problem with thisapproach (while highly effective) was that it is highly invasive, it exposed the patient tosignificant risk during surgery, and required relatively long recuperative periods.

By 1977, a new procedure had been introduced into cardiac surgery – PercutaneousCoronary Intervention (PCI) or Percutaneous Transluminal Coronary Angioplasty (PTCA)– commonly known as “balloon angioplasty.” This approach involves making an incision inone of the major blood vessels of the thigh. The surgeon then threads a catheter upthrough the blood vessel all the way to the heart. Using real-time angiography to monitorthe position of the catheter in the patient, the surgeon positions the tip of the catheter at the

Annexure 3: Coronary disease and use of stents

Cardiovascular disease (CVD), principally heart disease and stroke, is the leading orsecond-leading cause of death. Heart disease results from blood vessel damage in theheart due to the buildup of fatty plaque on the interior of the coronary arteries. Coronaryheart disease is caused by atherosclerotic narrowing of the coronary arteries due to thisbuildup. When these arteries narrow, they are unable to supply adequate levels of oxygento the muscle tissue of the heart. This lack of oxygen results in Angina Pectoris, andMyocardial Ischemic Heart Disease, including Acute MyocardiaI Infarcation.

BLOCKED ARTERY

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2329 July 2010

site of the Coronary Artery Ischemia (blockage). At the tip of the catheter, there is a smallballoon. Once the catheter is properly positioned at the arterial blockage, the balloon isgently inflated. This expands the coronary artery, breaking up the blockage, widening theartery, and restoring blood flow. Compression of the ischemic plaque, however, virtuallyalways creates trauma to the blood vessel wall. This blood vessel damage often results inre-closing of the artery, or restenosis.

To overcome the problem of restenosis, the stent was invented. Stents are stainless steel,nitinol, titanium or cobalt mesh-like devices (some are coated with gold or platinum) thatappear similar to the spring in a ballpoint pen. Stents are delivered into the coronary arteryon a catheter during a PCI/PTCA procedure. They are then deployed in the artery eitherby expansion of a balloon or by a unique self expanding delivery design. The stent servesas a scaffold to prop open the inside of the artery (the lumen), which increases blood flowto the heart muscle. Ultimately, the stent becomes covered with cells and, over time, partof the artery. Stents are currently used in approximately 70% of all PCIs for coronaryartery disease. Stents reduce the likelihood of acute closure during a coronaryrevascularization procedure, making it a much safer treatment modality. That is, theyreduce the likelihood that a treated coronary artery will occlude completely over the first12 to 24 hours after the procedure. Since the introduction of stents into cardiac surgery,acute closure has become extremely rare. Stents have also been proven to reduce therate of restenosis following PCI/PTCA.

STENT

Source: MOSL

The most widely known stent use is in the coronary arteries with a Bare-Metal Stent(BMS) or a Drug-Eluting Stent (DES).

Drug-eluting stents: These stents have coatings that slowly release drugs (e.g.Sirolimus, Paclitaxel or Everolimus) that reduce the unwanted growth of the arterywall tissue, thereby improving the chances that the artery will stay open. They canhelp the artery heal from the surgery and reduce the risk of future blockages.Bare metal stents: Sometimes BMS are used without the drug coating. These arealso effective in restoring blood flow. Bare metal stents are used in patients whocannot tolerate the medicine coating DES, as well as in some other situations.

How cardiac stents are placedCardiac stents are placed in the artery during an angioplasty. An angioplasty is performedwith a flexible, plastic tube (catheter) that has a deflated balloon at the tip. The cardiacstent is wrapped around this balloon. In the procedure, a doctor makes a small opening ina blood vessel in the groin (upper thigh), arm, or neck. The catheter is thread into the blood

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2429 July 2010

vessel and up to the site of a blockage, aneurysm, or tear. X-ray “movies” are taken of thecatheter as it moves into the blood vessel. This helps the doctor position the catheter.When the balloon is inflated, the stent is pushed against the artery wall and will remainthere when the balloon is removed. Cells in the artery eventually grow to cover the meshof the stent and create an inner layer that resembles what is normally seen inside a bloodvessel. This procedure usually takes a few hours and requires hospitalization.

STENT PLACEMENT IN CORONARY ARTERY

Source: MOSL

The exhibit above shows the placement of a stent in a coronary artery. The coronaryartery is located on the surface of the heart. Figure A shows the deflated balloon catheterand closed stent inserted into the narrowed coronary artery. The inset image on figure Ashows a cross-section of the artery with the inserted balloon catheter and closed stent. Infigure B, the balloon is inflated, expanding the stent and compressing the plaque to restorethe size of the artery. Figure C shows normal blood flow restored in the stent-widenedartery. The inset image on figure C shows a cross-section of the compressed plaque andstent-widened artery.

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2529 July 2010

Annexure 4: Promoters’ background

Mr Vinod RamnaniMr Vinod Ramnani is a BE in Mechanical Engineering from Manipal EngineeringCollege, Manipal, Karnataka.Till 1983, he was heading the Bangalore branch of New Standard Engineering. AsBranch Manager, Mr Ramnani was overseeing the company’s Marketing, CustomerService and Administration functions in the state of Karnataka.In 1983, he moved to Los Angles, USA and joined United Detectors Technology, LA,a manufacturer of Sensors as Plant Manager. During his association with the companyhe was looking after Manufacturing, R&D and Product Developmental functions ofthe unit.In 1987, Mr Ramnani joined Opto Sensors (S) Pte Ltd, Singapore, as General Managerand established the Manufacturing and Marketing facilities for the company.In 1990, Mr Ramnani along with Mr Thomas Dietiker and others established ElekonIndustries Pte Ltd, at Singapore to manufacture optoelectronic products. However,due to increasing operational costs, labor costs and other input costs in Singapore, theyestablished Opto Circuits India (P) Limited, in 1992.

Mr Thomas DietikerMr Thomas Dietiker is a US citizen holding a BS Degree in Electronic Engineeringfrom the Technical Institute of Wintherthur, Switzerland.Mr Dietiker worked with United Detectors Technology, USA, as Engineering Managerfrom 1983 to 1987. Subsequently, he joined Opto Sensors, USA as Vice PresidentEngineering and worked till 1990 before co-founding Elekon Industries Pte Ltd, atSingapore. During his tenure at Opto Sensors he was responsible for the implementationof new engineering designs and product marketing plans for a wide range of opto-electronic products. Mr Dietiker has extensive experience in Business Development,Product Marketing, Engineering of opto-electronic products and a wide range of relatedelectronic assemblies.

Mr C Jayesh PatelMr C Jayesh Patel is a US citizen and holds AS Degree in Electronic Engineeringfrom the National Institute of Technology, Anaheim California.Mr Patel worked with United Detectors Technology, USA, from 1984 to 1987.Subsequently, he joined Opto Sensors, USA. At Opto Sensors, Mr Patel headed suchdevelopments as miniaturized optical encoders, touch screen panels for the aerospaceindustry, various designs of opto-electronic components, medical sensors and turnkeyproducts.Mr Patel has been involved in the product design and conception of a multitude ofopto-electronic products for the company and has brought in over 12 years ofEngineering and R&D experience. His tenure at the company spans over 10 years.The R&D, Product Design and Implementation phases at Elekon are overseen andmanaged by Mr Patel.

Mrs Usha RamananiMrs Usha Ramanani, aged about 48 years, is an MCom graduate and has workedwith United India Insurance Company. Since 1992, she is looking after the administrationand personnel functions.

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2629 July 2010

Financials and valuation

INCOME STATEMENT (RS MILLION)

Y/E MARCH 2007 2008 2009 2010 2011E 2012E

Net Sales 2,516 4,681 8,185 10,776 13,500 16,361Change (%) 80.0 86.1 74.9 31.6 25.3 21.2

EBITDA 826 1,372 2,591 3,669 4,161 5,074Margin (%) 32.8 29.3 31.6 34.0 30.8 31.0

R&D Adjustment 92 55 558 200 0 0Adjusted EBITDA 734 1,317 2,032 3,469 4,161 5,074

Margin (%) 29.2 28.1 24.8 32.2 30.8 31.0

Depreciation 24 63 138 278 405 540EBIT 802 1,309 2,452 3,391 3,756 4,534Int. and Finance Charges 74 109 537 382 261 261Other Income - Rec. 37 171 288 -76 50 75

PBT before EO Expense 764 1,371 2,203 2,933 3,544 4,347Extra Ordinary Expense/(Income) 10 20 35 0 0 0PBT after EO Expense 755 1,352 2,168 2,933 3,544 4,347Current Tax 21 38 77 331 177 217Deferred Tax 1 0 -2 -3 0 0Tax 22 38 75 328 177 217

Tax Rate (%) 2.9 2.8 3.5 11.2 5.0 5.0

Reported PAT 733 1,313 2,093 2,604 3,367 4,130Less: Mionrity Interest 2 7 6 1 0 0Net Profit 731 1,307 2,087 2,603 3,367 4,130Adj PAT** 651 1,272 1,582 2,426 3,367 4,130

Change (%) 74.0 95.5 24.4 53.3 38.8 22.7Margin (%) 25.9 27.2 19.3 22.5 24.9 25.2

E: MOSL Estimates; ** Adjusted for extraordinary items and R&D expenses capitalization;

Capitalizationof R&D expensesboosted margins

Tax to remain low owing to taxbenefits in SEZ in

India andmanufacturingunit in Malaysia

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2729 July 2010

Capex on new SEZ inIndia and manufacturing

unit in Malaysia

BALANCE SHEET (RS MILLION)

Y/E MARCH 2007 2008 2009 2010 2011E 2012E

Equity Share Capital 616 942 1,615 1,829 1,829 1,829Preference Share Capital 0 40 0 0 0 0Total Reserves 1,509 2,364 3,551 9,084 11,466 14,388Net Worth 2,125 3,346 5,166 10,913 13,295 16,217Minority Interest 73 79 134 134 134 134Deferred liabilities 5 5 3 1 1 1Total Loans 645 1,012 5,379 2,179 2,179 2,179Capital Employed 2,848 4,442 10,682 13,227 15,609 18,531

Gross Block 946 1,209 5,035 5,975 7,775 8,975Less: Accum. Deprn. 149 222 666 944 1,349 1,889Net Fixed Assets 797 987 4,369 5,031 6,426 7,086Capital WIP 12 17 172 172 172 172Investments 3 3 3 3 3 3

Curr. Assets 3,044 5,075 9,843 11,609 13,746 17,009Inventory 1,055 1,456 2,305 2,982 3,699 4,617Account Receivables 1,187 2,376 4,060 4,428 5,918 7,307Cash and Bank Balance 385 686 913 1,246 431 379Loans & Advances 417 558 2,565 2,952 3,699 4,707

Curr. Liability & Prov. 1,010 1,901 3,709 3,592 4,742 5,743Account Payables 585 1,100 2,510 2,657 3,514 4,258Provisions 425 801 1,198 935 1,228 1,484Net Current Assets 2,034 3,174 6,134 8,017 9,004 11,266Misc Expenditure 2 261 3 3 3 3Appl. of Funds 2,848 4,442 10,682 13,227 15,609 18,531E: MOSL Estimates


Repayment of loanfrom fund raising

through QIP

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2829 July 2010


RATIOS

Y/E MARCH 2007 2008 2009 2010 2011E 2012E

Basic (Rs)EPS (Rs) 3.6 7.0 8.7 13.3 18.4 22.6Cash EPS 12.2 14.5 13.8 15.8 20.6 25.5BV/Share 34.4 32.3 32.0 59.6 72.7 88.6DPS 2.2 5.1 4.0 4.0 4.6 5.6Payout (%) 21.3 43.2 36.1 32.9 29.3 29.3

Valuation (x)P/E 72.0 36.8 29.6 19.3 13.9 11.3Cash P/E 20.9 17.6 18.6 16.2 12.4 10.0P/BV 7.4 7.9 8.0 4.3 3.5 2.9EV/Sales 16.5 8.9 5.6 3.9 3.2 2.6EV/EBITDA 50.4 30.4 17.7 11.5 10.4 8.5Dividend Yield (%) 0.8 2.0 1.6 1.6 1.8 2.2FCF per Share -6.8 4.0 -24.5 4.2 2.4 7.7

Return Ratios (%)EBITDA Margins (%) 32.8 29.3 31.6 34.0 30.8 31.0Net Profit Margins (%) 25.9 27.2 19.3 22.5 24.9 25.2RoE 51.4 51.3 51.7 32.4 27.8 28.0RoCE 39.0 43.1 37.4 28.1 26.6 27.2

Working Capital RatiosAccumulated Dep/Gross Block (x) 0.2 0.2 0.1 0.2 0.2 0.2Asset Turnover (x) 0.9 1.1 0.8 0.8 0.9 0.9Fixed Asset Turnover (x) 4.6 5.2 3.1 2.3 2.4 2.4Debtor (Days) 172 185 181 150 160 163Inventory (Days) 153 114 103 101 100 103Working Capital Turnover (Days) 239 194 233 229 232 243

Growth (%)Sales 80.0 86.1 74.9 31.6 25.3 21.2EBITDA 93.5 66.2 88.8 41.6 13.4 21.9PAT 95.2 78.8 59.8 24.7 29.3 22.7

Leverage Ratio (x)Current Ratio 3.0 2.7 2.7 3.2 2.9 3.0Interest Cover Ratio 10.8 12.0 4.6 8.9 14.4 17.3Debt/Equity 0.3 0.3 1.1 0.2 0.2 0.1E: MOSL Estimates; * Ratios adjusted for bonus issue

Valuation remainsattractive

Return rationsto sustainabove 25%

Working capitalrequirements likely

to remain high

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CASH FLOW STATEMENT (RS MILLION)

Y/E MARCH 2007 2008 2009 2010 2011E 2012E

Oper. Profit/(Loss) before Tax 826 1,372 2,591 3,669 4,161 5,074Interest/Dividends Recd. 37 171 288 -76 50 75Direct Taxes Paid -21 -38 -77 -331 -177 -217(Inc)/Dec in WC -681 -839 -2,733 -1,550 -1,802 -2,314CF from Operations 160 666 68 1,712 2,231 2,617

EO Expense / (Income) 10 20 35 0 0 0CF from Operating incl EO Expense151 646 33 1,712 2,231 2,617

(inc)/dec in FA -573 -268 -3,981 -940 -1,800 -1,200(Pur)/Sale of Investments 237 0 0 0 0 0CF from Investments -335 -268 -3,981 -940 -1,800 -1,200

Change in Net Worth 826 225 1,046 3,999 0 0Inc/(Dec) in Debt -128 373 4,422 -3,200 0 0Interest Paid -74 -109 -537 -382 -261 -261Dividend Paid -156 -567 -755 -856 -985 -1,208CF from Fin. Activity 468 -77 4,176 -439 -1,246 -1,469

Inc/Dec of Cash 283 301 228 333 -815 -53Add: Beginning Balance 102 385 686 913 1,246 431Closing Balance 385 686 913 1,246 431 379

E: MOSL Estimates

Cash-flowfrom operationsto improve going

forward

Capex related toCriticare acquisition

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N O T E S

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3129 July 2010

N O T E S

This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. Motilal OswalSecurities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solelyfor your information and should not be reproduced or redistributed to any other person in any form.

The report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon such. MOSt orany of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in theinformation contained in this report. MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regardingany matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. Therecipients of this report should rely on their own investigations.

MOSt and/or its affiliates and/or employees may have interests/ positions, financial or otherwise in the securities mentioned in this report. To enhance transparency,MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.

Disclosure of Interest Statement Opto Circuits1. Analyst ownership of the stock No2. Group/Directors ownership of the stock No3. Broking relationship with company covered No4. Investment Banking relationship with company covered No

This information is subject to change without any prior notice. MOSt reserves the right to make modifications and alternations to this statement as may be requiredfrom time to time. Nevertheless, MOSt is committed to providing independent and transparent recommendations to its clients, and would be happy to provideinformation in response to specific client queries.

For more copies or other information, contactInstitutional: Navin Agarwal. Retail: Manish Shah

Phone: (91-22) 39825500 Fax: (91-22) 22885038. E-mail: [email protected]

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