First of all, on behalf all TEDDies I would like to thank Mr. Donald for having created this opportunity to meet Mr. Chairman along with other two senior executives. His passion for detailed research on Opto has impressed the Chairman so much that, all three of them talk to us continuously for three hours. They answered all our questions patiently without bypassing or neglecting even a single of them. Infact they had lot of patience to explain in detail about some of those medical equipments & stents, since coincidentally all three of us are Engineers!!!

Mr. Donald has already explained all the points in detail. I just would like to add few more:

1)Sales Target of USD 1 Billion by 2014: This works out to 42% CAGR only. Infact Opto’s Sales has grown more than this rate for the past few years. Mr. Chairman accepted that most of this revenue increase has come from the acquisitions.   While he was upbeat about the future potentials of Eurocor as well as Criticare, he was not so optimistic about acquisitions. He agreed that this is a conservative target and they should able to achieve this without any acquisitions. If any bulk orders are received or acquisitions takes places, the scenario changes automatically.

They assured that they should able to maintain current Net Margins as well as ROE if not better.

2)     Mr. Chairman is very cool and calm. Looks like he plans well in advance lot of alternatives for each of the work so that Company’s target/focus are not compromised. One such example is SEZ. As we all know, the present factory place has got SEZ benefits extended by one year. More than a year back, they have purchased 35 acres of land (out of which 28 acres are declared for SEZ) directly from the farmers near Mysore. Last year, they have made the payment to State Government for 250acres of land at Hassan. They took few areas in Vizag SEZ on lease for Rs.7/-per SFT. They have an offer from SE Asian Country to start the production from that place.    They will take a decision regarding the location of SEZ after the AGM.

3)Lot of discussions have taken place regarding Dilution. Mr Chairman is clearly aware of the limited financial capital availability for small firms like his. He is also aware that there is a limit upto which they can dilute the company’s equity .

Future, they are planning for Holding Company concept where individual companies will raise money on their own on the strength of their balance sheet. Plan to list each one of them after they achieve critical sales & profit is also on the minds of Chairman. But that anyhow is may be 5year later story.

4)He does not feel threatened / intimidated by the big players. Infact he thinks that they will take advantage of his company’s low cost manufacturing base. He feels market is too big and all of them can easily share that. To a question of what is the company’s stand if a bigger company in the same field, want to acquire his company, he says let us not hypothise and worry about such situations. We will take the decisions accordingly as per the requirements / circumstances.

5)Both Eurocor and Criticare expected to take off (in terms of sales) from this year onwards with DIOR and MAGICAL stents in the case of former and with Criticare, increase in net margins due to complete integration with the parent company as well as synergizing of marketing efforts.

6)Mr. Chairman has also lined up few more novel schemes like the Speciality Ambulance Business (which is mentioned in their Annual Report) which will not only increase their product sales but also get vide coverage/advertisement for their products.

7)Loans have gone up from 88.29Cr (FY08) to 513.53(FY09). This is basically due to Criticare Acqui-sition (200cr + 100Cr for its working capital requirement) plus the increase in working capital requirement due to increase (60%) in sales.

8)Provisions also have gone up from 80Cr to 119.85Cr in FY09. I was under the impression that they would have made some provisions for any claims. But it is for MAT for the next 2 years which they have to do provisioning.

Originally posted by valuepicks Francis ji,   Thank you for posting this.   Just wondering how do you recollect everything. Do you carry a voice recorder for these management discussions? Are they allowed? Or is it from quick notes that you make?

Valuepicksji,

Thanks for your interest. No I didn't carry a recorder, nor did I take any notes. Its a gift I have discovered, of late:). Yoga and Meditation certainly helps - you can remain completely focused on the discussion, on what is happening at the moment!(shutting out everything else). If you can do that, the entire thing remains fresh with you; ofcourse the trick is in capturing it immediately!

If you are curious to develop a gift like that, you can try the courses from Art of Living foundation.

Cheers
Donald

Edited by DFrancis - 28/Sep/2009 at 2:52pm

Basantji,

Of the loans, Rs 292 Cr -Term loans from Banks & FI; Rs 242 Cr is as working Capital advances; 2.3 Cr other loans

You are asking 2 questions here
1. Tax implications would imply the debt cost as <9%?

Opto pays very little tax due to its EOU status of manufacturing units. It pays an effective tax rate of 3.5%. So cost of debt remains high, around 11-12%, based on interest costs for the year.

2. If debt comes down, financial leverage comes down. If financial leverage comes down, RoE falls. If RoE falls, pressure would come on growth, since its very difficult for growth to exceed RoE for long periods?

Are you saying the company is better off not paying off the debt, it can actually raise more debt, leverage the balance sheet more (since current d/e is 1), and that will help the company maintain/better RoE

Let me try to understand this better, as I am not sure higher financial leverage (within prudent limits), is the best route to better RoE. Generally speaking, Increasing Margins, or increasing Asset Turns would seem the best route to maintaining RoE and attracting more capital.

The formula for RoE can also be seen as
RoE = Net Profits/Sales x Sales/Assets x Assets/(Equity Cap+Reserves)

From the above it is clear there are only three levers to boost RoE because,

RoE = Net Margin x Asset turnover x Financial Leverage.

For Opto Circuits RoE has bobbed up and down from 32% in Fy05, to 48% in fy06, back to 34% in fy07, up to 39% in fy08, and crossing 40% in fy09.

If you analyse the reasons, except for fy08, the 40% plus RoEs have all been recorded on the back of Financial leverage shooting up both in Fy06 and gain in FY09. The only year where RoE reached close to 40% with low leverage was in fy08 on the back of good improvement in asset turns.

FY10 again will see Leverage coming down, as management has said they will pay-off high-cost debt. Probably some of it will get compensated by better Asset Turns (because of successfully integrating Criticare), but yes RoE will probably climb down.

This pattern of RoE going up and down has gone on over last 5 years as Opto has increased revenues 7x since fy05 from 122 cr to 818 crs. This pattern hasn't diminished their means of attracting capital; or leveraging the balance sheet as they have kept paying off the debt.

So I am not able to place a finger on the issue. What exactly is the criticism? What according to you is a better route?

If I understand this clearly, I can surely request Management to answer the question. Perhaps you can rephrase the question, and help us?

Rgds,
Donald

Opto 9 yr data on Net Margins, Asset Turns, Financial leverage, and RoE

Opto Circuits                             Profitability Snapshot     FY 02     FY 03     FY 04     FY 05     FY 06     FY 07     FY 08     FY 09
Operating Margin (%)     17.71%     17.47%     17.91%     21.25%     33.73%     33.89%     32.54%     35.16%
Net Margin (%)     12.39%     11.11%     13.28%     16.25%     27.65%     29.11%     28.05%     25.57%
Asset Turnover (x)     1.14     0.96     1.21     1.28     0.85     0.88     1.05     0.77
Return on Assets (%)     14.07%     10.63%     16.06%     20.80%     23.49%     25.72%     29.57%     19.59%
Financial Leverage (x)     1.40     1.76     1.77     1.58     2.07     1.34     1.34     2.07
Return on Equity (%)     19.71%     18.66%     28.41%     32.87%     48.63%     34.47%     39.73%     40.51%


Edited by DFrancis - 28/Sep/2009 at 2:47pm