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Opto Circuits (India) Limited (OCIL) is a $4.8 billion leading medical equipment manufacturing player making sensors and patient monitors. Established in 1992, this multinational medical device company is headquartered in Bengaluru. Some of the products manufactured by the company include patient monitors such as pulse oximeters, vital signs monitors, respiratory and anaesthetic care, Diagnostic and therapeutic cardiology devices and systems such as automated external Defibrillators, ECG systems, stress test systems, holter monitoring systems and related consumables and services.
Over the years OCIL has diversified into invasive space, supplying stents for cardiac use like bare metal stents, drug eluting stents, coated balloons, peripheral coated balloons, replacement implants and catheters. The company is the original equipment manufacturers (OEM) for several global players such as Philips, Tyco-Nellcor and Epic Medical Equipment and some of the brands under which it sells are Quinton, eVision, Burdick, MediChek, Dior, Genius Magic and many more. The company has 168 patents, with 53 pending patent applications with markets in over a 100 countries with predominant business in North America, Europe and the four BRIC nations.
STRENGTHS
Agile Operations and Management: A lower cost base and an attractive pricing strategy have enabled the company’s stents to gain acceptance globally. A steady growth in the non-invasive segment and increasing acceptance of DIOR, a revolutionary cardiac balloon, in Europe would also drive its growth. The Criticare acquisition has further enabled it to diversify into gas monitoring system and strengthen its position in the USA. The quick turnaround in the recently acquired Cardiac Lifescience is impressive and would drive the future growth.
Diversified business model: The company’s product suite includes medical equipment and interventional devices with state-of-the-art, world-class facilities located in the US, Malaysia and India. Apart from equipment manufacture the company provides specialised education and training services. Majority of the non-invasive products come with installation and in-service training by factory-trained representatives. The training is facilitated for end users as well as biomedical teams for certain products. For instance, the professional services team from cardiac science provides professional project management, processes and resources to meet specific end-user needs. The company manufactures over 80 types of sensors, 30 types of equipment and about 32 stents and balloons in varying sizes and types. Most of these products are used in critical care and life-saving devices requiring approvals from different agencies in different countries posing a serious entry barrier for new entrants.
Strong Subsidiaries and Strategic acquisitions: OCIL has 14 subsidiaries that have resulted both organically and inorganically. The company forayed into the invasive segment by acquiring Germany-headquartered Eurocor GmbH in February 2006 which manufactures cardiac and peripheral stents. This followed the acquisition of the US-based Criticare Systems in April 2008 which develops, manufactures and markets patient monitoring systems and accessories used in anaesthesia, critical care, medical transport and outpatient care settings.
Continuing the expansion process, in FY2011, OCIL acquired 100 per cent stake in three companies Kolkata-based NS Remedies, US-based Unetixs Vascular, Inc and Cardiac Science Corp. (CSC). The NS Remedies acquisition paved the way for backward integration which will help improve quality as well as margins in the stents business. This division manufactures both bare metal stents and drug eluting stents. Moreover, by acquiring this company, OCIL got access to two Conformité Européenne (CE) marked brands; eMagic and eFlex, a key indicator of a product’s compliance with EU legislation.
The acquisition of Unetixs Vascular, Inc, UFDA-listed vascular diagnostic systems and accessories further boosted the specialist nature of OCIL’s business in detection of peripheral arterial disease (PAD). Cardiac Science Corp. (CSC) a NASDQ-listed manufacturer of diagnostic and therapeutic cardiac equipment manufacturer for Rs 408 crores was in line with OCIL’s growth plans. This acquisition provided OCIL with a huge captive market share in the US. For instance, the buyout paved way for 27 per cent market share in the American automated external defibrillator (AED) market and 10 per cent globally. CSC served over 0.2 million primary care physicians globally that now automatically are served by OCIL.
Geographical Spread: With business interest in both developed economies and emerging markets such as Brazil, Russia, India and China (BRICs); the company has a wide global reach. The changing lifestyle trends in the emerging economies arising from rising middle class, increasing health insurance penetration has resulted in an increase in healthcare spending. On the other hand, the developed world, with a fast ageing population, continues to remain a lucrative market for OCIL’s product portfolio. In a capital intensive business, the company with its spread of manufacturing units including Germany has easy access to several markets.
CONCERNS
Operational risks: Cardiac Science Corp, the acquired entity by OCIL had to recall 26,000 AEDs between November 2009 and July 2010 that resulted in the USFDA sending a warning letter to the company. The company provided for US$33 million as charges for the recall and related software upgrades. Occurrence of such risks in the future can cause significant losses and even lead to cancellation of its licenses and approvals. The risk of losing customer confidence also exists which can impact credibility built over several years.
Corporate restructuring: OCIL has initiated corporate restructuring to align complementary business lines to achieve cost effectiveness and operational efficiencies. Under the proposed structure, Cardiac Science Corp, Criticare Systems and Unetixs Vascular have been transferred to Opto Cardiac Care. Likewise, NS Remedies and Eurocor GmbH have been transferred to Opto Eurocor Healthcare Limited. Both Opto Cardiac Care Limited and Opto Eurocor Healthcare Limited are wholly owned subsidiaries of OCIL. The restructuring exercise could result in interim transitional issues that can impact the existing structures.
Growth plans: The company is looking at consolidating its business and the management has proposed to raise up to Rs 1,000 crores through an initial public offer for its wholly owned subsidiary Opto Eurocor Healthcare Limited and fund its expansion plans in manufacturing facilities in India and Malaysia. In FY11, It invested in creating 8 emerging market manufacturing assets in India (Bengaluru, Chennai, Vizag, Kolkata and Parwanoo) and Malaysia (Johor Bahru). It is also maintaining a competitive cost structure owing to manufacturing set ups in tax free zones and special economic zones.
Rising Debt: Several acquisitions in pursuit of growth has resulted in a debt pile up that stood at Rs 1,084 crore as on September 30, 2011. Though the company managed to acquire NS Remedies and Unetixs with internal accruals, it had to resort to long term debt for funding acquisition of Cardiac Science. Servicing debt could impact the margins in the near future.
Goodwill: On the other side of the company’s balance sheet stands Goodwill which stood at Rs 629 crore as on March 31, 2011. During FY11, additions to the tune of Rs 391 crore were made representing excess paid over the net worth of the three companies acquired. The cumulative goodwill represents over 27 per cent of the assets on the balance sheet. Any deterioration in market dynamics could lead to intangible write-off impacting OCIL’s financials.
FINANCIALS
On a trailing-twelve months (TTM) basis, OCIL registered net sales of Rs 2,238 crore with a net profit of Rs 475 crore. The company has the ability to earn and sustain high margins with operating profit margin (EBITDAM) for FY11 being 30 per cent (five year Average-33 per cent) and the profit-after-tax margin (PATM) for FY11 being 23 per cent (five year Average-26.25 per cent). During the 2007-11 periods, the sales growth was 63 per cent CAGR with earnings per share growth of 47 per cent for the same period. The Average return on equity (RoE) earned during this period was over 44 per cent owing to the healthy operating margin of 33 per cent and profit after tax at 23 per cent. Although, the debt now stands at a staggering Rs 1,084 crore, keeping in mind the capital intensive nature of the industry, the debt-equity ratio of 0.76 as in September 2011 is pretty comfortable. An FCCB of US$7 million is due for redemption in March 2014.
Valuation
The stock is currently trading at a PE multiple of 11.3 which is at a discount of 31 per cent to its median PE of 16.3. Considering the five year EPS growth, the stock is available at an attractive PEG ratio of 0.24 with the dividend yield of 1.8 per cent. The company has been regularly issuing bonus shares (see table) with the board recently proposing another bonus issue of 3:10 while announcing Q3 results. We find both valuations and fundamentals of OCIL very strong and recommend a buy at current market price with a time horizon of three-five years.
This article was originally published on April 13, 2012.
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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