TRANSCRIPT Conference Call of Opto Circuits (India ... Concall Transcript.pdf · absolute numbers per day sale is now about 8 crores a day. So the absolute number in rupee terms will

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TRANSCRIPT Conference Call of Opto Circuits (India) Limited 16th August 2012, 4:00 PM IST Moderator: Good evening ladies and gentlemen. I am Daniel, moderator for this conference. Welcome to the conference call of Opto Circuits India Limited. We have with us today Ms. Shalaka Parab from Investor Relations at Opto Circuits India Limited. At this moment, all participants are in listen only mode. Later, we will conduct a question and answer session. At that time, if you have a question, please press * and 1 on your telephone key pad. Please note this conference is recorded. I would now like to hand over the conference to Ms. Parab. Go ahead ma’am. Shalaka Parab: Thanks Daniel. Thank you investors and analysts for joining the Opto Circuits Q1FY13 earnings call today. The Opto team here is represented by Mr. Vinod Ramnani, Chairman and Managing Director, Mr. Jayesh Patel, Co-founder and Director, and Mr. Valiveti Bhaskar, Director-Finance. Please note that today’s call is copyrighted material of Opto Circuits India Limited and no part of the call’s transcript can be reproduced or attributed to without the company’s explicit written consent. I would also like to remind everyone that statements made in this call may be forward looking statements within the meaning of applicable securities’ laws, and regulations. Actual results could differ from those expressed or implied. The duration of this evening’s call would be approximately one hour. Mr. Ramnani will begin with an update on the business performance for the first quarter of FY13 and he will follow it with a few remarks on some of the recent developments. Finally, we will open the forum for questions. Mr. Ramnani. Vinod Ramnani: Good evening everybody and thank you for joining us. Let me just begin today with some comments on our first quarter performance. I am happy to report a 37% year-on-year growth in net sales for the first quarter ending 30th of June 2012. We achieved revenues of Rs.715 crores on the back of excellent global sales across our two main segments. The non-invasive segment that is the equipment and consumables slice of our business achieved a year-on-year growth of 38%, led by robust sales of monitors and monitoring consumables. On the invasive front, we grew 33% year-on-year, an indication of improved acceptability of our drug-coated balloon products. Despite the challenging economic environment in most mature markets, we made significant strides in emerging markets, which as per last the fiscal performance, made for nearly 25% of our consolidated sales. I am especially excited about our team’s effort towards increasing market share in India through our subsidiary AMDL, which posted year-on-year revenue growth of 50% - the highest amongst all group entities.

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Our US presence, largely represented by Cardiac Science, Criticare, and Unetixs, all part of Opto Cardio Care Ltd., posted a combined year-on-year sales growth of 48% and its contribution to the group operating profit has gone up substantially. I must congratulate my team for achieving these numbers amidst a re-organization and restructuring phase and at a time when many large competitors have posted a decline in performance. In Q1 ’13 our gross profit grew 30%, our core operating profit grew 33%, and our profit after tax grew 19%. Our gross margins, which dropped by 300 basis points year-on-year, absorbed all research and development expenses within the group; this follows a board approval to expend all such costs without capitalizing any into the Balance Sheet. Our net profit margins of 19% generated an EPS of Rs.5.70 on the new equity of 24.23 crore shares. We urge you to avoid a quarter on quarter comparison of the PAT margin & EPS as in Q4’12, we realised a deferred tax asset of Rs. 81 crs., a trend not comparable to other quarters. The ICRA re-rating of the fund based facilities available to the Standalone entity during the period FY2010-11 has been a rude shock to us. We disengaged from the services of the agency on 7th July 2012, as evidenced by a letter we sent in this regard. Subsequently, we signed on CRISIL to rate our borrowing programme. CRISIL will be issuing its report shortly. In the meanwhile, we have been informed that a delay in paying even one Rupee or by one day can effect a re-rating or a downgrade. In this context, we would like to reiterate that we have been up to date in our interest and principal payments and general financial commitments to our lenders. In Q1’13 itself, we have repaid Rs. 68 crores. Our lenders will vouch for the fact that our accounts with them are regular and up to date. Most of them have attributed us excellent ratings internally. Here, I would like to highlight that the Opto Group is supported by some of the best multi-national banks in each of the geographies that we work in. Some of the reputed lenders we work with are SBI, DBS, Standard Chartered, IndusInd Bank and HDFC Bank. We are also very fortunate to be part of a highly defensive industry that appeals to bankers across the globe. We are, quite often, approached by leading banks to begin new relationships. On another note, I would like to address the issue of malicious rumours and defamatory statements that have been doing the rounds for the past few days. I want to put on record that as a policy, we do not react to market rumours & speculations. But, we believe that, in recent times, there has been deliberate and conscious manipulation of our stock price through such methods. To protect stakeholder wealth, it has now become imperative for the Board to bring this to the attention of the regulators and investigation agencies. We do not believe that the current market-capitalization of the Opto Circuits Group is in any way representative of its intrinsic strength of performance and industry position. We are

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a company with a 70%+ presence in the regulated markets and one that deploys products to government & semi-government institutions as well as defense establishments. We are subject to supplier and financial audits by internationally-accredited firms. I believe, therefore, our organization does not merit such treatment in its homeground. Before I conclude my remarks, I would like to communicate a few words to the investors through this conference. The growth this quarter is on our organic business. The last couple years, Opto Circuits has been growing by acquiring companies because at that point of time we believed that there were some links which could use to bridge gaps. We are now addressing a multi-billion dollar market. So, the growth, essentially, is now coming from within. This is an organic growth. I also think we have enough on the plate right now. We are not really looking for any more acquisitions till we maximize our full potential and we are just working to consolidate our business and trying to bring new products through our own R&D, leveraging our organic growth structure within a huge market. We will maximize what we have through a consolidation phase and we are very much on track. I think this will continue and you will see more organic growth in a very decent way going forward. Thank you very much. Now, the forum is open for questions from your side. Thank you once again. Question and Answer Session

Moderator: Thank you sir. Ladies and gentlemen, we will now begin the question and answer session. If you have a question, please press * and 1 on your telephone keypad and wait for your turn to ask the question. If your question has been answered before your turn and you wish to withdraw your request, you may do so by pressing * and 1 again. The first question comes from Sanjay Satapathy from Merrill Lynch. Go ahead sir. Sanjay Satapathy: Hi sir. First of all would like to know about this CRISIL rating, when do you think CRISIL will issue its rating? That’s one, and the other thing is that when you have already appointed CRISIL, would it have been possible to kind of have a smooth transition from ICRA to CRISIL rating? Valiveti Bhaskar: CRISIL will be giving us a report by the 1st week of September and we did communicate to ICRA that we are going to be hiring CRISIL and we did expect a smooth transition.

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Sanjay Satapathy: Okay. And sir my other question that I wanted to understand, is that over the years we have seen improvement in this receivables and inventory days, but our cash flows continues to be fairly negative because our other current assets have been going up quite sharply, which we really don’t understand and also the CAPEX has been pretty strong. And Mr. Ramnani has already informed that we are not looking at much of acquisitions; can you give us what kind of cash flows we can look forward to in fiscal ’13 and ’14 may be? Valiveti Bhaskar: Yeah, basically if you look at the number of days of net working capital that has been coming down, but please don’t forget Sanjay that the absolute numbers per day sale is now about 8 crores a day. So the absolute number in rupee terms will go up, and also you have to take into account the exchange rate has gone against us quite badly, about 20%, so the absolute number will go up. The number of working days, the effort is to bring it down lower and lower. If you look at the CAPEX, the CAPEX is not for new acquisitions, the CAPEX is primarily for setting up manufacturing facilities for the invasive side of the business and also to set up new factories in India to move the manufacturing out of the US into India, especially what need not be manufactured in the US, we can bring it to India. So the CAPEX is only for that and not for acquisition of technologies or acquisition of companies. Sanjay Satapathy: No, what I want to understand is that what kind of cash flows that one can really look forward to? When we will turn free cash flow positive and by what extent, do you have some kind of visibility on that? Valiveti Bhaskar: Sanjay that will take some time, because like we have already mentioned in the earlier call, we will be doing CAPEX for this year and next year till all the manufacturing lines are set up there will be a CAPEX involved. Sanjay Satapathy: And how much is that? Valiveti Bhaskar: There will be CAPEX involved for this year and next year, but we will be slightly cash positive. Exact numbers we will find out as we go along Sanjay. Sanjay Satapathy: What is the CAPEX plan? Valiveti Bhaskar: Roughly between 40 and 50 million dollars, of which some of it has already been done and the rest of it will be done. We have paid advances towards equipment last year. So this year between 40 and 50 million is the CAPEX plan.

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Sanjay Satapathy: Understood. And sir, my last question is that, it is fantastic to see your margin being so much better despite providing for 20 crore of R&D expenses, and also your top line has grown so much. How much of the benefit in top line as well as margin is because of the rupee depreciation, is it possible to give that? Valiveti Bhaskar: Yeah. It is roughly about 10% is because of the rupee depreciation and there has been a real growth of about 22%. Sanjay Satapathy: And that is sustainable? Valiveti Bhaskar: It is sustainable. I hope the rupee doesn’t go too much against us, then. It is definitely sustainable because we are definitely entering a lot of new markets Sanjay. Sanjay Satapathy: Thanks a lot and wish you all the best. Valiveti Bhaskar: Thanks Sanjay. Moderator: Thank you sir. The next question comes from Prakash Kapadia from I-Alpha Enterprises. Go ahead sir. Prakash Kapadia: Thanks for taking my question. Congrats on good numbers. Valiveti Bhaskar: Thanks Prakash. Prakash Kapadia: How are you? Valiveti Bhaskar: I am doing good, thank you. Prakash Kapadia: Just had a few questions, we mentioned about the change in accounting of the R&D expenses, so this would be for the entire product development expenses for the entire group or it is just pertaining to Opto Cardiac Care? Going forward how will this pan out? Valiveti Bhaskar: No, it is for the entire group, in fact from last year for the invasive segment we have already expensed out all the R&D spend and from this year we have started for entire group, it includes Criticare, Cardiac and all these companies. Prakash Kapadia: Okay. So last year how much was this amount, which you expensed because we have not got the annual report, I think…

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Valiveti Bhaskar: R&D spend for FY11-12 was 83 crores, out of which 76 crores was Capex and the rest was expensed through P&L. Prakash Kapadia: Okay. And you know, we are seeing interest costs have gone up year-on-year, is it because the cost of money has gone up because I think there has not been much of change in debt or has that debt also been increased? Valiveti Bhaskar: The cost of debt is 6.76% and it depends on the currency; there could be some rupee borrowings. See, you will have to take trending on a year-on-year basis. In some places where you have got to take on a dollar…the bulk of the 80% of the debt is in dollars. Prakash Kapadia: Okay. So it is basically the cost of money and some FOREX related, that is why it has gone up, not because the debt has actually moved up? Valiveti Bhaskar: No. Debt in fact has come down, yeah. Prakash Kapadia: And you know I see that the effective tax rate has gone up on a consolidated basis, but we are not seeing that on the standalone basis, so is the standalone basis under MAT, are we providing for MAT, and you know, what is the steady state tax rate over the next two years? Valiveti Bhaskar: No. In MAT it is provided, but MAT is not taken as an expense. It is still taken as below line item, this MAT what you are seeing here, is actual tax paid up in a few places, including Malaysia. So we see effective tax rate, like a guide for the whole year, don’t go quarter-on-quarter, you will have to go for the whole year, we still guide between 8-10%. Prakash Kapadia: But you know, there has been no provision in the standalone business. Valiveti Bhaskar: Because that is below the line item. Rs. 9 crores has been provided, it is below the line because you don’t have to provide for it in your P&L. Prakash Kapadia: Sir, MAT would figure as a cash flow item, I understand that, but we are not providing that and then reversing it through the balance sheet. Valiveti Bhaskar: We will have to check with our auditors, but that is how it is done Prakash. Rs. 9 crores have been provided for this year and it comes as below the line, you will see it in the balance sheet and you will probably see it in the September balance sheet, whatever is provided for these two quarters.

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Prakash Kapadia: And lastly we have seen staff expenses, which were around 4.5 - 4.6% in FY10 are now around 8% in FY12, so where do we see them from here on? Valiveti Bhaskar: That is primarily because the R&D expenditure used to be classified under staff expenses, marketing expenses, some expenses would have come under SG&A. Today, these expenses are no longer capitalized and they have straight gone into the regular lines of say staffing, general sales and administration. So all these line items have gone up to the extent of the R&D spend. Earlier it was taken out and capitalized as per the Indian GAAP, not any more. Prakash Kapadia: So, you know the staff cost includes some of these capitalized amounts, is that what you are saying? Valiveti Bhaskar: No, now we have not capitalized, so the entire amount has been expensed out. For example, say there are 150 people in the R&D department, earlier the salaries of this R&D department used to be taken out and capitalized. From this quarter on, no R&D expenditure is capitalized. That is the reason we find that number higher. Going forward you can take this to be more or less the numbers. Prakash Kapadia: And 20 crores, which we expensed through the P&L this quarter is not part of the depreciation and amortization, it is a part of staff cost and manufacturing expenses? Valiveti Bhaskar: No. It is not in manufacturing actually, it will be SG&A, but some small portion could have gone into manufacturing. For example, a few 100 samples that were tested out and things like that have gone into manufacturing. Prakash Kapadia: Fine, and lastly if you could throw some light on some sales reach, distribution, synergy or cross-selling opportunity, given that cardiac products are good, so based on our existing sales network and you know infrastructure, which we build and our empanelment, how does that help and is it now much easier to sell more given our empanelment and already distribution in place? So how does that work and you know will marketing spends increase, would they be in this range, if you could throw some light? Jayesh Patel: Okay, Prakash, at the very first, we have been doing the cross-selling in the US with our existing buckets. Cardiac, Criticare & Unetixs have already started cross-selling. What we have done is we have broken up the entire sales organization into three, acute care, primary care, and other care. And the way it works is, they all sell each other’s products now. It is no longer that a Criticare guy sells only Criticare, if a Criticare guy walks into acute care settings, he will also sell some products that are acute care products coming out of Cardiac Science, for example, so that has already been integrated, the sales.

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And the entire marketing is now combined, we don’t have separate marketing for all the entities, it is a single entity. One single unit for entire OCCL markets everything. Prakash Kapadia: So it does help for a while, cross-selling and leveraging our existing customers? Jayesh Patel: Right. And also what we have done is we have taken some of the distributors that did not exist for Cardiac Science or for Criticare or for Unetixs, now we have these distributors that are carrying all our products. Prakash Kapadia: Fine. Okay, thank you and all the best. Jayesh Patel: Thanks Prakash. Moderator: Thank you sir. The next question comes from Nimish Desai from MOSL Securities. Go ahead sir. Nimish Desai: Yeah, good evening. Just a few questions, one is could you give us an overall guidance for FY13, in terms of top line and EBITDA because last time you had given some guidance, EBITDA margins of round about 26%, top line of 15- 20% growth, does that still hold, does it change? Because I believe currency has changed, you are changing the R&D policy. Valiveti Bhaskar: No. If you take the top line growth, we expect for the whole consolidated group between 15% and 20% growth and if you take the EBITDA margins, between 26-28 after accounting for the total R&D. Nimish Desai: Okay, post R&D. And since now you have started expensing R&D through P&L, what would be the R&D expense for the full year? Valiveti Bhaskar: Roughly, it will be between 15 to 17 million dollars. Nimish Desai: Okay, fine. The other question was in your opening remarks you did mention, or may be in answer to some question you mentioned that you were planning to have some working capital savings, if I am not mistaken; you said that absolute working capital will go up, but as number of days, it would come down. Did I hear that correctly? Valiveti Bhaskar: Absolutely. Nimish Desai: Okay. So, what I wanted to know is one, what changes are you introducing for this working capital to actually come down?

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Valiveti Bhaskar: Well, one of the first things we are doing, Nimish, is that a portion of the manufacturing will come out of Malaysia now and that will reduce the logistics time by at least a couple of weeks compared to say Vizag. And we also are working with some vendors in Malaysia who will be able to support us with just-in-time supplies, which are not possible in places like Vizag and of course we are trying to see if we can get better terms with our vendors because if you are sitting in India, a chance of getting good terms from the vendors is difficult, but if you are sitting in Malaysia, where those guys will also have an office, it will be quite possible, they will give us a few days extra credit. So overall we are trying to reduce the pressure on the working capital, reduce the working capital days effectively. Nimish Desai: Okay. So this operating cycle in your presentation you mentioned that it was 180 days for 1Q and about 178 days for FY12. What number would you have in mind, what number should we look at by end of FY13 in terms of quantum of savings out here? Valiveti Bhaskar: I would say probably it will come down by about 10 days overall for the whole year. That is the target. Nimish Desai: 10 days? Valiveti Bhaskar: Correct. Nimish Desai: Okay, fine. Thank you. Thanks a lot. Valiveti Bhaskar: Thanks Nimish. Moderator: Thank you sir. The next question comes from Jiten Doshi from Enam AMC. Go ahead sir. Jiten Doshi: Congratulations sir for a very good result. Couple of questions. Sir, when you have guided for about 15 to 20% growth, would you say that it is in constant currency dollar terms? Valiveti Bhaskar: Yeah, I would say that. Jiten Doshi: So, if any, there is a rupee depreciation that would add to the turnover? Valiveti Bhaskar: Yeah. Jiten Doshi: Okay. And you probably would, you would be able to comfortably maintain your margin at a 25% - 26% band. Valiveti Bhaskar: Absolutely, absolutely.

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Jiten Doshi: Okay. Just wanted to know what is the cash tax paid out across geographies in this quarter? How much was paid out in India? Valiveti Bhaskar: Yeah, 6 crores in advance taxes have been paid. Jiten Doshi: Okay 6 in India and rest of the geographies what is the tax that has been paid? Valiveti Bhaskar: Malaysia is the only place where we have provided for tax about 8.7 crores. Jiten Doshi: Okay. And sir how much percentage of the R&D would be attributable to employee cost? Valiveti Bhaskar: I will have to work out the details, but I am just guessing a number here, approximately 60. Jiten Doshi: Okay, and sir can you throw more light on, what is the company that you would really say in your peer group that we could compare you with, and any recent transactions that have happened of companies like this or any acquisitions in the last couple of quarters, the last one year, and what would be the multiples if you can guide us? Valiveti Bhaskar: Zoll Corporation US-based Company, which is one of our direct competitors in the AED space, was acquired by Asahi Kasei, a Japanese company for 2.2 billion. And the other company that we were talking about is Physio Control acquired by Bain Capital. 487 million was the acquisition cost. Jiten Doshi: No, what was the profit multiple paid out for these companies during the acquisition? Valiveti Bhaskar: I don’t know, both of them were listed, I know they were 33% premium over the market price, because I know for a fact that Zoll’s market cap was about 1637 million and they were acquired for about 2.1 billion dollars. Jiten Doshi: And sir you had some plans to raise money in the invasive side in Eurocor, any progress on that sir? Valiveti Bhaskar: Right now we are waiting for the market to get better, so at the appropriate time we will let you know Jiten. Jiten Doshi: Okay. And you have any valuation benchmark in mind, last time you had said that the valuation benchmark would be north of 2500 crores, any changes in that?

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Valiveti Bhaskar: There is no change in that, we would think it should get better with the revenues getting better, so we think multiple of 20 PE should be the range so which we think should be in the range of 3300 to 3800 crores. Jiten Doshi: Okay. And you would be looking at divesting to PE or to a strategic stakeholder or what are you really looking for in that? Valiveti Bhaskar: No, see, what we are planning here is, like I said in one of the earlier calls also, we will require growth capital to grow, so obviously we will be diluting a portion of it as an IPO and use those funds to grow that business multifold. Jiten Doshi: So, are you looking at a PE investor, a private equity investor or you are looking at some kind of a strategic partner who would like to come in that business? Jayesh Patel: Not a PE for sure. Jiten Doshi: Okay, so a strategic investor could always be looked at. Valiveti Bhaskar: That is what always happens depending on what the strategic investor brings to the table. Jiten Doshi: Okay. And what would you like to do now to really enhance the shareholders value because your multiple is very low and any thoughts out there? Valiveti Bhaskar: Enhancing the shareholder value is to give good performance, we have to perform well and make sure that the profits are good for the company. Jiten Doshi: Okay, and this is the last question, what's your outlook for 2013-’14, I mean do you think you can maintain this growth? Mr. Ramnani was very kind enough to say that company is now on an organic growth track and there are no more acquisitions immediately on the horizon, so this year has been a very good performance on an organic basis, do you think that it is sustainable at the rate of 15- 20% dollar terms for the near future? Valiveti Bhaskar: 15-20% I don’t see an issue. Jiten Doshi: Okay, okay. Wish you all the best for the future, thank you very much. All the best. Valiveti Bhaskar: Thank you.

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Moderator: Thank you sir. The next question comes from Ms. Amelie Thevenet from Jupiter Asset Management. Go ahead ma’am. Amelie Thevenet: Hi, just following up on the peer group question, would it be correct to compare you to a company called Mindray in the non-invasive segment and to Biosensors in the invasive segment? Jayesh Patel: No. The reason is, if you look at what Mindray sells currently versus what we do, they are totally two different groups. We do compete on certain areas, for example, on the patient monitoring side, what we call vital-signs monitoring, we have competing products. But beyond that we don’t compete with Mindray on anything. A lot of products that Mindray makes like blood analysers, what we call liquid analysis. We are not into that segment whatsoever so it would be wrong to compare us with Mindray. Amelie Thevenet: And for Biosensors? Jayesh Patel: And Biosensors same thing, basically what we are doing is we have like drug-eluting balloons, drug-eluting stents and so on and so it is a little different from what Biosensors does, Biosensors is strictly into drug-eluting stents and bare metal stents. Amelie Thevenet: Okay and just a housekeeping question, when do we expect your annual report to be released? Valiveti Bhaskar: Annual report should reach; the softcopy should be released probably by end of this month. Amelie Thevenet: Okay. Thank you very much. Valiveti Bhaskar: Thanks Amelie. Amelie Thevenet: Thanks. Moderator: Thank you, ma’am. The next question comes from Mr. Arun Kejriwal from Kejriwal Research. Go ahead, sir. Arun Kejriwal: Bhaskar, just one question. What is our sundry debtors currently in the quarter for the standalone and for the consolidated basis? Valiveti Bhaskar: I will just give you the number, Arun. Arun Kejriwal: Sure, sure. Another question for Jayesh, your latest acquisition if you could give us a sense on how that company is faring and what you think would be the performance in the coming year?

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Jayesh Patel: Okay, Cardiac Science, which is now part of OCCL Group, the total overall growth of the OCCL entity has been about 48%. Now we expect that company to continuously grow, we have added a few new products to the sales organization, in fact we made the first shipment of the product out last Friday, it is one of the state-of-the-art AEDs, it is called the G5 and we anticipate two more new products to be rolled out this year from OCCL. Arun Kejriwal: And in terms of product offering that Opto Circuits as a group has now, would you say that in the invasive and noninvasive segment we are almost there, we have almost everything that is needed or we still have some segment, which is still not there? Jayesh Patel: Currently we have everything we need and whatever else that we need we would be developing internally. There are lot of new products in the pipeline, which are not currently manufactured by Opto, but they fall within the same category of cardiac diagnostic sort of applications. Arun Kejriwal: And one last question. In terms of cross-selling what kind of benefits do you think the company is now able to get with the product range and these acquisitions that have been done, say over the last 24 months are we able to do a fair amount of cross-selling or the benefits of cross-selling are just now creeping in or there is still some time? Jayesh Patel: They have been creeping in for the last two quarters or so and they will keep increasing. Arun Kejriwal: Okay and you are happy with the kind of cross-selling opportunities that you are getting? Jayesh Patel: Sort of, yes. Arun Kejriwal: Okay and Bhaskar, whenever you do have the answers just shoot them into the call. Valiveti Bhaskar: The consolidated sundry debtors were Rs. 1059 crores. Arun Kejriwal: Okay. Valiveti Bhaskar: Any other questions, Arun? Arun Kejriwal: No, that’s it, thanks. Valiveti Bhaskar: Thank you.

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Moderator: Thank you very much, sir. The next question comes from Fathima Khan from Khambatta Securities. Go ahead, ma’am. Fathima Khan: Did you say that you have paid 68 crores this quarter as debt repayment? Valiveti Bhaskar: Yeah, the long term debt was about 55 crores, the remaining 13 crores was working capital debt. Fathima Khan: Okay, so what is the current debt position right now? Valiveti Bhaskar: 1101 crores. Fathima Khan: Okay. There is one more question; can you please help us with the current scenario with respect to US FDA approval for DIOR? Jayesh Patel: It is still ongoing. We are still progressing on it. The way it works out is, the US FDA on any invasive product is a very long drawn process and so we continue working with the US FDA on DIOR, on the drug-eluting balloons. Fathima Khan: Okay, is there any other product which is queue for this approval? Jayesh Patel: We have quite a few other products awaiting approval, which we are working on filing FDA applications, one of them being a class 3 product filed as a 510(K), that application is being processed as we speak. Fathima Khan: Okay, so no timeframe as such for this product for US FDA approval right now? Jayesh Patel: Yeah, we do not have that one yet. The way it works with the US FDA, you get your approval is when we announce it. Fathima Khan: Right, okay. Thank you. Jayesh Patel: You are welcome. Moderator: Thank you, ma’am. The next question comes from Dhiraj Kataria from Fair Wealth Advisors. Go ahead sir. Dhiraj Kataria: Sir, I had two questions for you. First one was a followup question just on this R&D expenditure that has been done, so just wanted to understand whether this amount of 20.39 crores, this is the current expenditure or this is just the previously capitalized expenditure which has been explained out?

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Jayesh Patel: It is the current expenditure. Dhiraj Kataria: So, we can expect something like that on a continuing basis now? Jayesh Patel: Sort of. Dhiraj Kataria: Okay. Sir, my second question was about, accounting of goodwill, so in our balance sheet we do not amortize goodwill if I am not wrong? We do not amortize the goodwill over a specific period of time, so we just test it for impairment, right? Valiveti Bhaskar: That’s right we only test it for impairment, correct. Dhiraj Kataria: So sir, I just wanted to understand that for a technology-driven company like ours, I just wanted to understand the logic, why this entire accounting treatment is in this way because usual accounting treatment is to expense it over a period of let us say five years or something like that, so why are we not expensing out goodwill, that was one question and the second question on the same was that in our March results our goodwill has come down from 629 odd crores to about 452 crores, so why has this been reduced and where has this been taken, I mean in the P&L, I did not understand that? Valiveti Bhaskar: Generally when we talk of goodwill, most of our goodwill comes from the fact that you pay a particular price for an enterprise and if you start valuing the assets in that company, it is lower than the price that you have paid, so that becomes acquisition goodwill. Dhiraj Kataria: Right sir. Valiveti Bhaskar: Okay, so that nobody writes it off year after year unless you sell off that particular entity. Why it has come down last year you asked me the question. We have done a restructuring of the Opto Group into OEHL and OCCL, and because of the restructuring that goodwill has come down and plus under Indian GAAP, you cannot expense out goodwill, it is not permitted. Dhiraj Kataria: Okay, so sir this entire amount where has this been adjusted, I mean, I didn’t get the entire treatment of this? It has not been expensed out to the P&L so I am just confused on the entire treatment of this part? Valiveti Bhaskar: Yeah, it would be better if you could email the question and I will answer it. Dhiraj Kataria: Fine sir, I will do the needful. Thank you.

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Valiveti Bhaskar: Thanks. Moderator: Thank you, sir. The next question comes from Ranvir Singh from Share Khan. Go ahead sir. Ranvir Singh: Yeah, thanks for taking my question. Most of my question has been answered. Only one thing, for CAPEX during FY12 is around 340 crores so can you give me detail whether this has been expensed, in FY12 I am talking about? Valiveti Bhaskar: Yeah, roughly about 257 crores was the CAPEX for the year so that is the actual cash out. Ranvir Singh: So, that was related to manufacturing expansion? Valiveti Bhaskar: Yeah, all manufacturing expansions which took place in Malaysia and India and partly in the US. Ranvir Singh: And if I heard correctly, you mentioned certain shifting of some manufacturing to India, so can you give some more light on it of what has been shifted here? Valiveti Bhaskar: Yeah, a portion of the Cardiac Science manufacturing has moved into Malaysia and a portion has moved into Vizag. This is only about 30% of the job done rest of it will be moving in this current financial year. Ranvir Singh: Okay and for FY13 what you mentioned 40- 50 million for CAPEX so for what that CAPEX would be used? Valiveti Bhaskar: It will be used basically like I said we are setting up our own manufacturing facility for the invasive side of the business. Ranvir Singh: For invasive basically. Valiveti Bhaskar: Yeah, setting up facilities one in India and one in Malaysia. Ranvir Singh: Okay. Another question related to tax rate, what tax rate we can expect for FY13? Valiveti Bhaskar: We maintain the guidance of 8% to 10% for the whole year. Ranvir Singh: Okay and for this quarter is there any FOREX gain or loss adjusted somewhere in the other expenditure or some other line item? Valiveti Bhaskar: Yeah, it will be in the FCTR and other income.

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Ranvir Singh: I see for working capital cycle trade payable has been for FY13, 32 days which I can see from your presentation, right? Valiveti Bhaskar: Yeah. Ranvir Singh: So, how has this been arrived at? For creditors of Rs. 206 crores, how are the creditor days calculated? Is it a proportion of material cost? Or material cost multiplied by that 365 days? How has it been computed at? Valiveti Bhaskar: Everything is based on 7.94 crores per day sales. That is Sales of 715 crores divided by 91 days or 92 days. Ranvir Singh: Okay. So just we have averaged out 8 crores per day sales and so the creditors have been divided by that, right? Valiveti Bhaskar: Yes. Ranvir Singh: Yeah, thanks a lot. That’s all from my side. Valiveti Bhaskar: Thank you. Moderator: Thank you, sir. The next question comes from Sandeep Gupta from Edelweiss Securities. Go ahead sir. Sandeep Gupta: Sir, just wanted to know, what are the top five products of the noninvasive business and how much do they contribute to the total sales? Valiveti Bhaskar: AED is the number one, sensors is the second one. Jayesh Patel: Then you have got the cardiac monitoring and vital signs monitoring products and then all the accessories for the above. Sandeep Gupta: Okay and how much do they contribute to the total sales? Jayesh Patel: We don’t disclose that. Sandeep Gupta: Okay, sir and what would be the EBITDA breakup for the invasive and noninvasive business? Shalaka Parab: On the invasive side our operating profits are more than 40% and on the noninvasive side it is pretty spread out, we have Opto Circuits standalone, which is in the range of 40% to 44%, OCCL which is in the range of 10% to 15% and others, which are in the range of 7% to 10%.

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Sandeep Gupta: Okay and when do we expect the Malaysian facility to be fully operational? Valiveti Bhaskar: The monitoring plant, one of the Criticare facility is already up and running. Invasive side of the plant will be definitely running probably by December 2012-January 2013. Sandeep Gupta: Okay and sir just the last thing on the rating side, sir what are our ratings of the company for our other debts, I believe we are close to 120 crores of other debts, so what are our ratings for the other debts? Valiveti Bhaskar: We have no ratings. We don’t have individual rating on those debts. Sandeep Gupta: Okay, fine. Thanks a lot sir, all the best. Moderator: Thank you, sir. The next question comes from Vivek Veda from Edelweiss Securities. Go ahead sir. Vivek Veda: Hello, sir. Just two questions, one is how much R&D expenditure we have capitalized till date sir, any rough idea on that? And my second question is, sir, as far as I can recall that Malaysian facility is into tax free zone, sir and we have paid a advance tax of 8 crores you have said, so just a brief on that sir, how it is working? Valiveti Bhaskar: Correct, see till you get the local manufacturing license in Malaysia, that is actually it is not a license to manufacture, but it is some procedure that you have to follow, until we get that license we are taxable. We got that license on the 15th of July this year, so last quarter we still had to pay some tax of about 1.6 million dollars, now we don’t have to pay anymore. It is a local procedure that we can’t delay. Even if you start manufacturing and start exporting till you get the… it is called an LMW license, unless you get that license you don’t become a tax-free entity. Jayesh Patel: And it is product dependent by the way. Vivek Veda: Okay, so it is a three years tax-free entity. Jayesh Patel: It is 10 year tax free. Vivek Veda: Okay, sir and sir, regarding that R&D expenditure sir, how much we have capitalized sir, overall till now? Valiveti Bhaskar: I will have to come back to you on that Vivek.

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Vivek Veda: Okay sir, I think that answers my all the questions sir, thanks a lot, sir. Moderator: Thank you, sir. The next question comes from Bharat Shah from ASK Investment. Go ahead sir. Bharat Shah: Hi, this is Bharat Shah here. I think the results were pretty good to my mind; I have 2 or 3 questions, one, if I see the return on capital employed in the business over a period of time, barring last two years return on capital employed has been upwards of 30%; somewhere between 30% to 36% throughout the period. I understand that in the last two years of course significant acquisitions have occurred which has involved a capital outlay. Also I think on the manufacturing assets a very significant amount of money has been committed, so that too till those assets are consummated fully the return on capital employed will be affected, so which is down to about 23% last year. When do we think, will it be about in, would I say in couple of years time that our return on capital employed will once again come back to the 30% territory if we digest this capital expenditure as well as the acquisitions? Valiveti Bhaskar: Yeah, I would take say about six quarters would be what it takes, because we are completing the manufacturing facilities out in Malaysia and similarly India is also coming up with a facility, so once that is over I do not see any major capital expenditures happening because it will be only adding up the two lines to cover the increase in the revenues. Bharat Shah: So, will it be fair to say that by the time we conclude the year of ‘13-‘14 towards the end we will be approaching return on capital employed somewhere in the vicinity of 30% plus? Valiveti Bhaskar: I would think so, yeah. Bharat Shah: Okay. My next question is, I looked at the 10-year numbers of Opto all over again and what I notice is that in nine years out of the 10 years it had generated cash out of the operations before the capital expenditure, so of course in the last five years when I was looking at the cash flows it added up to about 600 crores of cash flows created from the business, but last two years significant CAPEX has been incurred as well as money spent on Cardiac Science and other acquisitions, so obviously it has been net cash negative, but as I understand from an earlier question that CAPEX bulk of it is over, a small part of about 40 odd million is left in the current year. So logically we should be able to see a fair bit of free cash being generated in the business from the next year onwards, will that be a correct assessment? Valiveti Bhaskar: Yeah, we will probably see a small positive cash in this year and substantially better free cash in the following year.

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Bharat Shah: Right, because in the current year there is still a CAPEX of about 40 million dollars. Valiveti Bhaskar: That’s right. Bharat Shah: Right, so after that we still will have some free cash left on the table and next year we should see material one? Valiveti Bhaskar: That’s right and after that the only thing that will be left is will be maintenance CAPEX which will not be as high as this. Bharat Shah: Right, now I understand that. My third question was on the goodwill part, one of the earlier questions which came by was that there was a goodwill on the balance sheet and what do you propose to do about it and you explained that it is a goodwill, which has arisen on acquisition, I understand that fully, but I would still think it is a non cash charge, it doesn’t matter at all when you write it off of the balance sheet because it makes the balance sheet lean and mean, I understand that you acquired Cardiac Science business, you acquired it for an X price, the physical assets which came with it were X-Y, so the Y amount is the goodwill that has been shown on the books, I perfectly understand that, but writing off that Y amount of goodwill over a period of time is a simple accounting procedure and that makes the balance sheet lighter without affecting any cash flow so I think to my mind it makes a logical sense to kind of work out a policy and write it off over a defined number of years so that balance sheet looks free from those assets, you know, I mean… Valiveti Bhaskar: Bharat sir, we will consult the company auditors and let us find out what is the best way to do it; we have really not had a look at it. We will definitely consult them and then see; probably we will come up with something in the next call. Bharat Shah: Right and I think it will be useful if that policy is laid out open to everybody to understand so that an appropriate understanding on the matter can be arrived at, because as I see it, it is a very straight forward equation it is a non cash charge much like your depreciation and whether you write off more depreciation or less to my mind it does not change anything about the business because what we eventually focus is on the cash flows, so long as those are there whether you have written off more goodwill or less goodwill to my mind is of complete irrelevance, so I would think it is appropriate to kind of form a policy on that and do the needful, because it does not affect anything about the business at all. Valiveti Bhaskar: Yeah, we will definitely consult our auditors and take it forward Bharat sir.

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Bharat Shah: Sure and one last question, the earlier gentleman asked the question about the goodwill amount being X at the beginning of the year and Y at the end of the year and there is some amount which has been written off and it will be helpful if you put the response to that on the website so that we all can get to see it. Valiveti Bhaskar: No, it will be coming up in the annual report, there is a note on the goodwill in the annual report. Bharat Shah: Yeah, it will be useful if you put it in the annual report or along with the quarterly notes so that it is clear to everybody, not only to that gentleman who asked the question but we all will be benefiting from it. Valiveti Bhaskar: We will do it, yeah. Bharat Shah: And once again excellent results and congratulations, we thought this was a difficult time, but adjusted for dollar a 22% growth in the business looks remarkable to my mind. Valiveti Bhaskar: Thank you very much, sir, we need good wishes and blessings from all of you. Bharat Shah: Thank you. Moderator: Thank you, sir. The last question comes from Amit Shah from Prabhudas Lilladher. Go ahead sir. Amit Shah: Hi, good afternoon. I just had one question from my side, see you are planning to raise money in the invasive business and that is a sizeable amount and if I am not wrong in our earlier interactions you had mentioned that you would be raising that money for various product developments and regulatory procedures to get approvals in US market, so now the markets are not that conducive so as you indicated it may take some time, so just want to understand till that time will you defer your R&D spend or development expenditure in invasive segment? Jayesh Patel: Not really, it is ongoing, whatever we are doing it is ongoing, irrespective of whether we raise funds or not. Amit Shah: Oh, so I am just trying to understand, I mean, then if it is ongoing irrespective of the raising of the fund then why there is need to raise so much fund?

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Jayesh Patel: See, right now we are working on absolute basic requirements, right, so if we have more funds we could work on little more, speed up the process by adding more studies and stuff like that. Amit Shah: Right and Jayesh, you also mentioned that getting US FDA approval for the stent is a time consuming process, so that is fair enough, but you have been conducting or you have been doing that for last 4, 5 years, so could we just know where exactly in the entire procedure your, I mean how much more time it will take roughly or on which stage you are in currently? Jayesh Patel: Okay, initially what we had done is, we were working on the US FDA for the bare metal stent, if you remember. Amit Shah: Right. Jayesh Patel: And so consequently we have started putting more emphasis on the drug-eluting stents versus the bare metal stent. We continue working on the bare metal stent, but we are reemphasizing our stand on the drug-eluting balloon and I will tell you why it has been done that way. I don’t know if you have seen the recent press releases, we have released a product called Magical which is nothing but a drug-eluting balloon with a bare metal stent, so what we are focusing on is the lower hanging fruits, if we can instead of spending a lot of money on US FDA we are looking at, how do we capitalize on like say for example CE, the focus is, yes we are working on FDAs, but not at the speed that we should be, it is a very capital intensive game and so our focus is mainly, where can we go ahead and catch all the low hanging fruit first, so that’s where the focus is and we continue working on FDA at a given pace. Amit Shah: Sure, I think that is it from my side, wish you all the best. Jayesh Patel: Thank you very much, Amit. Moderator: Thank you, sir. There are no further questions. Now I handover the floor to Ms. Parab for closing comments. Go ahead, ma’am. Shalaka Parab: Thanks everyone for joining in today. If you have any more queries, need clarifications on anything please write to us at [email protected] or you could reach us out at +91 80 28528088, thanks again. Have a good evening. Jayesh Patel: Thank you very much. Valiveti Bhaskar: Thank you everybody.

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Moderator: Thank you, sir. Ladies and Gentlemen, this concludes your conference for today. Thank you for your participation and for using Door Sabha’s conference call service. You may disconnect your lines now. Thank you and have a pleasant day.

Note: 1.This document has been edited to improve readability. 2. Blanks in this transcript represent inaudible or incomprehensible words.