Stock Recommendations:: Opto Circuits India, Deepak Fertilisers & Petrochemicals Corporation

Opto Circuits India
Recommendation: Buy
Price target: Rs460
Current market price: Rs316

Results in line with estimates

Result highlights

• Opto Circuits (Opto) has reported a top line growth of 43.1% to Rs120.5 crore for Q4FY2008 and of 86.1% to Rs468.1 crore for FY2008. The revenues are ahead of our estimates and were driven by a doubling of the invasive business and an increasing demand for the non-invasive products (sensors and patient monitors) from the regulated markets.
• Opto's operating profit margin (OPM) shrank by 670 basis points to 29.2% in Q4FY2008 and by 350 basis points to 29.3% in FY2008, largely due to an increase in the promotional spend on the distribution of free samples. Consequently, the operating profit grew by 16.2% to Rs35.1 crore in Q4FY2008 and by 66.2% to Rs137.2 crore in FY2008.
• Buoyed by a significant jump in the other income (on account of higher foreign exchange [forex] gains), Opto's net profit jumped by 43.5% to Rs34.8 crore in Q4FY2008 and by 80.7% to Rs132.4 crore in FY2008. The net profit reported by the company was in line with our estimate.
• Opto has successfully closed the acquisition of US-based Criticare Systems (Criticare) for $70 million. We estimate the Criticare acquisition would generate incremental earnings of Rs1.0 per share in FY2009 and of Rs2.7 per share in FY2010.
• In keeping with its trend of rewarding its shareholders, Opto's management has announced a 50% dividend and also decided to award seven bonus shares for every ten shares held by the existing shareholders.
• In order to incorporate the acquisition of Criticare, we are revising our revenue estimate upwards by 30.7% for FY2009 and by 19.7% for FY2010. Our profit estimate has also been upgraded by 5.3% for FY2009 and by 1.8% for FY2010. We believe Opto's revenues will grow at a compounded annual growth rate (CAGR) of 57% to Rs1,158.9 crore in FY2010 on the back of a 30% compounded annual growth in the non-invasive business and a 67% compounded annual growth in the base invasive business of stents. We expect Criticare to grow at a 20% CAGR to $62 million in FY2010. The net profit will grow at a CAGR of 48% to Rs290.6 crore in FY2010.
• At the current market price of Rs316, Opto is trading at attractive valuations of 15.0x FY2009E fully diluted earnings and 10.4x FY2010E fully diluted earnings. We maintain our Buy recommendation on the stock with a price target of Rs460.

Deepak Fertilisers & Petrochemicals Corporation
Recommendation: Buy
Price target: Rs169
Current market price: Rs100

Benefits delayed

Result highlights

• The net sales of Deepak Fertilisers & Petrochemicals Corporation (DFPCL) increased by 56.8% year on year (yoy) to Rs330 crore. The chemical division and the fertiliser division contributed 72% and 27% respectively to the net sales. The revenues from the chemical division increased by 48.2% yoy to Rs241.5 crore on the back of a strong contribution from isopropyl alcohol (IPA), while the sales from the fertiliser division increased by 72.3% yoy to Rs90.6 crore due to an increase in the trading volume.
• The operating profit during the quarter grew by 38.7% yoy to Rs56.8 crore with the operating profit margin (OPM) declining by 230 basis points to 17.2%. The segmental profit before interest and tax (PBIT) for the chemical division increased by 41.8% to Rs62.4 crore with the margin declining from 27% to 25.8%. The loss in the fertiliser division reduced to Rs0.3 crore from Rs1.4 crore.
• The interest expenses were higher by 11.6% yoy on account of the increased outstanding debt issued for new projects and capacity expansions. The depreciation charge also increased by 5.7% yoy during the quarter.
• The adjusted profit after tax (PAT) increased by 13.1% yoy to Rs31.3 crore with the margin reducing by 370 basis points to 9.5%. The effective tax rate increased during the quarter as the company had carry forward losses last year.
• Commencement of additional ammonia storage tank (15,000MT) at Jawaharlal Nehru Port Trust and new nitric acid capacity (45,000TPA) at Taloja has got delayed by over nine months till March 2009.
• The company is still in the process of negotiating long-term gas supply contract. An improved supply of natural gas to Taloja plant would help in replacing naphtha by natural gas for steam generation. Spot liquid natural gas at around $12-14 per million British thermal units (MMBTU) would cost almost half the price of naphtha ($22 per MMBTU).
• Setting up of the ammonium nitrate plant at Paradeep (Orissa) has got delayed due to impending approvals. Civil and construction work is complete and the orders for various equipment have been placed.
• The company's JV with the global major Yara International is still under due diligence and is expected to get over in the next two months.
• The company's specialty mall Ishanya, for interiors and exteriors, commenced operations during the quarter, ahead of the festive season. The company has already leased out nearly 80% of the 550,000 square feet leasable area at an average rental price of Rs46 per square foot.
• At the current market price of Rs100, the stock is trading at 7.6x its FY2009E earnings and 5.7x its FY2010E earnings. We maintain our Buy recommendation on the stock with a price target of Rs169.