| Summary of Contents STOCK UPDATE Opto Circuits India
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs236
Current market price: Rs216
New product launches to boost growth Key points -
With the ramp-up in sales, Eurocor Gmbh (Magical and Freeway used in the treatment of coronary disease) is expected to grow at 40-45% over the next two years, which we feel is a little on the higher side given the stiff competition in the segment. Emerging markets like Latin America, Africa and South Asia are the key target markets for these products. This launch, we believe, could add considerable growth momentum to Opto Circuits? invasive business, in which growth has been under pressure of late. -
Criticare Systems will launch three new products (in patient monitoring and sensors), important amongst them being the gas bench technology monitoring system. The company has recently signed a strategic long-term partnership agreement with a European player to manufacture and distribute anesthetic gas delivery products in several key markets in the USA and European Union (EU). Opto Circuits however retains the marketing and distribution rights for India. The company has about three-four more such deals involving Criticare Systems? modular gas delivery products. We expect Criticare Systems to post a compounded annual growth rate (CAGR) of 24.3% over FY2009-11E. -
The current portfolio of products in the invasive and non-invasive front has an addressable market size of $5 billion and $4 billion respectively. With an order book of Rs125 crore (for two months) and a blended growth of ~28-30% for the next two years, Opto Circuits is set to target a 10% market share in each of the non-invasive and invasive segments over the next three to four years (European and Asian markets). Opto Circuits has planned a capital expenditure (capex) of Rs200 crore to set up plants in Vizag (India) and Malaysia over the next two years. -
To improve its market share, we believe, Opto Circuits will have to simultaneously be at the forefront of technological innovation and considerably fortify and develop strong brand equity and recognition, which seems to be a challenging proposition given the intense competition in the mature markets. However, despite being a small company with a market cap of ~Rs4,000 crore, Opto Circuits has established itself in 56 countries and its niche technology and low-cost products have enabled it to grow at a fast track. It continues to explore all options to include value-added products to its bouquet and enter newer geographies. -
We like its niche business model with high margins, strong capital efficiency and high entry barriers. We see the company consolidating on its sales over its acquisitions and maintain a healthy growth rate of 30% with steady margins of 30-32% over the next two years. We continue to value the stock using the dividend discount model. At the current market price of Rs216, the stock is trading at compelling valuation of 15.2x FY2010E fully diluted earnings and 11.5x FY2011E fully diluted earnings. We maintain our Buy recommendation on the stock with a price target of Rs236. Maruti Suzuki India
Cluster: Apple Green
Recommendation: Hold
Price target: Rs1,700
Current market price: Rs1,592
Suzuki-Volkswagen deal, beneficial for Maruti in longer term -
Volkswagen AG (VW), the owner of iconic brands such as Audi, Porsche, Bentley, Bugatti and Skoda, has announced that it would buy a 19.9% stake in Japanese carmaker Suzuki Motors for $2.5 billion. On the other hand, Suzuki Motors will invest half of the amount received from VW to purchase shares of the German automaker. Even though VW will be the largest shareholder in Suzuki Motors, there would be no change in management control of the Japanese company. The deal also suggests that VW and Suzuki Motors may plan to develop hybrids and electric vehicles under the brand of both the companies. -
Suzuki Motors, which is the ninth largest player in the global automobile industry in terms of production volumes and has the technology for small and compact hatchbacks, may also gain access to the greener technology of Volkswagen AG, post this deal. Suzuki Motors has diesel engine technology of up to 1.3 litre for which it has a tie-up with Fiat; however VW has the technology for diesel engines above 1.3 litre, which could be shared with Suzuki Motors. This partnership is also expected to boost the sales of the two companies as Suzuki Motors has strong presence in India (through Maruti Suzuki) and VW is a big player in China. -
Thus, there are many possibilities emerging from the VW-Suzuki Motors deal that may have a positive impact on Maruti Suzuki in the medium to longer term. -
At the current market price, the Maruti Suzuki?s stock is trading at 18.7x its FY2011E earnings and an enterprise value/earnings before interest, tax, depreciation and amortisation of 12.3x. We maintain our Hold recommendation and price target of Rs1,700 on the stock.
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