Opto Circuits India Ltd Final - Rakesh Jhunjhunwalarakesh-jhunjhunwala.in/wp-content/files/Opto_Circuits_India_Ltd.pdf · Incorporated in 1992, Mr. Vinod Ramnani promoted Opto Circuits

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Stock Analyser October 09, 2009

Background Incorporated in 1992, Mr. Vinod Ramnani promoted Opto Circuits India Ltd. (OCIL) is engaged in the design, development, manufacture & marketing of Medical Electronic Devices and health care products, in both invasive and non-invasive segments. Its range of products includes Digital Thermometers, Pulse Oximeters, Fluid Warmers, Patient monitoring systems, Medical sensors, cardiac stents and catheter systems. Triggers OCIL has a strong presence in Medical Equipment industry with diverse range of

critical care & tertiary care medical devices. The industry is relatively insulated from any economic slowdown as these are non-discretionary spends. As per World Health Organisation (WHO), the industry, which has been growing in excess of 15% p.a, is expected to grow 10% p.a. over next decade. This will lead to medical equipment market size of USD 428 bn by CY2013. OCIL, being one of the leading players in the industry is expected to capitalise on the growing opportunities.

Acquisitions & alliances have enabled OCIL to expand its product & client base & to strategically segment itself into the invasive & non-invasive markets. In the last nine years, OCIL has made eight successful acquisitions of which Eurocor & Criticare acquisitions have been major turning points. Eurocore is a pioneer in the field of invasive cardiology while Criticare has established product & technological leadership in anesthetic gas monitoring, vital signs monitoring, gas & agent analysis. These two acquisitions are expected to be the major catalyst for OCIL’s future growth.

OCIL constantly launches new & innovative products every year both under the invasive & non-invasive categories, which are expanded aggressively in new markets. OCIL has a very strong marketing & distribution network, which enables it to improve its brand image & boost the sales. OCIL’s 59.7% subsidiary, Advance Micronic devices, has been a medical equipment distributor in India for approximately three decades, while its 100% US subsidiary Mediaid distributes its medical devices internationally. Further, for promoting its products, OCIL uses alternate channels like conducting various seminars & summits & inviting cardialogists to participate.

The new launches expected this fiscal (gas bench module, modular patient monitoring system & patient monitoring system with networking capability) under the non-invasive category & Eurocor’s unique invasive products viz; ‘Magical’ (which is a combination of a drug-eluting balloon with a bare metal stent) & Cobalt Chromium stent are expected to add to OCIL’s revenue going forward. Also the strategic technology sharing agreement entered into by OCIL recently with US based Micell Technologies for jointly developing new stent & balloon systems for world markets would enable OCIL to further enhance its revenue by addressing additional market opportunities.

OCIL holds 35 patents through its subsidiaries, which enables it to change product design & configuration. IPR can also be rented to third party, which generates royalty.

To lower the production costs, OCIL has taken steps to transfer traditionally outsourced manufacturing by its US operations to its facilities in India. OCIL has shifted nearly 35% assemblies, sub-assemblies & testing practices of Criticare Inc to Bangalore. This is expected to improve consolidated operating margins. Also, two of the OCIL’s five manufacturing facilities in Bengaluru are currently registered as 100% EOUs, which enjoy tax-free status. OCIL has also set up a subsidiary ‘OCI Infrastructure Ltd’ for setting up an SEZ. In case EOU benefit is not extended beyond FY11, OCIL could shift its operation there & avail of continued tax exemption. This coupled with the expected reduction in interest liability due to repayment of loan taken for Criticare acquisition (Rs. 2040 mn) out of the recently raised QIP funds of Rs. 4000 mn is expected to keep the PAT margins on a higher side.

OCIL is an investor friendly company, which has a good track record of paying consistent dividends since FY01. Going forward, we expect OCIL to continue enriching its shareholders wealth with healthy dividend payouts.

OCIL’s consolidated turnover & PAT have grown at a CAGR of 80.2% & 75.5% respectively over FY06-09. Over FY09-11, we expect turnover & PAT to grow at CAGR of 26.5% & 28.1% respectively, which is likely to be driven by both invasive & non-invasive segment. The new products to be launched under both segments are

Industry: Medical Equipments 6-9M Target Price - Rs. 244 (Buy at CMP & add on dips in the price band of Rs. 170-180)

Opto Circuits India Ltd. (OCIL) CMP: Rs. 204.2

Price Chart OPTO CIRCUIT-Dly .30/11/07-08/10/09 B-532391 TREND

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Stock Details BSE Code 532391NSE Code OPTOCIRCUIBloomberg OPTC.INPrice (Rs) as on Oct. 08, 2009 204.2Equity Capital (Rs Mn) 1614.7Face Value (Rs) 10.0Eq. Shares O/s (mn) 161.5Market Cap (Rs Mn.) 38,573.4Book Value (Rs) 27.4Avg Volume (52 Week) 3,73,26552 wk H/L 212.9/ 69.5

Shareholding Pattern (As on June 2009) Domestic Institutions 4.0 Non Promoter Corp Hold 9.4 FIIs 22.6 Promoters 31.1 Public & Others 32.9 Total 100.0

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expected to add to OCIL’s turnover & profits. However, the CAGR growth estimated is lower than that achieved over FY06-09 mainly on account of higher base & lack of contribution from inorganic acquisitions over the next two years.

Consolidated Financials at a Glance

(Rs. in Million) Particulars FY07 FY08 FY09 FY10E FY11E

Net Sales 2515.7 4680.8 8185.2 10558.9 13093.0% Growth (y-o-y) 80.0 86.1 74.9 29.0 24.0Operating Profit 825.6 1372.0 2590.5 3347.2 4157.0% Growth (y-o-y) 93.4 66.2 88.8 29.2 24.2PAT (Adjusted) 730.5 1306.5 2087.3 2633.0 3424.6% Growth (y-o-y) 89.0 78.9 59.8 26.1 30.1EPS (Fully Diluted) 3.9 6.9 11.0 13.9 18.1% Growth (y-o-y) 89.0 78.9 59.8 26.1 30.1PE 52.8 29.5 18.5 14.7 11.3

Valuations & Recommendation We expect OCIL’s consolidated turnover & PAT to grow at a CAGR of 26.5% & 28.1% respectively over FY09-FY11 on the back of strong performance expected from both the invasive & non-invasive segment. Being a market leader in the medical equipment industry with diverse range of products, OCIL is expected to leverage its strength & exploit the potential of the industry, which is expected to grow at CAGR of 10% for the next decade. Acquisitions & alliances have enabled OCIL to expand its invasive & non-invasive product portfolio & client base. Though OCIL has not made acquisitions since April 2008, we feel that the company would continue to look out for opportunities to grow inorganically. In the meanwhile, deeper & wider integration of the acquired companies could lead to growth in topline & bottomline. Eurocor & Criticare are expected to perform well over the next two years & are expected to be the major catalyst for OCIL’s growth. The new launches expected this fiscal (gas bench module, modular patient monitoring system & patient monitoring system with networking capability) under the non-invasive category & Eurocor’s unique invasive products viz; ‘Magical’ (which is a combination of a drug-eluting balloon with a bare metal stent) & Cobalt Chromium stent are expected to add to OCIL’s revenue going forward. Also the strategic technology sharing agreement entered into by OCIL recently with US based Micell Technologies for jointly developing new stent & balloon systems for world markets would enable OCIL to further enhance its revenue. OCIL has shifted nearly 35% assemblies, sub-assemblies & testing practices of Criticare Inc from US to Bangalore, which is likely to lower its production costs & help in improving the consolidated operating margins. Further, the EOU status & expected decline in interest cost (due to repayment of term loan of Rs. 2040 mn taken for Criticare acquisition out of the recently raised QIP funds of Rs. 4000 mn) is expected to improve the profitability further. Also, OCIL has also set up 87.33% subsidiary ‘OCI Infrastructure Ltd’ for setting up an SEZ. In case EOU benefit is not extended beyond FY11, OCIL could shift its operation there & avail of tax exemption. At the CMP of Rs. 204.2, OCIL is trading at 14.7xFY10E & 11.3xFY11E EPS. OCIL has been a consistent wealth creator for shareholders through regular dividends & bonuses. At CMP, the scrip offers dividend yield of 2.4%. Looking at its future growth prospects, we feel that stock has the potential to trade at 13.5xFY11E EPS, which gives a price target of Rs. 244. Hence we recommend investors to buy this scrip at current levels and to average it on dips in the price band of Rs. 170-180 for the above mentioned price target over the next two to three quarters.

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Investment Rationale Strong presence in Medical Equipment industry with diverse range of devices

OCIL has a very strong presence in the medical equipment industry. The company has over the years developed a diverse portfolio of critical care & tertiary care medical devices through internal research & development and acquisitions. These critical care and tertiary care products include stents, PTCA balloons, patient monitors, vital sign monitors, pulse oximeters, and anesthesia gas monitors. These specialties generally require advanced technology and high quality products, and as such, command high profit margins. In addition, some of its products by their nature of being non-discretionary and life saving are not prone to economic downturns. Around 95% of OCIL’s non-invasive medical devices are FDA & CE approved, and invasive medical devices are CE marked. The diverse range of devices allows OCIL to achieve sales and distribution synergies & economies of scale. Medical equipment industry offers immense growth potential Medical equipment industry is a secular growth story, which is relatively insulated from any kind of economic slowdown. Whether a multi-bed hospital or a small physician clinic, more than a thousand devices are used in today's medical facilities that strive to meet multifarious patient needs in differing economic landscapes. Government policies make the installation & use of many of these mandatory, rendering them non discretionary in nature. The speedy progress of medical science & laboratory research and the globalization of diseases & disease control are actively propelling industry to new levels. As per World Health Organisation (WHO) report, global healthcare expenditure is estimated to double by 2015. The medical equipment industry has been growing in excess of 15% p.a & is expected to grow by 10% p.a. over a period of next decade. This will lead to medical equipment market size of USD 428 bn by CY2013, which is a big business opportunity by any standard. The global market for patient monitoring devices is estimated to grow to USD 6 bn by 2011, with multi-parameter patient monitors accounting for over 40% of the market. The global pulse oximetry sensor market is estimated to be approximately USD 880 mn and is expected to increase in size when the Global Pulse Oximetry Project, commissioned by the WHO kicks off to promote the availability of pulse oximeters. Further, the global market for coronary stents is expected to grow to approximately USD 8 bn by the end of 2010 from USD 5.8 bn in 2008. OCIL is one of the leading players in the medical equipment industry commanding ~6% share globally in sensors. With the long-term prospects of the medical equipment industry looking good, we believe that a well-established player like OCIL is set to benefit immensely from this secular demand growth. Regular expansion of product portfolio & client base through aggressive acquisitions besides growing organically OCIL has been regularly expanding its product portfolio & client base through aggressive acquisitions. OCIL’s strategy to provide a broad range of medical devices requires a wide array of technologies and capabilities. The rapid pace of technological development in the medical industry, specialized expertise required in different areas of medicine and the process of bringing a medical device from development to market, makes it difficult for the company to extend its portfolio organically. Hence, in addition to organic growth through its research and development efforts, historically OCIL has relied & would continue to rely on acquisitions and alliances to provide access to new technologies both in areas served by its existing businesses as well as in new businesses. Acquisitions & alliances have enabled OCIL to complement its existing portfolio of medical devices & assist in growing its existing operations. Also, it has enabled OCIL to enhance its sales & distribution network & to increase its client base. OCIL has established long-standing relationships with physicians, general practitioners and specialists and with clinics and hospitals. This long-term relationship and the quality of its customer base is a key strength that enables OCIL to expand its business & operations.

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In the last nine years OCIL has made eight acquisitions spanning US & Germany. These acquisitions enabled the company to expand its product base & to strategically segment itself into the invasive & non-invasive markets. The acquisition of Advanced Micronic Devices (India) in 2001 enabled OCIL to

develop strong client base & establish a strong distribution network across India. Mediaid (US) acquisition in 2002 enabled OCIL access to a range of Patient

Monitoring Systems & Veterinary products. By acquiring Thermometer division of Unilever (India) in 2002 & Altron Industries

(India) in 2005, OCIL added digital thermometers to its portfolio. Acquisition of Eurocor (Germany) in 2006 added invasive medical products to OCIL’s

portfolio, giving access to USD 6 bn invasive market. Eurocor specializes in coronary stent technology & special cardiovascular devices. Its product portfolio includes drug eluting stent, bare metal stent, coronary dilatation catheter & a drug-eluting catheter. This is the first company in the world to be awarded with CE mark for drug coated balloon catheter. It has got a strong distribution network in 35 countries worldwide.

Devon Innovations (India), acquired in 2007, added products for urology, gastroenterology, gynecology to OCIL’s portfolio.

Ormed Medical Technology (India) acquired in 2007 added products like orthopedic prosthesis & surgical disposables to OCIL’s portfolio.

Criticare Systems Inc (US) acquisition in 2008 expanded OCIL’s non-invasive product basket further by adding anesthesia monitors, vital sign monitors & related accessories to portfolio. It also enabled OCIL to strengthen its presence in the US markets. Criticare has got USFDA approval for its products and holds many patents.

Eurocor (acquired for Rs. 609 mn) & Criticare (acquired for $70 mn) acquisitions have been major turning points for OCIL. These acquisitions have enabled OCIL to increase its business size & profitability significantly. In FY09, Eurocor achieved turnover of Rs. 1037.7 mn, which increased by 50.4% over FY08. The growth was driven by new products launched over the last two years including, DIOR, a drug eluting balloon catheter, which was a major success. Its PAT grew much higher by 204.5% to Rs. 274.9 mn over FY08, mainly because of higher margins offered by invasive products. Similarly Criticare’s turnover stood at Rs. 1451.1 mn in FY09, while its PAT was Rs. 260 mn. Eurocor & Criticare together contributed 30.4% to the total consolidated revenue & 25.6% to the consolidated PAT. The new invasive products expected to be launched by March 2010 viz; ‘Magical Stent System’, a combination of a drug-eluting balloon with a bare metal stent, and Cobalt Chromium stent, are expected to add to OCIL’s revenues. Also, at present, the certification process for USFDA is underway for stents manufactured by Eurocor. On the completion of the same (expected by December 2010) the largest and the most lucrative market in the world for stents will become open for OCIL & would contribute to the turnover & profitability. Similarly, Criticare turnover & profitability growth is also expected to be very robust with constant new & innovative product launches. As per the Company, Criticare’s size is expected to double over the next two years. Strong marketing & distribution network to improve the brand image & boost the sales Today, OCIL’s devices are distributed & sold in 56 countries in the European Union, North and South America, Middle East, Asia & Asia-Pacific through a combination of direct sales personnel & independent distributors. Its sales and marketing networks in India presently consists of 379 third-party distributors, and 106 sales personnel. OCIL currently has a network of approximately 800 third-party distributors and 42 sales personnel in Europe, United States and other parts of the world. Its subsidiary, AMDL, has been a medical equipment distributor in India for approximately three decades. Its US subsidiary, Mediaid distributes its medical devices internationally & has a wide reach in OCIL’s key markets. Such extensive distribution, sales and service network allows OCIL to be closer to end-users & enables the company to be more responsive to local market demand. Further, in order to promote its products, OCIL uses alternate channels like conducting various seminars & summits and inviting well-known cardialogists to participate. In FY09, OCIL attended or sponsored more than 70 medical exhibitions & seminars. Furthermore, the company conducts on-site demonstrations of its devices at hospitals and training workshops for doctors and other medical professionals on a regular basis and often offers

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new customers its devices at promotional rates. The company also advertises in industry publications that cater to distributors of medical devices, industry experts or doctors. Such multiprong sales and marketing strategy adopted for promoting its products could enable OCIL to improve its brand image & boost its sales going forward. Supplementing new & innovative product launches with aggressive market push For the design & development of new range of products, OCIL has a strong & well-qualified research team. The company constantly launches new & innovative products every year. The products launched are expanded aggressively in new markets.

In FY09, OCIL’s subsidiary Criticare Systems Inc (CSI) launched two new USFDA approved & CE certified vital signs patient monitors - eQuality & nCompass, both developed in-house. These are portable, lightweight & cost effective. CSI also converted a bulky bedside gas bench into a portable module that can be used in CSI’s range of multi parameter monitors & by systems integrator companies in their own branded equipment. Further, OCIL developed sensors to adapt to CSI’s new range of patient monitors. In Q1FY10, Mediaid Inc, the US based 100% subsidiary of OCIL, received approval from USFDA for Model 900, a bedside monitor, and model 960, a vital signs monitor. Both the monitors have been designed and developed by OCIL’s R&D centre at Bengaluru. The subsidiary also received approval for marketing and sale of the Mediaid brand of US FDA-approved Pulse Oximetry (SpO2) products (Patient Monitors & Sensors) in Brazil and surrounding geographies. The Company also announced the receipt of US FDA approval on a next-generation pulse oximeter (SpO2) module, Sequel TM developed by Criticare Systems Inc. (CSI). The approval enables immediate integration of the module into CSI monitors and marketing and sale of the product to OEM manufacturers across the globe. By the end of FY10, OCIL has plans to launch three non-invasive products, which include a gas bench module, modular patient monitoring system & patient monitoring system with networking capability. The gas bench module enables to measure nitrogen & anesthesia gas in patients in addition to vital signs being monitored. A modular patient monitoring system enables moving the system along with the patient & creates logistical ease. The patient monitoring system with network capability helps in monitoring multiple patients at the same time in one machine. OCIL would be the first company to launch these non-invasive products. Recently, CSI has forged a strategic multi-year OEM contract with another US company to privately label its anesthesia monitor for the signed partner. The agreement leverages CSI's unique anesthesia gas monitoring technology in applications that involve the calibration and maintenance of anesthesia equipment in some of the leading hospitals in the US. OCIL’s invasive line of products especially for Eurocor, continues to make inroads in many important cardiovascular markets. The team is also working on a product pipeline that goes beyond cardiovascular applications & the preferred drug in use, in turn expanding the company’s addressable market size. In FY09, Eurocor launched DIOR, a drug eluting balloon catheter, in many Asian countries including India, Singapore & Vietnam. DIOR is a good substitute for DES (Drug Eluting Stent) and it is the best device for treatment of Instant- Restenosis, Side Branches, Small artery Lesions and Bare Metal Stenting. This unique concept received very good response & was equal to the interest & demand generated from the European markets. OCIL expects the product to be approved for & widely used in many more clinical applications like valvuloplasty (plastic repair of a valve, especially a cardiac valve). Eurocor has hired leading marketing agency, VascuMed, to distribute its cardiovascular product in the Ireland & UK. Further, the company organizes various seminars and summits and invites leading cardiologists to participate into it. As a result, new distribution agreements have been signed for countries like Italy, UK, India, Malaysia, Thailand and Mauritius. By the end of FY10, Eurocor is planning to launch two unique products viz; ‘Magical Stent System’, which is a combination of a drug-eluting balloon with a bare metal stent, and Cobalt Chromium stent. In traditional drug stents, the drug is currently being coated with an adhesive using plastic polymers. This covered lesser arterial wall portion & had certain health implications (resulting in controversies). However, in case of Magical, the drug would be coated with biodegradable solution covering three times the arterial wall as compared to that covered by the traditional drug stents. This has good potential going

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forward from medical as well as from side effects angle. The product has already received CE approval & is expected to be yet another path breaking offering from the OCIL group. The company is awaiting sufficient clinical data to launch the product in different markets. Also, Cobalt Chromium stent is better in relation to traditional steel stent in the sense that the wall thickness is less. OCIL would be the first company to launch both these unique invasive products. Besides this, OCIL has also entered into a strategic relationship with North Carolina, US based coating company Micell Technologies for jointly developing new stent & balloon systems for world markets. Such innovative product launches along with their aggressive expansion into new markets is expected to benefit OCIL significantly in terms of sales & profitability.

Consistently enriching shareholders’ wealth with healthy dividend payouts & bonus OCIL is an investor friendly company, which has a good track record of paying consistent dividend since FY01. Though the dividend payouts have been falling over the last two years, the dividend payment has increased significantly from Rs. 123.2 mn in FY06 to Rs. 645.7 mn in FY09. In FY10, we expect the dividend payouts to improve to 35.2% from 31% in FY09 & stabilise thereafter. The chart below gives an overview of dividend payments by OCIL since FY06 along with our FY10 & FY11 projections.

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OCIL has also benefitted the shareholders in the past (in terms of improving dividend yield on the investment made) by giving bonuses regularly since FY03. FY09 has been the only year in which OCIL has skipped the bonus, mainly due to global economic slowdown & higher equity base in FY09. The table given below provides with the bonuses awarded (ratio) by OCIL since FY03:

Year End Bonus Ratio FY03 2:10 FY04 3:10 FY05 5:10 FY06 1:1 FY07 1:2 FY08 7:10

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Strong Revenue growth expected from non-invasive & invasive segments OCIL’s consolidated revenue has grown at a CAGR of 80.2% over FY06-09, which has been driven by robust performance from both its invasive & non-invasive segment. Over the years, OCIL has been regularly expanding its invasive & non-invasive product portfolio & client base through aggressive acquisitions. The acquisition of Eurocor in 2006 & Criticare in 2008 has helped OCIL to increase its business size significantly. Organic growth has also been robust as OCIL has been constantly launching new & innovative products every year & has expanded them aggressively in new markets. OCIL holds 35 patents through its various subsidiaries. This enables it to change design & configuration of a product. Also the IPR can be rented to a third party, which generates royalty. Also, recently, OCIL, through its newly incorporated subsidiary Maxcor Inc has entered into a strategic technology sharing agreement with Micell Technologies for jointly developing new stent & balloon systems (rapamycin based) for world markets. This would complement OCIL’s present range of Paclitaxel based DES & DEB, thus enabling it to further enhance its revenue by addressing additional market scenario. However, in FY10 & FY11, we expect OCIL to grow only organically. The non-invasive segment, which currently contributes 74.9% to the total revenue, would continue to remain a major growth driver. Certain key products in non-invasives like gas benches are expected to drive growth in H2FY10. Further the new launches expected by FY10 under the category is expected to add to the company’s revenues. Eurocor’s existing products (including those launched in FY09) could continue to do well. Further, the new products viz Magical & Cobalt Chromium stent expected to be launched by March 2010 are expected to add fuel to the growth. The lower growth in invasives in Q1FY10 was due to cutbacks in marketing expenditure for the past two quarters. However, in H2FY10 (especially in Q4FY10), the segment is expected to report a strong growth. We expect OCIL’s consolidated turnover to grow at a CAGR of 26.5% over FY09-11. However, the growth estimated is much lower as compared to CAGR growth achieved over FY06-09 mainly on account of higher base & lack of contribution from inorganic acquisitions, which have contributed immensely to the sales & profitability growth in the previous years. The chart below gives an overview of OCIL’s consolidated sales performance since FY07 along with our projections for FY10 & FY11:

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Cost Efficiency coupled with EOU status & decline in the interest cost likely to improve profitability OCIL has invested and intends to continue to invest in operational infrastructure, human resources, process optimization & proprietary technology to integrate its growing business. It plans to reduce its expenditure & improve its cost structure by adding more equipment for certain manufacturing activities in India, where labor & manufacturing costs are lower than North America & Europe. This in turn would allow OCIL to create additional capacity to develop critical components in its US & German facilities. In order to lower its production costs, OCIL has also taken steps to transfer traditionally outsourced manufacturing by its US operations to its manufacturing facilities in India. The company has shifted nearly 35% assemblies, sub-assemblies and testing practices of Criticare Inc to Bangalore. Over the next few months, some more shifting is expected. Once this is done, CSI’s operating margins, which are currently 21%, are expected to improve due to more proportion of low cost production of its products in India. OCIL also outsources certain specialized non-critical functions to third parties, such as cable prep and soldering. However, there is a limit to which the manufacturing can be shifted to India due to approval conditionalities. OCIL’s consolidated operating profit has grown by 82.4% over FY06-09, which has been driven by robust growth in sales organically as well as inorganically along with cost cutting initiatives taken by the company. The operating margins improved from 29.3% in FY08 to 31.65% in FY09. Going forward, OCIL’s competitive cost structure would continue to allow the company to increase its sales volumes & further lower its manufacturing costs as a result of economies of scale, thereby leading to improvement in margins. The consolidated operating profit is expected to grow at a CAGR of 26.7% over FY09-FY11, while the OPM is expected to improve to 31.7% in FY10 & 31.8% in FY11. The operating profit growth estimated is much lower than the CAGR growth achieved over FY06-09, since we expect the sales growth to be lower due to higher base and lack of inorganic participation, which has contributed immensely to the sales & profitability growth in the previous years. The chart given below gives an overview of OCIL’s consolidated Operating Profit performance since FY07 along with our projections for FY10 & FY11.

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Two of the OCIL’s five manufacturing facilities in Bengaluru are currently registered as 100% EOUs, which enjoy tax-free status. Also, the company is not required to pay any customs duty on the import of plant & machinery to be used for the EOUs. The EOU status is these units is valid till March 26, 2010, and May 1, 2011 respectively. Thus the parent company is effectively under MAT (Minimum Alternate Tax) only. However, the effective tax rate on consolidated PBT stood at only 3.4% in FY09, mainly because of the accumulated losses of Criticare Systems & Eurocor.

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OCIL has also set up subsidiary ‘OCI Infrastructure Ltd.’ (in which OCIL has 87.33% stake) to further reduce its tax liability. This company has been allotted 250 acres of land in Hassan, Karnataka for setting up an SEZ. Around Rs. 400 mn has already been spent for land. However, with the extension of Section 10B benefits in Budget 2009, the move to an SEZ has been deferred. In case EOU benefit is not extended beyond March 2011, OCIL could shift its operation there & avail of tax exemption. OCIL’s consolidated PAT has grown at a CAGR of 75.5% over FY06-09, while the PAT margins have declined from 29% in FY07 to 25.5% in FY09. This has been due to significant increase in the interest and depreciation. In FY09, the interest cost increased by 394% over FY08. This was mainly due to term loan of Rs. 2040 mn taken by OCIL to finance Criticare Systems Inc acquisition in April 2008. Even depreciation expense jumped up by 119.6% over FY08. However, OCIL is likely to utilize a part of its proceeds of Rs. 4000 mn raised recently through preferential issue to repay the entire debt taken for Criticare acquisition, which is expected to lower the interest cost significantly going forward. Inspite of decline in interest cost, we expect the PAT margins to decline further to 24.9% in FY10 due to higher depreciation (on account of higher CAPEX). However in FY11, we expect the margins to improve by 122 bps to 26.2%. PAT is expected to grow at a CAGR of 28.1% over FY09-11.

The chart below gives an overview of OCIL’s consolidated PAT performance since FY07 along with our FY10 & FY11 projections:

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Industry Outlook Industry Structure And Development: Healthcare industry is highly working capital intensive, which is driven by sustained innovation, rigorous government regulation and longer payment terms. Whether a multi-bed hospital or a small physician clinic, more than a thousand devices are used in today's medical facilities that strive to meet multifarious patient needs in differing economic landscapes. Government policies make the installation and use of many of these mandatory, rendering them non discretionary in nature. Insurance penetration, private or national, also dictates usage patterns and product design. The speedy progress of medical science and laboratory research and the globalization of diseases and disease control are actively propelling the industry to new levels. US accounts for around 39-40% of global expenditure on medical equipments followed by EU & Japan, which account for 27% & 18% respectively. As per World Health Organisation (WHO) report on primary healthcare status, global healthcare expenditure is estimated to double by 2015.

Two factors that are distinctively influencing the growth in the industry are: i) The baby boomers in North America and the ageing population in Western Europe and Japan. The governments in these geographies are continuously investing in the

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healthcare sector given the fast defining profile of its populace. Medical innovation and product development is also centered in these countries due to the prevalence of lifestyle diseases and high insurance penetration. ii) The emerging market countries like the BRICS, representing nearly 40% of the world population, are demanding greater healthcare infrastructure, benefits and treatment cost effectiveness. The growth in purchasing power & per capita income amongst these people is forcing industry players to develop and design medical devices that cater to their socio-economic and healthcare policy background. US will have leadership position in highly technology-oriented products, while countries like Brazil, China, India & Taiwan would dominate products with low or moderate technology requirement, as in these countries, low cost trained manpower is available in abundance. As per WHO, the medical equipment industry is expected to grow by 10% p.a. over a period of next decade. This will lead to medical equipment market size of USD 428 bn by CY2013.

Patient Monitors & Accessories: The global market for patient monitoring devices is estimated to grow to USD 6 bn by 2011, with multi-parameter patient monitors accounting for over 40% of the market. The global pulse oximetry sensor market is estimated to be approximately USD 880 million & is expected to increase in size when the Global Pulse Oximetry Project, commissioned by the World Health Organization (WHO), kicks off to promote the availability of pulse oximeters in every operating room in the world, including in the public sector facilities of developing countries.

Stents: The global market for coronary stents is expected to grow to approximately USD 8 bn by the end of 2010 & half of which will be used in Japan and North America. The opening up of the angioplasty market for peripheral interventions has expanded the industry size by another USD 2 bn. Approximately 90,000 interventions are carried out in India each year. Minimally invasive treatments, which save patients a lot of time and costs, are increasingly preferred over full-fledged surgeries today. Stents, for the past decade, have been undergoing rapid innovation and constant scrutiny. Angioplasty, as a method of treatment, first evolved from the use of a dilatation balloon and is today, evaluating the clinical efficacies of a drug coated balloon catheter for multiple site applications. Stents are based on a metal alloy like stainless steel, cobalt chromium or platinum. The drug eluting stents are coated with antigrowth factor inhibitors like paclitaxel, sirolimus oreverolimus. The industry is highly patent driven. The major technology developers in this field are concentrated in the US and Western Europe. Catheters: According to the Global Catheters Market, the world catheter market, which was USD 13 bn in 2007, is expected to grow at a compound CAGR of 8.3% to reach USD 19.4 bn by 2012. The market is broken down into segments of cardiovascular, urology, neurovascular, intravenous & specialty applications. Of these sectors, cardiovascular has the largest share of the market at 38%. The urology catheter market has the second largest share of the market at 27% for 2007. The market is currently estimated to be USD 3.5 bn and is expected to reach USD 6.3 bn by 2012, a CAGR of 12.3%. This market is mainly driven by an increase in the number of procedures and new products and materials entering the market. The specialty catheter segment, which comprises catheters used for thermo-dilution, oximetry, and suction catheters, is still in the niche stage and offers good potential for growth.

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Company Background & Business Profile Incorporated in 1992, Mr. Vinod Ramnani promoted Opto Circuits India Ltd. (OCIL) is engaged in the design, development, manufacture & marketing of Medical Electronic Devices and health care products, in both invasive and non-invasive segments. Its range of products includes Digital Thermometers, Pulse Oximeters, Fluid Warmers, Patient monitoring systems, Medical sensors, cardiac stents and catheter systems. The company is a leading provider of healthcare systems and tools to a wide range of OEMs, hospitals & alternate healthcare environments throughout the world. The non-invasive segment accounts for 74.9% of OCIL’s total consolidated revenue, while invasive segment accounts for 21.9%. IT & Commission account for a very small percentage of 3.1% to total sales. In the non-invasive segment, sensors contribute 46% to the total revenue, while 54% comes from sale of patient monitors. Almost 95% of the non-invasive range products are US FDA approved. Under the invasive segment, 87% revenue is generated from sale of stents (Drug eluding stent contributes 74% & bare metal stent contributes 26%), while Catheters / Balloons contribute the remaining 13%. Post the Criticare acquisition in 2008, the revenue contribution of invasive segment has reduced from 23.3% in FY08 to 21.9% in FY09, while the share of non-invasive segment has gone up from 70.5% in FY08 to 74.9% in FY09. The table given below gives an overview of OCIL’s segmental breakup of consolidated turnover over the last three years: (Rs. In Million)

Particulars FY07 FY08 FY09 Non-Invasive 1767 3300 6133.4% Of Net Sales 70.2 70.5 74.9Invasive 486.5 1089.6 1794.4% Of Net Sales 19.3 23.3 21.9Others (IT & Commission) 262.2 291.2 257.4% Of Net Sales 10.4 6.2 3.1Total Net Sales 2515.7 4680.8 8185.20 (Source: Company)

OCIL’s devices are distributed & sold in 56 countries in the European Union, North & South America, Middle East, Asia and Asia-Pacific. Most of its medical devices are sold through a combination of direct sales personnel & independent distributors. OCIL also manufactures devices for OEM customers based on their device designs. OEM sales account for ~10% of the consolidated revenue. OCIL’s sales & marketing networks in India presently consists of 379 third-party distributors, and 106 sales personnel. It presently has a network of approximately 800 third-party distributors & 42 sales personnel in Europe, US & other parts of the world. OCIL’s products are sold under the brand name Mediaid & Criticare. OCIL’s subsidiary, AMDL, has been a medical equipment distributor in India for approximately three decades. Another subsidiary, Mediaid distributes the company’s medical devices internationally & has a wide reach in its key markets.

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OCIL’s Product Profile:

Description & Usage of products Healthcare Products Invasive Stent: A stent is a cylindrical structured product that is placed into a hollow tubular organ to provide artificial support & maintain the patency of the opening. The product is used for the removal of artery blockage. Although it is most often used for cardiovascular functioning, it is also utilized to manage obstructions in cancer patients.

Catheter: A catheter is a flexible tube made of latex, silicone, or teflon that can be inserted into the body creating a channel for the passage of fluid or the entry of a medical device. Its uses include the drainage of urine from the bladder through the urethra or insertion through a blood vessel into the heart for diagnostic purposes. Non-Invasive Pulse Oximeter: A Pulse Oximeter is a medical device that indirectly measures the oxygen saturation of a patient's blood (as opposed to measuring oxygen saturation directly through a blood sample) and changes in blood volume in the skin, producing a photoplethysmograph (optically obtained plethysmograph, a volumetric measurement of an organ). It is often attached to a medical monitor so staff can see a patient's oxygenation at all times.

OCIL Group

Non-Invasive

Patient Monitors Sensors

Pulse Oximeters

Multi Parameter Monitors

Disposable

Reusable

Invasive

Cardiac Peripheral Stents

Drug Eluding Stents

Bare Metal Stents

Drug Eluding Balloons

Information Technology

Catheters

Maintenance of computers PCB Designing Distribution of PCB design tools Distribution of global positioning systems.

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Multiparameter Monitors: These systems are used for monitoring the patient’s vital signs such as ECG, blood pressure, temperature, oxygen level saturations and heart rate. Multi Parameter Monitors are used in intensive care units & specialty clinics. These are now enhanced with added features like connectivity to the network & battery back up.

Pulse Oximeter Sensor: The Pulse Oximeter sensors are used with Pulse Oximeters and with Multi parameter monitors. These products are the interface between the patient & the Monitoring systems. The sensor types depend on the different applications & usage. Broadly there are two types: Disposable & Reusable sensors. a) Disposable sensors are one-time use sensors. These are hygienic, avoid allergies etc. and are gaining importance since healthcare awareness is on a rise. b) Reusable sensors as the name suggests can be reused. Currently it is being used widely but due to hygiene awareness the shift is more towards disposable sensors Cholesterol Monitors: Cholesterol monitor is a portable battery operated instrument, which uses an invasive method of measuring the total cholesterol in the blood. It displays the cholesterol level through an LCD panel. The unit also undertakes health risk analysis based on the cholesterol value to indicate heart attack & cardiac arrest risk for various ages. The instrument has a facility to store the cholesterol value along with the date & time of the measurement in the personalized health card (smart card). Digital Thermometer:

Digital Thermometer is used to measure the body temperature. The conventional mercury based thermometers are banned in US and many other countries. This is mainly because the exposure to mercury is hazardous & unsafe to use. However, Digital thermometers being very safe to use comes with a microprocessor chip and thermistor for enabling quick and accurate measurement of body temperature. OCIL manufactures a range of Digital thermometers with different applications.

Electronic Products Infrared Emitters & Detectors: Infrared emitters are discrete components that emit infrared (invisible) light. These are basic building blocks in opto electronic applications. They consist of light emitting diode (LED) chips with lead frames and gold wiring that are mounted on printed circuit boards (PCBs) or ceramic carriers or in plastic packages. Infrared Detectors are discrete components that detect or receive infrared light. They consist of light sensors such as photodiodes and phototransistors, which are semiconductor chips capable of converting light into electrical signals. OCIL’s sensors are attached to lead frames and are mounted on PCBs or ceramic carriers or in plastic packages.

Photo Sensor, Detector, Emitter Assemblies: These products involve multiple components and combinations of detector and emitters. Opto’s sensor assembles are used to sense motion, objects, speed and distance.

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Facilities OCIL currently has manufacturing facilities in India & US. It also operates a design and development facility in Germany. A brief description of its facilities is given below as follows: Electronics City, Bengaluru: OCIL has five manufacturing facilities in Bengaluru of which three are ISO 9001:2000 certified. In addition to the ISO 9001:2000 certification, one of the facilities is also ISO 14001:2004 certified for its environmental management system, OHSAS 18001:2007 certified for its occupational health and safety management system, ISO 13485:2003 certified, FDA registered and CE certified for design and manufacture of vital signs monitors, disposable and reusable sensors and rigid and flexible digital clinical thermometers and accorded status of a trading house. Also, two manufacturing facilities are currently registered as 100% EOUs, that earn certain export incentives. Their EOU status is valid till March 26, 2010, and May 1, 2011 respectively.

Parwanoo, Himachal Pradesh: This manufacturing facility is ISO 9001:2000 certified & is involved in the manufacture and supply of catheters & stents for urology, gastroenterology, radiology & gynecology applications. Chennai, Tamil Nadu: This manufacturing facility is ISO 9001:2000 & CE certified for the design and manufacture of surgical implants & disposables. The facility is also registered as a small-scale unit for manufacturing and assembling of surgical disposables, orthopedic implants and instrumentation.

Vizag, Andhra Pradesh: This manufacturing facility is present in a SEZ and has been leased by OCIL from the Government of India. Bonn, Germany: This design & development facility is ISO 13485:2003 certified & CE certified for the development, manufacturing and testing of its coronary stent, catheters and balloons. California, United States: This design and development facility is FDA and CE certified for the design and testing of medical devices. Wisconsin, United States: This manufacturing facility is FDA approved, ISO 13485:2003 & CE certified for the design and manufacture of patient monitoring devices. In addition, OCIL’s subsidiary, Opto Infrastructure, has obtained approvals to set-up sector specific SEZs in Hassan & Mysore in Karnataka, which are valid until September 23, 2011 and August 20, 2010, respectively.

Subsidiaries: At present, OCIL has nine subsidiaries having presence across US & Europe, namely, Advanced Micronic Devices Limited, a listed company, Mediaid Inc (US), Altron Industries Pvt. Ltd. (India), Eurocor GmbH (Germany), Devon Innovations Pvt. Ltd., Ormed Medical Technology Ltd., Criticare Inc. (US), Opto Infrastructure & Maxcor Lifescience Inc. The subsidiaries account for 57.4% of OCIL’s total consolidated revenues (in FY09) with majority of contribution coming from Mediaid, Eurocor, Criticare & Advanced Micronic Devices. The chart below gives an overview of OCIL’s subsidiaries, their year of acquisition & their respective businesses:

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Mediaid Inc. USA Mediaid Inc. is a wholly owned subsidiary of OCIL. It was incorporated during 2002 in US. Mediaid has an established distribution network across US, Latin America and Europe. The company has strong design & engineering capability & acts as overseas marketing arm for OCIL. With the introduction of newer models in its product line-up & FDA approval for a range of Pulse Oximetry sensors, Mediaid has garnered more market share. With this acquisition, OCI has access to a range of Patient Monitoring Systems & Veterinary products apart from leveraging Mediaid’s distribution worldwide.

Eurocor Gmbh, Germany In 2006, OCIL acquired 100% stake in Eurocor for Rs. 609 mn. The subsidiary is a European Life Sciences Technology corporation specializing in the research, development and manufacture of interventional cardiology products. Eurocor specializes in coronary stent technology and special cardiovascular devices. Its product portfolio includes drug eluting stent, bare metal stent, a coronary dilatation catheter& a drug-eluting catheter. It has got a strong distribution network in 35 countries worldwide. The acquisition of Eurocor has added Invasive medical products (stents) to OCIL’s portfolio. Criticare Systems Inc. (CSI), USA CSI is a wholly-owned subsidiary of OCIL, which was acquired in 2008 for $70 mn. CSI is an international medical device company, which manufactures Pulse Oximeters, Vital Sign

OCIL

Advanced Micronic Devices Ltd. (59.71% Indian Subsidiary)

Mediaid Inc., USA (100% Subsidiary)

Altron Industries Pvt. Ltd. (100% Subsidiary)

Eurocor Inc GmbH, Germany (100% Subsidiary)

Ormed Medical Techno Ltd. (100% Indian Subsidiary)

Devon Innovations Pvt. Ltd. (100% Indian Subsidiary)

Opto Infrastructure Ltd. (87.33% Indian Subsidiary)

Criticare Inc., USA (100% Subsidiary)

Maxcor Lifescience Inc, USA (100% Subsidiary)

Acquisition Year: 2001 Business: Producing Medical & GPSProducts

Acquisition Year: 2002 Business: Patient Monitory Systems &Veterinary Products

Acquisition Year: 2004 Business: Engaged in ContractManufacturing

Acquisition Year: 2006 Business: Stents technology & specialcardiovascular devices

Acquisition Year: 2007 Business: Orthopedic Prosthesis &Surgical Disposals

Acquisition Year: 2007 Business: Polymer based medicalCatheters & related products

Year of Incorporation: 2008 Business: Incorporated for SEZdevelopment

Acquisition Year: 2008 Business: Pulse Oximeters, Vital Sign &Anesthesia Gas Monitors

Year of Incorporation: 2008 Business: Cardiovascular InterventionDevices.

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Monitors & Anesthesia Gas Monitors. It has well established distributor network across the globe. This acquisition has helped CSI to expand in the US markets. Advanced Micronic Devices Ltd. (AMDL), India Based in Bangalore, AMDL is engaged in manufacturing & marketing of critical cardiac-care and other health-care equipments. It is also in the business of information technology consulting, global positioning systems & electronic design automative services in India. AMDL has an R&D set-up with a full-fledged product design division & also acts as domestic marketing arm of OCIL. It has marketing offices at all the important metros in India. It has huge customer base including state & central government hospitals, banks & research institutes. With about 59.7% stake in AMDL, OCIL can leverage the company’s well-settled & widespread distribution/ service network. Devon Innovations Pvt. Ltd. (DIPL), India Devon Innovations, a 100% subsidiary of OCIL is engaged in the business of manufacture and sale of polymer based medical catheters and related products. ORMED Medical Technology Ltd., India ORMED manufactures specific range of Orthopaedic products. The main products include total hip replacement items, both stainless steel stems & UHMW-Polyethylene Cups. Altron Industries Pvt Ltd (AIPT), India AIPT is an ISO certified company based in Bangalore with ability to do the contract manufacturing. Opto Infrastructure Ltd. (OIL) Bengaluru-based OIL was incorporated for SEZ development. OCIL has 87.33% stake in the same. The subsidiary was allotted 250 acres of SEZ land in Hassan, Karnataka by the government of Karnataka.

Maxcor Lifescience Inc. (MLI), USA In 2008, OCIL incorporated MLI as 100% subsidiary for development of Cardiovascular Intervention Devices. It has signed an agreement with New Carolina US-based Micell Technologies to develop rapamycin-coated drug eluting balloon & stent systems.

Geographical Spread of Revenue: OCIL’s is predominantly an exports player accounting for 97% of its total consolidated revenues. Under the healthcare segment, US & Rest of the World (ROW) each account for 40% of OCIL’s non-invasive product exports, while Europe accounts for the balance 20%. Out of the total invasive products export, US contributes 20%, while Europe & ROW account for 40% each. The pie charts below give an overview of geographical revenue distribution of OCIL’s invasive & non-invasive products under the healthcare segment:

Invasive Segment Non-Invasive Segment

% contribution to revenueUS

20%Rest of World40%

Europe40%

% contribution to revenue

Europe20%

Rest of World40%

US40%

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Equity Dilution through QIP placement & issue of warrants: OCIL’s current equity is Rs. 1614.7 mn. Recently in July 2009, the company issued 60 lacs convertible warrants at Rs. 210, which amounts to Rs. 1260 mn. Also in September 2009, OCIL raised around Rs. 4000 mn through the QIP placement by issuing 21.4 mn equity shares at Rs. 186.65. Post the QIP issue, OCIL’s equity would be Rs. 1829 mn in FY10. In FY11, it would be diluted further to Rs. 1889 mn, post the conversion of warrants. We have assumed 100% warrants conversion in FY11.

Competitive Profile

The medical devices and healthcare industries are characterized by rapid device development, technological advances and intense competition. Across all device lines and device tiers, OCIL faces direct competition both domestically & internationally. The company competes based on factors such as price, value, customer support, brand recognition, reputation, device functionality, reliability & compatibility. OCIL’s competitors include large multinational companies. It also faces competition from companies that have local operations in the markets in which it sell its devices.

Non-Invasive devices: For domestic and international sales of patient monitoring devices, OCIL’s primary competitors are Phillips, GE Healthcare, Siemens Medical, Dragger GmbH, Mindray & Space Labs.

Invasive cardiac devices: For domestic and international sales of stents & balloons, OCIL’s primary competitors are Johnson & Johnson (Cordis), Boston Scientific, Medtronic & Abbott Laboratories.

Invasive non-cardiac devices: The primary markets for non-cardiac invasive devices are India, Bangladesh, Sri Lanka and the Middle East. OCIL’s competitors in those markets include Boston Scientific, Cook Medical and a number of local manufacturers.

Risks and Concerns OCIL operates in multiple geographies spread across countries, which increases the

geo-political and macro economic risks, though to some extent it reduces the risks of business concentration in a specific area.

OCIL’s business requires a significant amount of working capital to finance the purchase of raw materials, consumables & expanding the business. The company makes around 100 types of products with multiple variants in some of the key categories. This makes it important for OCIL to ensure an extensive inventory to effectively service its distributors & direct customers. Hence the average inventory-holding period of OCIL is higher. The significant credit lines that are typically extended by OCIL to direct & OEM customers also affect the working capital requirements. At present, OCIL’s debtors’ collection period is 181 days (in FY09). Failure and / or delay to recover amounts from the distributors could adversely affect the results of OCIL’s operations.

Any changes in Government policies, regarding excise duty, service tax, import and export policies / duty, income tax, fringe benefit tax, VAT and any other Central/ State levy could affect the working results of OCIL.

Delay in new product launches due to hurdles in obtaining approvals from regulatory authorities (mainly from highly regulated markets like US & Europe) could affect OCIL’s growth in revenues.

OCIL operates in an Industry, which is exposed to product obsolescence, with high cost. The sector is also exposed to litigation risks arising out of patent infringements.

OCIL is predominantly an exports player with nearly 97% of its revenues being derived in USD & Euro. Its domestic revenues are almost non-existent. This exposes the company to foreign exchange fluctuations. However, this risk is mitigated to some extent by the fact that the company's import is also substantial (around 98.7% of total RM cost & around 20% of total sales).

In FY09, OCIL’s consolidated revenue increased substantially mainly on account of acquisition of US based Criticare in 2008. Hence the growth was largely inorganic. It is to be noted that lately, the standalone results have not been very impressive. In Q1FY10, the growth of 30% (consolidated) was mainly organic (since there have been no further acquisitions) & it was the lowest growth reported in the last nine

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quarters. Going forward, it could be difficult for OCIL to maintain higher growth rate, if the company does not expand inorganically.

Exports by OCIL’s 100% EOU units enjoy tax-free status. At present, the government has recommended an extension of tax incentives for EOUs by one more year (till March 2011). However, once such incentives are discontinued, OCIL’s tax rate could increase significantly, which would adversely affect its profitability.

OCIL’s profits for a period could get impacted positively or negatively depending upon the amount of R&D & product development expenses capitalized and the amount that is amortized during that period.

Sales of OCIL’s invasive segment are dependant on the marketing & promotion expenses incurred in the same & the previous quarter. This discretionary spend could impact the sales & profits of this segment from quarter to quarter.

There is goodwill amount of Rs. 2375 mn in OCIL’s FY09 consolidated balance sheet, of which Rs. 1940 mn has been created on acquisition of Criticare. Going forward, there may be a requirement to impair the goodwill in case the performance of Criticare deteriorates sharply.

Results Update (Quarterly) Standalone: Y-o-Y OCIL’s standalone Q1FY10 results were not very impressive. While the sales & operating profit were up by 19.2% & 25.5%, PAT (Adjusted) fell by 7.2%. OPM improved from 40.5% in Q1FY09 to 42.6% in Q1FY10. This was on account of lower expenditure as a % to sales, which declined from 59.5% in Q1FY09 to 57.4% in Q1FY10. Employee cost, administrative & selling expenses & other expenses fell by 13.8%, 9.4% & 24.3% respectively. However, significant increase in the interest cost (which rose 368.9% from Rs. 27.3 mn in Q1FY09 to Rs. 128 mn in Q1FY10) led to decline in PAT. PAT margins reduced substantially from 37.3% in Q1FY09 to 29%. Q-o-Q Sequentially, the results were disappointing, since net sales decreased by 18.2%, while operating profit & PAT (Adj.) fell 9.7% & 31.4% respectively. However, the total expenditure as a % of sales fell by 400 bps from 61.4% & OPM improved by 400 bps from 38.6%. Also, interest & depreciation cost reduced by 38.6% & 1.4% respectively. However PAT (Adj.) fell sharply on account of significant decline in the other income, which reduced by 98.6% from Rs. 160 mn in Q4FY09 to Rs. 2.2 mn. PAT margins (Adj.) reduced by 560 bps from 34.6%. Consolidated: Y-o-Y OCIL reported decent Q1FY10 numbers on consolidated basis. Net sales grew by 29.9%. The non-invasive segment grew by 34%, accounting for 78% of total sales, while the invasive segment grew by only 22%, contributing 21% total sales. The lower growth in invasives was due to cutbacks in marketing expenditure for the past two quarters. Also, it is to be noted that growth reported was largely organic in nature & was the lowest since the last nine quarters due to acquisition effect. Operating profit growth was much better at 38.9%. This was on account of decline in selling & admin expenses by 31.7% (due to lower expenditure on participation in conferences) & lower growth of 10.6% in other expenses. However, employee cost increased by 56.7% over Q1FY09. Total expenditure as % to net sales fell by 210 bps to 66.6%. However, depreciation increased by 227.4%, putting some pressure on PAT (Adj.), which increased by 30.7%. PAT margins (Adj.) increased marginally by 10 bps to 25.7%. Q-o-Q Sequentially, the results were dull, since net sales increased marginally by 8.1%, while operating profit & PAT (Adj.) rose marginally by 9.2% & 2.3% respectively. The total expenditure as a % of sales fell by 30 bps from 66.9%. OPM improved by 30 bps from 33.1%. PAT margins (Adj.) fell by 150 bps from 27.2% in Q4FY09.

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Conclusion We expect OCIL’s consolidated turnover & PAT to grow at a CAGR of 26.5% & 28.1% respectively over FY09-FY11 on the back of strong performance expected from both the invasive & non-invasive segment. Being a market leader in the medical equipment industry with diverse range of products, OCIL is expected to leverage its strength & exploit the potential of the industry, which is expected to grow at CAGR of 10% for the next decade. Acquisitions & alliances have enabled OCIL to expand its invasive & non-invasive product portfolio & client base. Though OCIL has not made acquisitions since April 2008, we feel that the company would continue to look out for opportunities to grow inorganically. In the meanwhile, deeper & wider integration of the acquired companies could lead to growth in topline & bottomline. Eurocor & Criticare are expected to perform well over the next two years & are expected to be the major catalyst for OCIL’s growth. The new launches expected this fiscal (gas bench module, modular patient monitoring system & patient monitoring system with networking capability) under the non-invasive category & Eurocor’s unique invasive products viz; ‘Magical’ (which is a combination of a drug-eluting balloon with a bare metal stent) & Cobalt Chromium stent are expected to add to OCIL’s revenue going forward. Also the strategic technology sharing agreement entered into by OCIL recently with US based Micell Technologies for jointly developing new stent & balloon systems for world markets would enable OCIL to further enhance its revenue. OCIL has shifted nearly 35% assemblies, sub-assemblies & testing practices of Criticare Inc from US to Bangalore, which is likely to lower its production costs & help in improving the consolidated operating margins. Further, the EOU status & expected decline in interest cost (due to repayment of term loan of Rs. 2040 mn taken for Criticare acquisition out of the recently raised QIP funds of Rs. 4000 mn) is expected to improve the profitability further. Also, OCIL has also set up 87.33% subsidiary ‘OCI Infrastructure Ltd’ for setting up an SEZ. In case EOU benefit is not extended beyond FY11, OCIL could shift its operation there & avail of tax exemption. At the CMP of Rs. 204.2, OCIL is trading at 14.7xFY10E & 11.3xFY11E EPS. OCIL has been a consistent wealth creator for shareholders through regular dividends & bonuses. At CMP, the scrip offers dividend yield of 2.4%. Looking at its future growth prospects, we feel that stock has the potential to trade at 13.5xFY11E EPS, which gives a price target of Rs. 244. Hence we recommend investors to buy this scrip at current levels and to average it on dips in the price band of Rs. 170-180 for the above mentioned price target over the next two to three quarters.

Quarterly Financial Performance: Standalone:

(Rs. In Million) Particulars Q1FY10 Q1FY09 VAR [%] Q4FY09 VAR [%] Q3FY09 Q2FY09

Net Sales 981.1 823.4 19.2 1199.2 -18.2 946.1 1043.6Other Income 2.2 3.4 -35.3 160.0 -98.6 67.8 48.1Total Income 983.3 826.8 18.9 1359.2 -27.7 1013.9 1091.7Total Expenditure 562.7 490.0 14.8 736.1 -23.6 554.7 663.4PBIDT 420.6 336.8 24.9 623.1 -32.5 459.2 428.3Interest 128.0 27.3 368.9 208.3 -38.6 139.8 35.1Depreciation 7.3 6.7 9.0 7.4 -1.4 7.4 7.2PBT 285.3 302.8 -5.8 407.4 -30.0 312.0 386.0Tax (incl. DT & FBT) 0.4 0.3 33.3 5.0 -92.0 0.2 0.2Reported PAT 284.9 302.5 -5.8 402.4 -29.2 311.8 385.8Extra-ordinary Items 0.0 -4.6 -100.0 -12.8 -100.0 0.0 0.0Adjusted PAT 284.9 307.1 -7.2 415.2 -31.4 311.8 385.8EPS 1.8 3.3 -45.9 2.6 -31.4 1.9 4.1Equity 1614.7 941.7 71.5 1614.7 0.0 1600.9 941.7Face Value 10.0 10.0 0.0 10.0 0.0 10.0 10.0OPM (%) 42.6 40.5 5.3 38.6 10.4 41.4 36.4PATM (%) 29.0 37.3 -22.1 34.6 -16.1 33.0 37.0 (Source: Company)

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Consolidated: (Rs. In Million)

Particulars Q1FY10 Q1FY09 VAR % Q4FY09 VAR [%] Q3FY09 Q2FY09 Net Sales 2303.6 1773.7 29.9 2131.2 8.1 2110.2 2170.2Other Income 4.4 22 -80.0 135.6 -96.8 96.3 33.7Total Income 2308 1795.7 28.5 2266.8 1.8 2206.5 2203.9Total Expenditure 1533.4 1219.1 25.8 1426.2 7.5 1501.7 1480PBIDT 774.6 576.6 34.3 840.6 -7.9 704.8 723.9Interest 134.7 109 23.6 155.5 -13.4 146.6 125.8Depreciation 44.2 13.5 227.4 73.2 -39.6 27 24.5PBT 595.7 454.1 31.2 611.9 -2.6 531.2 573.6Tax (incl. DT & FBT) 2.9 4.2 -31.0 57.4 -94.9 4.9 6.3Reported PAT 592.8 449.9 31.8 554.5 6.9 526.3 567.3Extra-ordinary Items 0 -4.6 -100.0 -25.4 -100.0 -0.4 -0.3Minority Interest 0.1 1 -90.0 0.8 -87.5 0 0Adjusted PAT 592.7 453.5 30.7 579.1 2.3 526.7 567.6EPS 3.7 4.8 -23.8 3.6 2.3 3.3 6.0Equity 1614.7 941.7 71.5 1614.7 0.0 1600.9 941.7FV 10 10 0.0 10 0.0 10 10OPM (%) 33.4 31.3 6.9 33.1 1.1 28.8 31.8PATM (%) 25.7 25.6 0.6 27.2 -5.3 25.0 26.2

(Source: Company) Financial Estimations: (Consolidated) Profit & Loss A/c

(Rs. In Million) YE March FY07 FY08 FY09 FY10E FY11E

Net Sales 2516 4681 8185 10559 13093Other Income 37 171 288 86 78Total Income 2552 4852 8473 10645 13171Manufacturing Expenses 1303 2753 4624 5955 7371Employee Cost 151 211 401 549 694Admin & Marketing Expenses 236 345 570 707 871Total Operating Expenses 1690 3309 5595 7212 8936EBITDA (incl. other inc) 862 1543 2878 3433 4235EBITDA (excl. other inc) 826 1372 2591 3347 4157Interest 74 109 537 492 386Depreciation 24 63 138 205 289Profit Before Tax 764 1371 2203 2737 3559Tax (including FBT & DT) 32 58 110 96 125PAT (incl. Minority interest) 732 1313 2093 2641 3435Minority Interest 2 7 6 8 10Adj. PAT (net of minority interest) 731 1307 2087 2633 3425

(Source: Company, HDFC Sec Estimates) Balance Sheet

(Rs. In Million) YE March FY07 FY08 FY09 FY10E FY11E

Share Capital 616 942 1615 1829 1889Equity Warrants 0 39.6 0 315 0Reserves & Surplus 1509 2364 3551 8900 12199Shareholders Funds 2125 3346 5166 11044 14088Minority Interest 72.80 79.40 134.00 141.92 152.23Secured Loans 640 938 5363 2145 2574Unsecured Loans 5 74 16 19 17Loan Funds 645 1012 5379 2165 2592Deferred Tax Liability 5 5 3 2 1Capital Employed 2848 4442 10682 13353 16833Gross Block 607 778 2661 3833 4819Less: Depreciation 149 222 666 871 1160

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Net Block 459 556 1995 2962 3659CWIP 12 17 172 86 95Goodwill 338 431 2375 2375 2375Investments 3 3 3 3 3Inventories 1055 1456 2305 2893 3587Sundry Debtors 1187 2376 4060 5352 6636Cash & Bank 385 686 913 1600 2756Loans & Adv. & other current assets 417 558 2565 3335 4201Total Current Assets 3044 5075 9843 13179 17181Current Liabilities & Provisions 1010 1901 3709 5253 6479Working Capital 2034 3174 6134 7927 10702Miscellaneous Exp. not w/off 2 261 3 0 0Capital Deployed 2848 4442 10682 13353 16833

(Source: Company, HDFC Sec Estimates) Ratio Analysis

YE March FY07 FY08 FY09 FY10E FY11E FD EPS (Rs.) 3.9 6.9 11.0 13.9 18.1PE (x) 52.8 29.5 18.5 14.7 11.3FD Book Value (Rs.) 11.2 17.7 27.3 58.5 74.6P/BV (x) 18.2 11.5 7.5 3.5 2.7OPM (%) 32.8 29.3 31.6 31.7 31.8PBT (%) 30.4 29.3 26.9 25.9 27.2NPM (%) 29.0 27.9 25.5 24.9 26.2ROCE (%) 29.5 33.4 25.7 24.2 23.4RONW (%) 34.4 39.1 40.4 23.8 24.3Debt-Equity 0.3 0.3 1.0 0.2 0.2Current Ratio 3.0 2.7 2.7 2.5 2.7Mcap/Sales (x) 15.3 8.2 4.7 3.7 2.9EV/EBITDA 47.0 28.3 16.6 11.7 9.2 (Source: Company, HDFC Sec Estimates) Cash Flow Statement (Rs. In Million)

YE March FY07 FY08 FY09 FY10E FY11E Profit Before Tax 764 1371 2203 2737 3559Net Opt Cash Flow -88 403 1153 2234 2490Net Cash from Investing Activities -304 -498 -4175 -1086 -995Net Cash from Financing Activities 675 397 3250 -461 -340Cash & Cash Equivalents 385 686 913 1600 2756Net Inc/(Dec) in Cash 283 301 228 687 1156

(Source: Company, HDFC Sec Estimates)

Analyst: Mehernosh K. Panthaki ([email protected]) RETAIL RESEARCH Tel: (022) 6661 1700 Fax: (022) 2496 5066 Corporate OfficeHDFC Securities Ltd. Trade World, C. Wing, 1st Floor, Kamala Mills Compound, Senapati Bapat Marg, Lower Parel, Mumbai 400 013 Phone: (022) 66611700 Fax: (022) 2496 5066 Website: www.hdfcsec.com Email: [email protected]

Disclaimer: This document has been prepared by HDFC Securities Limited and is meant for sole use by the recipient and not for circulation. Thisdocument is not to be reported or copied or made available to others. It should not be considered to be taken as an offer to sell or a solicitation to buyany security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not berelied upon as such. We may have from time to time positions or options on, and buy and sell securities referred to herein. We may from time to timesolicit from, or perform investment banking, or other services for, any company mentioned in this document. This report is intended for Retail Clients onlyand not for any other category of clients, including, but not limited to, Institutional Clients