| Summary of Contents STOCK IDEA Opto Circuits India
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs460
Current market price: Rs338 A growth monitor Key points - Opto Circuits India’s (Opto) non-invasive business is expected to grow at a compounded annual growth rate (CAGR) of 39.5% over FY2007-10E to Rs550.7 crore on the back of rising demand for its sensors and patient monitoring systems, coupled with an increasing market penetration and innovative new launches.
- The invasive business would be driven by the increasing acceptance of the company's stents due to superior technology and better pricing. Further, the growing revenues from DIOR in Europe and the semi-regulated markets due to limited competition would also fuel the growth of the invasive segment. We expect the invasive segment (EuroCor) to contribute ~43% to the company's total revenues by 2010.
- Opto has recently completed its $70 million acquisition of Criticre Systems (Criticare), a US-based publicly listed company specialising in vital signs and gas monitoring instruments. We estimate the Criticare acquisition to generate incremental earnings of Rs0.60 per share in FY2009E and Rs1.80 per share in FY2010E. We will incorporate the impact of the acquisition after the announcement of Opto's FY2008 results.
- We expect Opto's fully diluted earnings (without Critcare) to grow at a CAGR of 35% over FY2007-10E on the back of a 57% CAGR in revenues. We estimate earnings of Rs20.0 per share in FY2009E and Rs29.9 per share in FY2010E.
- We have valued the stock using the dividend discount model and the P/E mutiple, arriving at price targets of Rs453 and Rs470 per share respectively. Using the average of the two, we fix our price target at Rs460 per share, an upside of 36% from the current levels.
- Opto is trading at attractive valuations of 16.9x FY2009E fully diluted earnings and 11.3x FY2010E fully diluted earnings. Hence, we initiate coverage on Opto with a Buy recommendation and a price target of Rs460. Our current estimates do not incorporate the Criticare acquisition, which could yield incremental earnings of Rs1.8 per share in FY2010E, implying an upside of Rs28-30 per share to our target price.
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