We recommended Opto Circuits twice in the past 14 months to our readers; first in August 2011 when its price was `277 (adjusted price Rs 213 for bonus) and again in March 2012 at a price of Rs 287 (adjusted price Rs 220.62 for bonus). But, a lot of water has flown down the bridge since then. Its price has nosedived to low of Rs 115, as on August 29, 2012, due to market’s reaction to rating agency ICRA downgrading it to ‘B’ in August this year.
These ratings are for the long-term working capital facilities. ICRA justified its move stating that the company’s working capital requirement had gone up and a high capital expenditure led to negative cash flow for FY12. Since then, Opto has disengaged ICRA’s services and appointed CRISIL. Hitting back, ICRA also suspended Opto’s ratings. Now the question that arises is, what’s the brouhaha all about? Is there a genuine cause of worry and what if you are invested in Opto?
The answer is that we still stand by our recommendation and there is no need to panic. If you have already invested then remain so and if you aren’t then it’s time to buy at a more attractive price.
The reason Opto ran out of free cash was due to the 11 acquisitions it made since 2001, resulting in high capital expenditure and piled up debt of Rs 1,100 crore. Of its debt, the company has already paid Rs 68 crore and will pay Rs 50 crore in FY13. It has no further plans for acquisitions and has instead started consolidation of the acquired business. It is also focusing on the invasive segment by setting up a facility in Malaysia.
The company’s loan book and prices may look dicey as of now but long-term prospects remain optimistic. The stock is currently trading at price to earnings multiples of 5.93 which is at 64 per cent discount to its 5-year median of 14.78 while the price to book value is at 1.74, which is again at 66 per cent discount to its 5-year average of 5.12.