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What to do with Opto Circuits?

I’ve received a lot of emails over the past few days on my report on Opto Circuits (OCIL) and my “latest view” on the stock in light of its continuous fall – now down almost 11% from my intrinsic value of Rs 130.

Some people have also sent me hate mails asking why I researched and reported on a dud company like OCIL that is facing the “biggest problems faced by any company in the world”.

One reader also blamed me saying – “In my opinion you have just had a look at the presentations on the website of the company and not put your mind on the bigger picture.”

One reaction I can have on such emails is to rue my luck and curse myself for reporting on OCIL.

“How could you touch such a company?” the “expert analyst” inside me is itching to say.

But if I look at the positive side of OCIL’s fall, especially since many readers would only remember the fall that happened after my report :-), I can think of five “positive” outcomes:

  1. People will stop taking my reports seriously, and instead do their own homework after reading whatever I write, and not buy any and every stock that I cover via StockTalk.
  2. People will not treat my reports as “recommendations”, which many have been doing (given the hate mails). This is despite the fact that I have always suggested in the past that my reports are not to be treated as recommendations, but just as explanation of the process one can use to analyze a company on his own (through the checklist process etc.)
  3. People will expect me to write fewer StockTalk reports in the future, which will mean that I will have less chances of reporting on “dud” companies like OCIL.
  4. I will be left with only those readers who believe in my vision of creating value through teaching the process of investing (the investment education part) than the few random outcomes (like OCIL).
  5. People will finally realize that even I make mistakes…and a lot of them.

Now, you must be itching to say, “Cut the story short, Vishal! Tell me what I must do with my Opto Circuits?”

See I said – despite all my disclaimers, people still look to me for “stock tips?” or “what to do with XYZ stock?” – two questions I am never comfortable answering.

But as a long-time tribesman, Mansoor wrote in a testimonial for the Art of Investing Workshop…

Vishal will make every effort to make you understand about investing and he will not give you so-called tips even if you pay him.

So, even if you want to pay me money for receiving stock tips, know that I will refuse your offer because I don’t offer tips. I will never get back to that business.

Now since you are about to curse me dead for not telling you what you should do with OCIL, here is my view on the stock – but not what you should do with the stock, but what I would have done if I had the stock in my portfolio.

What I would do with Opto Circuits?

1. Ignore rating agencies
First I would ignore what rating agencies are saying about OCIL. Here is what Deepak Parekh (if you can’t trust this man, you must not trust any other corporate leader in India) has to say on rating agencies…

I think it is about time someone rates ratings agencies. What have ratings agencies achieved in the US with subprime? Even in India, we have had a case of short-term A1-rated commercial paper being downgraded straight to default overnight. In such a situation, how are investors able to take care of themselves?

So if I can find that the biggest reason OCIL’s stock has been punished is because of the suspension of its rating by ICRA (the same agency that had rated Reliance Power’s IPO at a grade of 4 out of 5, indicating above average fundamentals ;-)), I will probably sell most of my other stocks and buy a big personal stake in OCIL at the current valuations.

Now, some people are waiting for CRISIL’s rating on OCIL as the company has already suspended ICRA from its services (so ICRA’s rating sounds like more of a tit for tat for OCIL – “You suspended us? Now, we’ll suspend your rating!”).

My question is – How trustworthy will be CRISIL’s rating? For me, not an inch more!

So overall, I will not take a rating agency’s advice to decide whether to buy or sell OCIL, or any other stock.

2. Ignore Mr. Market
Here’s what Benjamin Graham said about the madness of Mr. Market, his man representing stock prices…

If you look to Mr. Market for advice, you are destined to fail. But if you look to Mr. Market for opportunity, if you attempt to take advantage of the emotional extremes, then you are very likely to succeed over time.

With OCIL, I won’t let Mr. Market – the stock’s price – decide whether I should sell it, or hold it, or buy more of it.

Remember, in investing, a past decision or a past stock price holds no importance in what you decide to do with the stock today.

We all make financial mistakes. But when you realize you’ve done something wrong, try not to think about the money (and time and emotion) you’ve already spent. Instead, decide what to do based on the present and the future.

So, don’t think how much you lost given your investment in OCIL fell from Rs 100,000 to Rs 80,000. Think what you can do with Rs 80,000 now so that it grows back to Rs 100,000 (and more) in the future.

In other words, don’t think in terms of “costs”, but in terms of “opportunity costs”.

In the book Why Smart People Make Big Money Mistakes and How to Correct Them, the authors write:

Once your money is spent, it’s gone. It has no relevance. To the extent you can incorporate that notion into your financial decisions, you’ll be that much better off for trying. If you’re debating the sale of an investment (or a home), for example, remember that your goal is to maximize your wealth and your enjoyment. The goal is not to justify your decision to buy the investment at whatever price you originally paid for it. Who cares?

What counts, in terms of getting where you want to be tomorrow, is what that investment is worth today.

So, simply avoid the advice of Mr. Market and get over that ‘I can’t quit’ trap. Instead, use Mr. Market as an opportunity to buy more of OCIL in case your analysis tells you to buy the stock now.

OCIL will not become a ‘buy’ just because the stock falls to Rs 100, or its P/E drops to 5x. It will become a ‘buy’ only if your analysis of the business tells you that at 5x P/E, the value of the business is much greater than the stock’s price.

3. Review my analysis of OCIL
Whenever I research a stock or buy a stock, I always start with the expectation of going wrong in my decision.

This was also true when I analyzed OCIL. I had clearly outlined my concerns on the company’s stretched working capital situation. This is what I wrote:

My biggest concern regarding OCIL is the company’s high working capital requirements, which is blocking precious cash. While the management has suggested that the working capital requirements are gradually coming down as the company is integrating its subsidiaries and shifting manufacturing closer to the markets in which it operates – which might subsequently result in faster finished goods delivery and thus faster payments by clients, but I’ll still wait for the actual numbers to see where the working capital and thus the FCF are heading.

So, I started with the assumption that things could get worse on the working capital front. On the contrary, OCIL’s working capital situation has actually improved in the latest completed quarter, and in line with what the management had expected.

Now, just because a rating agency has raised its concerns on the company’s working capital, I won’t run towards the gate and get caught in the stampede.

Instead, my reaction to the rating agency would be, “Boss, thanks for the concern…but you are late! Most investors already know this for a fact.”

Anyways, some investors are also raising the issue over how the company has not been paying taxes for years and why this is fishy.

I just hope India’s tax authorities were so inept (though they are somewhat!) that they did not point fingers at OCIL for so long for not paying any tax. When they can deal with a much bigger Vodafone, why special treatment for OCIL?

OCIL has been operating from tax-free zones (now from Malaysia as well) and that’s why its tax rates were negligible in the past. The company now pays tax at an effective rate of around 5-7%, and this is what the management expects it to pay in the future as well.

If there’s one thing about OCIL’s financials and reporting, I was particularly impressed by its recent decision to treat a part of its R&D costs in the Profit & Loss account, which will impact its profits somewhat but will provide a more realistic picture of the company’s operating performance.

Most other companies of this size, if given a chance, will transfer all their expenses to Balance Sheet, thereby showing inflated profits!

Overall, I remain concerned about the company’s working capital, which while improving, needs to get much better for me to become more comfortable with the company’s balance sheet.

But other “concerning” aspects, including ICRA’s rating, don’t bother me much. If OCIL were to go bankrupt in the future, which any company that has some debt on its books can, it will go bankrupt and the rating agencies will “reveal” that later!

4. Review my holding of OCIL
If I held some stock of OCIL in my portfolio (which I don’t do because I am fully-invested as of now), here are some possible scenarios I will consider:

  1. If the stock is already 5-6% of my portfolio, I won’t buy any more just to average my costs. If I continue to believe in the story (without falling for “endowment bias” that makes us love what we own), I would hold on to whatever I own. Buying more just for the sake of “averaging” is most often a bad policy.
  2. If the stock is already 5-6% of my portfolio and I realize I made a mistake in buying the stock because the business is not going to be as strong as I expected it to be when I bought the stock, I will sell it even if the loss is ‘just’ around 15-20% and I can still digest greater losses.
  3. Using Graham’s technique, if I have been holding OCIL for the past 2-3 years, and the stock has not given me more than 50% return, plus I also don’t see as much strength in the business as I did earlier, I will sell the stock and reinvest the money in a better business that’s available at a bargain price.
  4. If the stock is just a small portion of my portfolio (say 1-3%) and I continue to believe in the story (without falling for “endowment bias”), I would buy more of the stock.

In the same way, you can create your own scenarios and take a decision accordingly.

Overall, if I believe in the story with complete integrity, I will hold or buy the stock based on the scenarios suggested above.

But if I do not believe in the story anymore – because of my changed view on the business and NOT due to the decline in stock price – I will not let my ego come in between, and I will simply sell the stock at the current price and take my lessons.

As Prof. Sanjay Bakshi shared in his recent interview:

  • There are no mistakes, only lessons.
  • Learning does not end.

So this was my view on OCIL, and what I would have done if I had owned the stock.

Also, I’m sure you will now take my StockTalk reports with two pinches of salt, for I am myself in the process of making mistakes, and learning from them.

What do you say?

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Comments

  1. Bang on Vishal…. Thank god still wondering why people dont ask that infosys price is moving up so what to do ?????

    Whether the intrinsic value changes in Each Quarter… If we try to take the value based on Q1,Q2…. results the values will be really confusing….???

    How to include the effects of Sector issues in the calculation???(Cap Goods ,Telecom — fall in ARPU each Quarter).. bit confused…especially in Telecom… Bharti is available at a decent price…but how to include the effects of its fall in ARPU which is one of the measure of profitability…

  2. Anil Kumar Tulsiram says:

    The main problem is everyone treats stock market as a means to make quick money. No one see it as a way to buy partial stake in business. Whenever I tell anyone that I have taken stock investment as my full time career their immediate reaction is ‘ Give us some tips’, no one says please explain us how we should choose any stock for investment etc. My standard answer to everyone is ‘Direct stock investment is only for professionals, amateur should invest only in highly rated diversified mutual fund on SIP basis.

    • sanjeevbhatia says:

      Anil, this is a common phenomenon. The moment anyone comes to know that you are interested in stock market, one of the two questions are bound to come up :- “Kaun sa stock acha lag raha hai” and two, “Market ka kya lag raha hai”. Idiots, agar mujhe itna confirmed hi pata hota, to mein sir khapaai kyon kar raha hota, ghar baith ke note nahin chapp raha hota, aur phir tumhe KYON batata…:D

    • Thanks Anil! I will just modify one statement of yours – “Direct stock investment is only for people who can learn the art of doing it on their own.” :-)

    • Venkatesh says:

      Very True I am Grateful to AMFI for the excellent care they take for people who are willing to give good Advice. What happened give Good Advice like invest in SIP with Debt funds for those who deserving and they go for Direct Investments and if it was you who even suggested it, they will always remember your name in their Prayer, but what if the investment doubles ? AMFI and the whole host of Asset Managers will father the credit. Sorry I got led away @ Shri Vishal, chosen task is extremely difficult one, you are honing a subject which not many would dare touch without a good stake. Wish you the very best in your very Noble cause.

  3. R K Chandrashekar says:

    Dear Vishal
    The problem is most people know the price of everything and the value of nothing!
    You put it across superbly and i repeat it here: OCIL will not become a ‘buy’ just because the stock falls to Rs 100, or its P/E drops to 5x. It will become a ‘buy’ only if your analysis of the business tells you that at 5x P/E, the value of the business is much greater than the stock’s price.
    So the first thing to do is to cut out the noise( Ignore the ICRA Ratings, sudden interest by all and sundry seeing a steep fall in price-never mind Opto was never in their circuit! ) and do your homework.
    Disclosure: Hold a small quantity(0.1 % in OCIL-purchased 1.5 years ago) . I am trying to reduce the no of stocks in my portfolio, and may exit at the right price- certainly not now!!

    • sanjeevbhatia says:

      And my disclosure: Had bought some small qty earlier, and bought some more today. Will keep on adding as per my portfolio allocation strategy, if it falls further, with a view of atleast 2-3 years holding unless something very drastic happens. Lets see.

      • Hi Sanjeev, just recheck your IV calculations once in light of some accounting issues that have surfaced (like the one on goodwill I just mentioned below) and then take an action accordingly. Regards.

        • sanjeevbhatia says:

          Thanks for pointing it out, Vishal. Will have a relook, in fact a long hard look, and then decide further course of action.

  4. Agree with you Vishal, one has to take ownership of what one does. While all kinds of products (tobacco, alcohol) and services (so called oldest profession) are sold we do not buy many of them, consciously. Similarly everyone decides basis reading and understanding and analysing information.
    You can only do that much research and analysis (unless you only do this, for a living) after that it is ‘integrity’ of the company’s management and your ‘luck’.
    Your summary in the end of the article is apt.

  5. Manish Sharma says:

    Vishal, I have a suggestion. All those people who have questioned your analysis please ask them to take their query to D-Street ka Don! ;)

    Like Mr. Chandrashekhar and Sudhir I too feel that the end part of your article is worth for keeps. Cheers! :)

    • Ha Ha, Manish!

      If D-Street ka Don comes to know that we are talking about him, then usse bachna muskhil hi nahiin, naamumkin ho jaayega ;-)

      • Reni George says:

        Hi Vishal
        Good Morning to you
        Bhai just tell that Don–Kahi aisa na ho,ki kuch waqt ke baad 11 states ki public usse doondti hui Phire…..hahahahhhahhahh

  6. Hi Vishal,

    been very busy talking care of the kid so not much time to comment on your recent post ( because i haven’t read them yet) but i have been following the entire OCIL comments and one thing is for sure, Tell those who are questioning you to Buzz off, this blog is not for people who cant take responsibility of their decisions. This blog is for people who want to learn and can respect other people opinion.

    Thanks
    Vik

  7. Yes the company is leveraged but hopefully it is for getting to higher growth/ acquisitions which also normally are with a view to get better growth.
    If you consider the financial nos. (I have not done a detailed analyses) it has profits after tax of around 570 cr plus add depreciation of around 54 cr in FY 12 that makes it cash from operations of 624 cr . As per the nos. I see, the total loans outstanding aggregate around 1186 cr (including working capital) which is 2 times annual cash accruals from operations and that on is not high for a profitable growing company. I would look at this no. (as a first check) vs a debt equity ratio. If this ratio was 5 or more, I would be very scared.
    May be the devil is in the details, which I have not been able to lay my hands on yet.

    • sanjeevbhatia says:

      Sudhir, just came across this beautiful quote by Winston Churchill :

      “A pessimist sees the difficulty in every opportunity; an optimist sees an opportunity in every difficulty”.

      So Apt, Isn’t it.?

      • True, who knows who is what at that point in time and in hindsight you are definitely wiser.

      • True, but the question real question is- “Is this really an oportunity? Just because you see a stock falling to new lows after tading at high PE’s for many years doesnt make it an opprtunity.”

        People who are bullish on this stock in the wake of new developments are suffering from many behavioural biases.Only time will expose them.

    • Thanks for sharing your inputs Sudhir!

  8. Anil Jain Shastri says:

    good one I appreciate your spirit.

  9. Ratan Gupta says:

    Hi Vishal,

    Great mail!! I have been reading lot on your website and I like your commitment, i am learning a lot in the process too.

    Dont worry about these mails, most people here are coming to make quick money, but hope they understand from your mail.

    Thanks and all the best
    Ratan

  10. sanjeevbhatia says:

    Hi Vishal,

    Don’t know whether to laugh at stupidity of people or feel bad at their selfishness. Its so strange instead of appreciating someone for his tireless efforts and zeal to educate all and sundry, without any selfish motive or pecuniary interest, they just try to demoralise him.

    First things first, you don’t have to regret ANYTHING, Repeat ANYTHING, at all. There is a whole world of dedicated loyal tribesmen who adore you. Just don’t let some small group try to force some negativity in your mind.

    For those who are criticizing your coverage of Opto, I would like to ask ” Bhai logo, Did Vishal send you a telegram to buy it? Does he, in any way, get any commission or any other incentive had you bought it? Grow up, folks, and take charge for yourself, something which Vishal has been advocating and forcing us to do all along”. At the end of every stock talk, it is clearly mentioned that it is HIS decision to buy and the IV is HIS IV. Man, you are free to buy or not buy at same price or any other price, where is the confusion? Or you are just plain english challenged.. :)

    But this is not surprising at all. Have been witness to lots of the same. Had Opto shot up and given 30% return in 3 months, the same people would have been shouting about “their” excellent stock picking skills :) . Simply put, Some genius calls it the TKB Syndrome (Thaali Ka Baingan Syndrome :P). It is explained simply as: “If it works, I did it; If it doesn’t, you are at fault”. No prizes for guessing who that genius is. Yes, its me.. :D

    First +ve outcome, if it works, would be superb. Four would be still better (Quality over quantity, eh) and five is, in any case, possible, plausible, expected and of course understandable. When one realizes that despite their immense genius , people like WB, RJ, Munger et all also have, at times, committed mistakes, what a big deal? I guess, the only one who doesnot commit any mistake is either not doing anything at all or has not been trying enough.. :)

    Regarding Rating Agencies, the less said the better. You have beautifully put up ICRA rating of Reliance Power, the true trash company without any iota of business. Just have a look at USA and see how many junk bonds were being rated Investment Grade by big names in rating business. If one simply does the REVERSE of what these so called experts want us to do, we would simply be millionaires many times over. It is only these opportunities that give a chance to true value investor to enter, an event for which he waits patiently. Its plain common sense that any good company will be available at sale only when there is going to be some temporary negative news about it. What so difficult to understand about it? :(

    And finally, the Caveat I am so fond of ” Sawaari apne samaan ki khud jimmewar hai”. If I have taken a decision to buy OCIL after going thru my due diligence, the Profit/Loss is ENTIRELY my responsibility. No one else is responsible for my errors of omission or commission, and that’s the way it should be. Either way, it is going to be a learning process.

    As Prof. Bakshi put it beautifully, Learning never ends. :P

  11. saurabh shankar says:

    Hi Vishal,

    Nice post man. Appreciate the mature way in which you have dealt with the nasty comments.
    We are inherently built to take shortcuts, so any analysis by you automatically is perceived as a buy/sell call and will continue to be so :)

    As for rating agencies, nowhere is the incentive bias more blatantly shown than in them. Trust CRISIL to give an investment grade rating to OCIL, after all they have already got the incentive/fees.

    cheers,
    saurabh

  12. Vishal, you are doing the right thing by analyzing companies based on the information that is available to you and presenting the summary to us. It is left to us to decide if this is asuitable buy/sell for me based on my current portfolio and risk absorbing capability. Till about a year back, I used to tell my friends about the stocks that I was buying hoping that I have made right decision and that it would help others as well. But stopped it after I learned a nice lesson this year. I had recommended tata motors DVR at Rs 90. I had also told my friend that only if he has the guts to hold it long term, he should buy it and should not panick if it goes down. He seemed to understand everything and bought it. But later when it went to Rs 80, he was angry with me, used all possible curse words and sold it. Recently when it went to Rs 160, he again cursed me saying that I did not stop him from selling at 80. Since then, I have just maaged my portfolio and have stopped telling others what to buy or sell.
    Please continue with your analysis. I have really enjoyed going through the details you have put. In the end I know that it is up to me to decide if I need to buy it or sell it or ignore it.
    Regards,
    Bhushan

  13. Amit Jotwani says:

    Vishal,I am a new convert to your site and let me congratulate you on doing a fantastic job.Your Opto Circuits stock talk & follow up analysis is clear & stimulating.Keep up the good work!

  14. Reni George says:

    Beaking News:
    Mr.Vishal Khandelwal, the Chief-Tribesmen of Safal Niveshak came out with a post on Opto Circuits in the Middle of the noon,which i think never happened earlier.Joking Around.
    So dear vishal,how many hate mails have you received,again joking.
    Now Coming to actual Comments to your post.
    1)Is Vishal to be blamed
    Ans)NO.No at all.We are here together for a common agenda ,that is to increase the resources for deciphering a stock and vishal is playing a major part here.Vishal could have had easily carried on with his job,where he would have been earning much more.But somewhere down the line,his conscience was not letting him do that,as he was in the field ,where it was the bread and butter for recommending a stock.So this speaks about the integrity of Vishal.He was not bogged down by the situation,but he broke the Chakravyuh and came out it trumps.We vouch for it.
    2)Was Vishal wrong in his assessment when he researched Opto Circuits.
    Ans)No.Not at all.Vishal had clearly indicated his negative views on certain parameters such as a)Does the Business generate strong cash flow?b)Is the Operating Cash Flow higher than Net Profits?c)Is the Debt to Equity below 0.5 Times?d)How capital Intensive is the business?e)What has the management did with free cash flow in the past?That means it are the same points that have now dragged the stock down,which vishal was afraid of.
    3)What was vishal’s Biggest concern regarding OCIL?
    Ans)The Company’s high working capital which was blocking precious cash.Vishal had clearly mentioned in his report that capital turnover ratio was around 1.0 times,which was pretty dangerous.
    4)What was Icra’s stance?
    Ans)ICRA has revised the long term rating assigned to the Rs. 538 crore† fund based facilities of Opto
    Circuits (India) Limited (OCIL) from [ICRA]AA- (pronounced ICRA double A minus) to [ICRA]B‡
    (pronounced ICRA B). ICRA has removed the ‘Negative’ outlook on the long term rating. Further,
    ICRA has suspended the rating assigned to the Rs. 538 crore fund based facilities of OCIL.
    The rating revision takes into account Opto’s stretched liquidity position on account of continued high
    working capital intensity in 2011-12 resulting from high receivable period, and significant inventory
    levels as well as advances to suppliers. Moreover, high capital expenditure and dividend payout,
    resulted in negative free cash flows. The stretched liquidity position of OCIL is also reflected in its
    increased working capital borrowings and irregularities in utilization of its working capital facilities and
    servicing of its debt obligations. Further, Opto’s significant capital expenditure plans in the medium
    term and its contraction in operating margin post acquisition of Cardiac Science Corporation, constrain
    the rating.
    Given the absence of the requisite information from the company , ICRA has suspended the rating
    assigned to OCIL’s Rs. 538 crore line of credit.
    5)Can I put faith in ICRA’S Report?
    Ans)Maybe yes ,Maybe not.If not why?Remember the bonds with AAA rating during the Subprime Crisis,Overnight they moved to junk status,is it possible?absolutely not,there was lot more dirt inside when it comes to these rating agencies.its a murky world.Even check out some of crisil’s report on some companies.I have seen money being exchanged to these rating agencies for the sake of a good report,that can be presented to the bank for loan purpose.
    6)What is my view on OCIL?
    Ans)I had never researched on OCIL,but had gone through the research of Vishal,but i was fully invested and somewhere down the line,i had one more parameter the net-net.The net Current Assets was working around Rs.70 which was way below the market price,so thought to give it a miss for some time,there were lot of misses earlier but its a saying.”You should never regret and never be happy in stock market”.
    7)Does the current downtrend present a window of opportunity?
    Ans)First of all there will be denials from opposing parties,lot of mud will be thrown at each other and a third player (crisil) will also make the play interesting.OCIL is also in the FO,so bears will get a chance to pounce on it,retail investors will start leaving the boat after a slight hesitation.There will be plenty of opportunities now if you intend to buy the stock or add onto it,but as vishal pointed out if you believe it.And now finally to all those who expect some kind of recommendations on stock.”Find Mentors.Today,Do not Expect anything from them”.

    Thanks and Regards
    Happy Investing

    Reni George

    • sanjeevbhatia says:

      Well Done Reni.

      You have put the whole issue in a very nice detailed perspective. After your lucidly written piece, there should not be any iota of doubt or confusion remaining in anyone’s mined regarding this whole saga of Optocircuit.

      Regards.

    • Thank you everyone for the support to the initiative! Feel really proud to know that at least there are some tribesmen who believe in what I am doing (including the mistakes I am making) :-)

      Just to add one more concern on OCIL that I’d forget to put in the report earlier despite having discussed the same with the management, but was reminded by a blogger-friend (OCIL now seems like “paap ka ghada jo bharta jaa raha hai :-) ) – It relates to the large amount of goodwill that the company holds on its balance sheet. The goodwill was largely created owing to the acquisition of CSC. My concern arises from any risk of impairment of this goodwill, which will happen in case CSC’s business does not perform in line with what OCIL expected when it bought the former. Already in FY12, as I just realized, the goodwill has been written off by 28% straight from the reserves. So this is a concern that investors must be aware of, as any write-off just hurts the balance sheet.

      The risk on account of the same can be adjusted in the IV calculations and margin of safety, and a decision taken accordingly whether to buy the stock at the current price, hold it, or sell it (if it seems like a mistake). :-)

    • That’s really well done Reni..:) Great job..:)

  15. As the living legend always says “‘Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.”

  16. Hey Vishal, I landed here because of SB. Love your site and love what you are trying to do; and I agree with most of the things mentioned above – people tend to find the easy route, always. The post is fantastic. One request though – can’t find the pdf Opto FY12 annual report anywhere. Am a professional investor and find it irresponsible of the company not to have it available on the net. Do let me know if you have a link for me. Cheers.

    • Thanks for the appreciation, Tirath! OCIL has not yet released its FY12 annual report (most Indian companies release the same by September, so OCIL’s report is expected soon).

      However, you can look through its FY12 balance sheet that was released in May along with the fourth quarter results. Here’s the link.

      • Alright. Thanks. I have done a short analysis on Opto – and it is harsh. Please bear in mind that I have spent very little time on this company, but based on what I see, I would not touch this company from an investing perspective because it interferes with my concept of margin of safety. Vishal, feel free to remove this post if you deem it unfit for this forum.
        I dont have the annual report but I do have the annual consolidated results and what I see is poor. Plus, I dont see a balance sheet for Q1FY13. Numbers are approximated.

        FY12 and FY11, respectively.
        Sales: 2370 Cr and 1615 Cr
        EBIT: 575 Cr and 425 Cr
        PAT: 573 Cr and 369 Cr (Accumulated losses on acquisitions and tax breaks)
        98%+ of sales are overseas.
        M Cap: 3000 Cr

        But let’s go to the book liabilities:
        Long term borrowings: 304 Cr and 269 Cr
        Short term borrowings: 865 Cr and 615 Cr
        Total Debt (at least): 1170 Cr and 880 Cr
        Interest: 59 Cr and 32 Cr (WTF, so low?!!!!?)

        So, why is a company that makes 570 Cr in PAT not pay off debt!!??
        Because:
        • Inventories: 512 Cr and 432 Cr
        Looking at the gross profitability of more than 50% – this translates to 1000 Cr of sales which is a 5 month stock of stuff, which kinda makes sense because of the nature of the products being sold.

        • Receivables: 846 Cr and 678 Cr
        So, this means that out of 2370 Cr of sales, I still have to receive 846 Cr of cash!!?? And the ratio was more unfavourable last year.

        • ST loans and advances: 448 Cr and 408 Cr
        Why, what, how?

        • Cash: 174 Cr and 234 Cr – on books because they plan to fund future contingencies I presume
        • Goodwill: 452 Cr and 629 Cr (This is an impairment of some sorts and it is still a massive amount for a company that is funding it with short term debt)

        From the FY11 annual report I saw that free cash flow was 50 Cr and 112 Cr for FY11 and FY10 (I subtract interest expense and depreciation for free cash flow) (Quite poor for a company that shows such high profits). The FY12 free cash flow should be below 200 Cr.

        Working Capital sucked out 370 Cr in FY12 and 320 Cr in FY11 and 100 Cr in FY10. Is this a good business? I think it used to be a good business before they decided to fund acquisitions with short term debt.

        My prime concerns are: Free cash flow, short term debt and a potential bad debtor/ inventory mark down situation.

        Could I be wrong? For sure. I know very little about this company and I trust other investors to know more. But the above mentioned numbers don’t seem to be lying. I don’t see safety in this investment – unlike the picture from 2 years ago.

        Once again Vishal, I don’t intend to spam here, so feel free to not publish this post.

        • Tirath, there was no way I would have not approved this comment of yours as it has added a lot of value to the entire discussion around OCIL.

          While I have also had my concerns around FCF and working capital led by acquisitions (and I duly mentioned them in my StockTalk report), you’ve highlighted them in a way better than I did. So thank you so much for the same!

        • Manish Sharma says:

          Hi Tirath,

          Thanks a lot for your inputs. In fact, discussions like these make it worthwhile to continue with this initiative called Safal Niveshak. You have highlighted your concerns that too in such a manner that would help a lot of investors and a learner like me ;-) in doing a better analysis in future. Keep going.

          So long as someone doesn’t bombard this forum with his buy/sell recommendations, all other views are welcome :)

        • sanjeevbhatia says:

          Hi Tirath,

          Any form of discussion here is welcome, and in fact, it is better if somebody plays the devil’s advocate. There can be so many perspectives to view a particular thing, and all can be right in their own way. It is really commendable the type of analysis you have done in such a short time, and more importantly put it in such a clear-cut, easy to understand way. As Manish has said, it is discussions like these which help all of us and make this initiative all the more engagng and worthwhile.

          Welcome on-board and Thanks for your inputs. Look forward to lot more inputs from your end in times to come, which will greatly enhance the learning process of people like me.

          Regards.

        • Hey Tirath,
          That’s really a great job man. Well done!!

  17. This post does not pertain to Opto.
    The site as you pointed out has multiple sections/ discussions / book reviews which are all very interesting.
    A video on various sections and what they have and how to navigate them may be very useful. I find navigating the Investor Forum difficult. I think you have used readymade software, which is very good, but it would help to have a short video on how to navigate.
    It is a suggestion.

  18. Firoz Ahmed says:

    Hey Vishal,

    Plz continue your good work. Don’t let selfish fools hamper you.
    I follow your posts to learn more about value investing. As you said these are your research and we should try to master the process, not blindly follow them. If we don’t know the golden rule ” not making money is better than losing money” and that we should better keep our money in cash before rushing in to invest without research, then God help us.
    I had thought of investing in ocil, but refrained because

    1. Your earlier post about ocil “story”. I thought maybe I was having a “bias”
    2. Comments section after the stock talk had a nice debate between you and another reader.
    3. Due to above points, a I had not done any independent research of my own , I tried to play safe.

    My take and advice to those selling tips ” don’t blame others for your laziness”

    And vishal, once again, i request you to continue the good work

  19. Hey Vishal,
    As you mentioned the ‘true’ tribesmen were always with you, are with you and always will be..:)
    I like your spirit very much…:) Just keep going..

  20. Vishal,
    I realized this tread existed with such extensive comments only this evening. If any of my comments on the main thread, caused you to rethink your Safal initiative then, please don’t. I am convinced that you are doing the right thing and please continue with your initiative. I am sorry if I hurt your sentiment please note it was neither intentional nor personal. I have had some finding on the company which I was trying to put forth probably it would have better to act on it rather than write it. That way I would have made more money !!

    On the parting note you are a Munger fan, so why not turn the question around its head and decide what data point/s appearing in the future will make the Opto analysis up for reconsideration on the negative side? Lets debate them.

    • Atul, my post was triggered by some emails I had received and not the constructive discussion we have had on the OCIL post. So rest assured that your points have not been the cause of this post. In fact, I liked the points you raised about OCIL, some of which (like employee and power costs etc.) I overlooked.

      As for your suggestion about implementing Munger’s “inversion” theme, yes that’s a great idea. The points we discussed in the comments section of the OCIL post, and the points you raised, were in that very direction. Maybe I can add this small section in my future StockTalks. So thanks for the idea! :-)

  21. Not read any of the ‘negative’ comments really but i dont get why there should be any at all …Thought id ask 2 things, just to follow the logic applicable to all stocks going forward…
    1. How is the price going down by xyz percent indicate any ‘mistake’ if the factors for the fall were already factored in ? In other words, how does price movement alone determine if the research is right or wrong ( at least in short term )
    2. How does one ‘value’ a company if there is concern its going ‘bankrupt’ ( ive taken a broader sense )? Either there is a case for servicing debt, else bond and equity holders both run the risk of not getting their money ( although bond holders may have more safety backed instruments )- It should follow therefore that primary analysis is if the company can service its debt and a negative answer here should not warrant any investment irrespective any rating , however if one is confident about solvency dips in price due to these very reports may provide good points of entry –
    (Disclaimer – ive put in small amounts post recent fall on the premise that value for growth had become decent.)
    Wonder it this logic itself makes sense or its flawed ??? What say Vishal? others ? …
    austin

    • Well Austin, the first answer needs to be answered by people reading the research and those acting on the same (despite being suggested not to do so!).

      As for the second question, yes debt (and a lot of it) is one big factor that can cause bankruptcy. But in India, you won’t find bankruptcies because our laws aren’t so effective! And yes, if the company is seen as getting over such short term issues, then any drop in price below the intrinsic value must be seen as a point of entry. However, one must always avoid “over-weighing” on one stock (like I don’t let any one stock become more than 10% of my stock portfolio), however confident and convinced one is about the story. Regards.

  22. Dear Vishal

    Many have raised the capability of rating agencies to provide accurate ratings to start with and examples of Reliance Power, Enron etc has been provided. All are valid arguments but not applicable to current situation. The valid question to ask is what is the track record of rating agencies once they have downgraded a particular company rating.
    My experience suggest that, while the rating agencies are late in downgrading a particular company, in most cases they are highly accurate and it is to the detriment of equity investor. I am trying to get hold of acedemic research on this and will post a link on the same.
    There is valid reason for that because the default criteria for a debt investments are very straight forward and require very little judgement. Once the data is input the computer spits out the coverage ratios and when linked to past experience it is very easy to come out with rating judgement.

    The question is why do the rating agencies are wrong initially but right later. The answer is my opinion is due to the way the rating agencies are paid.

    The rating agencies are paid by the rated company. The company has the right to reject the initial rating and shop for favourable rating from other rating agencies. So it is the effort of sales person at the rating agencies is to ensure that the initial rating is to the liking of the client. Which means it has to be investment grade. Once the company accepts rating and raises money using the rating then it loses control on the rating process. Now the rating agency calls shot on the subsequent ratings whether the comapny likes or not. All the company can do is not pay rating agency and in that case you get Opto-ICRA conflict. Hence the downgrades are more accurate than initial ratings.

    On this subject what do you think is chance of Opto accepting lower rating from CRISIL. Zero in my opinion because the stock will collapse. Hence, I will not be surprised if we do not hear about CRISIL rating in the future. Remember Opto has right to reject initial rating.

    • Great inputs, Atul! Thank you for sharing these insights that not many of us might have here.

      Your points further strengthen the point about the need for investors to junk all kind of rating – good or bad – while making an investment decision. Doing an independent study on the company – like finding the level of trouble in OCIL’s balance sheet and whether it can overcome this situation in the future (which the rating agency will be late to reveal) – and then taking the decision is the way to go. Regards.

      • Vishal,

        As I feared, we have not heard from Opto about Crisil rating yet despite the promise. Looks like Opto amanagement did not like the rating and chose to ignore it. There is no news/chatter about AGM on the web which is very unusual for Opto. In the absense of any fundamental news I looked at delivery statistics of Opto share at NSE. After August 14 th, the day the ICRA news broke, the delivery percentage of share has almost quadruple to about one million share per day approximately. The price has been steady at around Rs. 130. Thus depending on whom you ask either accumulation or distribution is happening. Someone has either accumulated or distributed over Rs 200/300 crore worth of shares over last 30 trading days. These numbers are staggering in my opinion. This can not last. We are at the cusp of some big move in Opto. Which direction is a million dollar question.

  23. I am amazed by the confidence of the retail investors in this forum who are bullish on this stock based on their fundamental analysis.Everybody thinks this company falls into their circle of competancy(violating Buffets key investment principle) because they have been reading nice stories about this comapany in media over the past few years.

    I bet 99% of the commmon investors(including myself) cannnot understand the products the company sells in various markets.Its impossible to analyse the competitive dynamics faced by this company unless you are an insider to the medical devices industry and having knowledge about the regualations and comepetiton in different countries.

    I guess most people are decieved by the appealing story of this company selling stunts and other invasive products used in heart surgeries, thereby thinking this company falls into their circle of competancy.

    Please go back to the annual reports and see the diversity of products this company has and try to understand from which products they are getting profitability and understand whether there is any competition for those products and ensure that profitability is going to last for many years.

    People who buy this price levels may get lucky because the price can go up due to a trading bounce back and make them overconfident of the process the have applied in selecting this stock. But serious long term investors who are hardcore Buffet and Munger followers should introspect again and check if this company falls into their circle of competancy and whether they are bale to undestand about the company and the industry in which it operates.

    All the best.

    • Hi Rakesh, thanks for your comment!

      Anyways, like you are amazed by the “confidence of retail investors in this forum who are bullish on this stock”, I am amazed by your confidence when you write – “I bet 99% of the commmon investors cannot understand the products the company sells”. :-)

      Since you are a new reader of Safal Niveshak, let me clear one thing here – the true tribesmen of Safal Niveshak are not here to portray their knowledge of companies and investing. Instead they are here to learn so that they can gain in knowledge by sharing learnings from one another. That’s what is the true idea behind this entire initiative.

      Even if you read carefully the above discussion, readers have put forward different and opposing views on the company/stock based on their understanding of the same. I can see nobody here sounding arrogant with his understanding. Instead, people are appreciative of differing opinions from others.

      Ultimately, the idea here at Safal Niveshak is to learn by sharing ideas with others, doing the hard work in analyzing businesses and then taking the investment decisions. Plus, we understand that despite all this, we will make mistakes. But then, as a wise man said, “There are no mistakes, only lessons.”

      So I am not sure if you can come with a preconceived notion that people here are “not serious” and “understand everything”. As I’ve known from my discussions with readers over the past many months, they are serious, they don’t understand everything (like I don’t), but they are eager and willing to learn. That’s the idea! Regards.

    • Dear Rakesh..

      Thank you very much for your feedback..:)

      A couple of statements you made…

      //I am amazed by the confidence of the retail investors in this forum who are bullish on this stock based on their fundamental analysis. Everybody thinks this company falls into their circle of competancy(violating Buffets key investment principle) because they have been reading nice stories about this comapany in media over the past few years.//

      And

      //I bet 99% of the common investors(including myself) cannnot understand the products the company sells in various markets.//

      To clarify these, we are not bullish on this stock just by reading the news about it in media in the recent past..!! Instead we are considering its past records, analyzed its annual reports, moats, management and then came to a conclusion. If we just believed in the media hype then you would have found research reports on Kingfisher Airlines, Suzlon Energy, SKS Microfinance,Temptation Food and many more..!! We are trying to understand good, credible companies which have high integrity, responsible management, strong annual reports..

      As Vishal pointed out, we are not here to showcase our knowledge instead we are here to learn the things, share the things.

      And even if the research goes completely wrong who cares!! We accept it and keep moving. We never got motivated by media hype or we never believed on particular stock based on some research company. We are happy that we did our own research, own analysis and we are proud of that.

      And moreover we never expect everything to be right!! Then there won’t be any learning left thereafter!!!

      Anyways thanks for your comment and interest on the forum..:) :)

    • Reni George says:

      Dear Rakesh
      You have the right to put your view,but i would disagree with the post as a whole.
      1)You talked about confidence,be sure the confidence is there in each and every member of safal Niveshak,this bout of confidence was not born overnight,but it was cultivated slowly by each and every member with the support of vishal,they became confident by interacting with fellow members,followed a learning process and have rightly played devil’s advocate whenever needed.Sugar coating is never done here…that is the best part here.
      2)Circle of competency is never a set of structure……you can grow your circle of competency….buffet started with a small investment,but he slowly grew his circle of competence…that is what we also need to do…Investment doesn’t follow a set of principles,here principle is defined by each individual according to his needs.
      3)It doesn’t require you to be an insider to understand the intricacies of a business,this i can tell from the fact that i could research many companies on the basis of research that i did on the ground,that is possible by each and every retail investor.
      4)We as a retail investor put ourselves as a pity thing.We are here to remove that preconceived notion .we want to empower each and every retail investor in such a way that….he will not accept anything lying down..he will question each and every point that has been raised.We are here to raise the bar for retail investors….so that they can also compare themselves with topnotch Investment Advisors.
      5)Speaking about the Annual Reports,Vishal had clearly mentioned about the shortcomings in his stock talk .And If i am correct,he has gone through the Annual Reports,without which its impossible to collect the data as mentioned by him,even many safal niveshaks have gone through the Annual Reports,you must go through the complete thread,whereby some members even requested if 11-12 reports are available,then it should be made available,to see if they have missed something.
      6)Being a Buffet and Charlie followers does not guarantee that you can not make mistakes,even both these greats also made lot of investment mistakes.If someone tells me that they have never made mistake in the stock market,I would believe in him that he had never invested in equities.

      So as Abraham Lincoln says “I disagree with you,but i will fight unto death for your right to disagree with me”.

      Thanks and Regards
      Happy Investing
      Reni George

  24. Sunny Gupta says:

    Thanks Vishal for the nice post, as always :)

    I’ve been thinking about the future prospects of OCIL purely from the point of view of rising cardiac health problems across the globe, and more disposable income with people to spend on sophisticated products to help their cardiac problems.

    I also appreciate the critical analysis of working capital, debt, acquisitions through short term debt, etc. However, the following are some points:

    1. Do you, or others on the forum understand in depth the various products OCIL and its subsidiaries make?
    2. Can we simply ignore the value of several patents that OCIL holds in its arsenal? I think we can’t, while agreeing its not simple to value them also. In the information age, presence of a decently strong patent portfolio helps, since they help you gain royalties, which is a revenue stream with 100% profit margins, and provide cushion against cash problems (the company I work for sold patents worth $200M to Apple to retire off some debt couple of years back when we were in trouble…)
    3. Not going too far, is there a way to compare how strong is their patent portfolio compared to competition?
    4. Like Peter Lynch does, we may want to offset short term debt with intangible assets in their patents, and then the potential concern of short term debt is relieved a bit.
    5. Is there an information available on how many acquisitions failed in the past and have caused impairment charges to reduce the reserves?
    6. Do we know if the acquisitions are profitable, or what is the expected time in which they’ll start generating revenues…?

    And many other questions. Overall, my feeling is

    1. Purely on numbers basis, its a small bargain at current price using simple metric like PEG
    2. Is it too complicated a business to be able to analyze with any decent accuracy?
    3. Can one invest purely based on the future prospects of cardiac healthcare industry, especially in developing world? If so, are their any other better similar opportunities available?

    I’ve taken a very small position (tracking) in OCIL today, but I’m seeking answers to these questions…its too complicated to analyze on a per product basis unless you’re a cardiac specialist, but probably this company holds a good deal of future prospects purely based on increasing cardiac patients across the globe…

    Just some thoughts to add to the great ongoing discussion…

    • Really great points Sunny…:)

      • Thanks Shankar, but I found myself unconfortable holding the small tracking position on OCIL, and within a day, decided this business is too complicated for me to have it in my portfolio, and I can hopefully find simpler businesses with similar prospects for profit from shareholding, so exited my tracking position…that’s the benefit of tracking position concept…buy small amount share of shares and if your gut feel says something’s wrong…you know what to do…

        of course, we shouldn’t keep doing this tracking position on every stock we come across ;)

        • Manish Sharma says:

          Sunny, if you come across much simpler business then do let me know ;)

          • :) I think I understand SRF better, and it’s a good bargain at current price, maybe better than OCIL…you can read my post on SRF in the Stock idea forum and add your views there :)

            Frankly speaking, I’m always uncomfortable of evaluating companies related to medical industry, though I really wish I can understand them since they present a great opportunity :(

            • SRF…Looks pretty cool, Sunny…:) Let me take a complete analysis on that and will get back to you later…:) Thanks for sharing your views about it..:)

  25. Vishal,Shankar and Reni..Thanks for your reply.I tend to agree with most of the points in your reply. My post is specific to OCIL and people who are bullish on this stock.All I am asking them is to think again and check whether it really fall into their circle of competancy.Hope my intentions are not misunderstood.

    However I still hold my comment: “I bet 99% of the commmon investors cannot understand the products the company sells”.:) The reason is pretty simple.I have been reading their annual reports and they dont have enough information on the current revenues they are generating for different products and in which products they are having competitive advantage in US market.All they have is nice pictures of their products and high level numbers on overall industry potential.Also they donot mention the current revenues or market share for any of their products.With the absence of such kind of information I wonder if anybody could come to any real conclusions about the quality of their business.All we have is some financial numbers and some generalized statements about their products.Its hard to come to a conclusion about the quality of their business and it becomes even more tough because its a technology company where things change very fast and most of their revenues are from overseas operations.If anybody has the analysis to all these, please post it here.I will be happy to learn from them.

    I suggest the investors to go in depth to the qualitative aspects of the company and try to find answers to some basic question like
    1.What the company sells to generate a bulk of its revenue.
    2.How much it sells currently.
    3.Can it continue to sell the same amount(and hopefully grow) in future and there is no threat from regulators or competitors.

    This is specially important for technology based companies in rapidly changing industires and specially for OCIL.

    Understanding the financial statements and rasing concerns related to quantitative aspects like working capital and taxes is all fine.But what I am saying is it is equally important to understand the qualitative aspects of OCIL(which is not very easy due to lack of information and most of us donot have any the basic understanding of medical devices industry).

  26. Dear Reni,

    My reply to the points you have raised…

    /// 1)You talked about confidence,be sure the confidence is there in each and every member of safal Niveshak,this bout of confidence was not born overnight,but it was cultivated slowly by each and every member with the support of vishal,they became confident by interacting with fellow members,followed a learning process and have rightly played devil’s advocate whenever needed.Sugar coating is never done here…that is the best part here. ///

    I have not talked about the confidence of safal Niveshak members in my post,I have only mentioned about the people who are confident about OCIL.

    /// 2)Circle of competency is never a set of structure……you can grow your circle of competency….buffet started with a small investment,but he slowly grew his circle of competence…that is what we also need to do…Investment doesn’t follow a set of principles,here principle is defined by each individual according to his needs. ///

    Agree that you can expand your circle of competency.But it cannot happen quickly just by reading some stock reports and internet discussions.For example, if people who don’t have any idea about medical devices industry until recently,but within a few days of reading Vishal’s report and participating in the forum think that they can take a long tern fundamental call on Opto circuits – to me that sounds like an lay investor entering into trouble.Let me give you an example of how difficult it is sometimes to expand your circle of competency to some industries.Warren Buffet started reading the annual reports of IBM since 1951 and certainly had Bill Gates as his close friend since 1995 but he still thinks technology doesn’t fall into his circle of competency.

    /// 3)It doesn’t require you to be an insider to understand the intricacies of a business,this i can tell from the fact that i could research many companies on the basis of research that i did on the ground,that is possible by each and every retail investor. ///

    Agree with you on that but I would like to add that it is far more difficult to analyze companies in some industries like defense, small software product companies,Biotechnology R&D companies etc. Medical devices also fall into that category.You cant develop a lot of conviction on your long term bets unless you are an insider of those industries or spend significant time and effort in learning about dynamics of the industry.I don’t think there is anyone who has gone in depth and put in lot of effort to study and understand the dynamics of medical devices industry.Instead I find all the research reports on OCIL having the same optimistic picture presented by the management.No offense to Vishal :)

    /// 5)Speaking about the Annual Reports,Vishal had clearly mentioned about the shortcomings in his stock talk .And If i am correct,he has gone through the Annual Reports,without which its impossible to collect the data as mentioned by him,even many safal niveshaks have gone through the Annual Reports,you must go through the complete thread,whereby some members even requested if 11-12 reports are available,then it should be made available,to see if they have missed something. ///

    I have also read some annual reports of OCIL.They have enough information on the quantitative aspects but don’t have sufficient information to understand the fundamentals of their business(atleast that is my opinion). That is what I mentioned in the post.I urged the people who are following the stock to re-read the reports to find some qualitative information,which I have been looking for but unable to find. I didn’t accuse anyone for not reading the reports. :)

    /// 6)Being a Buffet and Charlie followers does not guarantee that you can not make mistakes,even both these greats also made lot of investment mistakes.If someone tells me that they have never made mistake in the stock market,I would believe in him that he had never invested in equities. ///

    If you read my post carefully, I never mentioned that Buffet followers in this forum are making mistakes.Since circle of competence is one of the main pillars of Buffet and Munger’s investment approach I urge the passionate investors in this forum to understand its true meaning and its importance.It will make a lot of difference to their long term results.

    Hope I am being clear with my thoughts.Feel free to disagree with me.

    • Well Rakesh has been able to stir up a lot of emotions on this boards.

      Lets use them to dispassionatly analyse if other than finanicial information, how many of us know opto. Let’s also use it to crowdsourse some information.

      Q How many of us have seen/ used Opto products?
      A. I have neither seen nor used maybe because the company does not sell its product in India. Those of our tribesman in US can throw some light if they come across any Opto products. ( I am sure they would have come across cardiac science products so please make distinction between CSC and Opto)

      Q. Do Indian hospital use imported/ high priced products, if yes, why not Opto products?
      A. I find practically all high end equipment imported. I am sure many of our fellow tribesman are related to medical field they may be able to throw some light.

      Q what are the Opto product which earn bulk of the company revenue.
      A. Opto management has always avoided this question successfuly by stating that they have hundreds of products and also it is not in competetive interest to disclose this information. Analyst and investor comunity has always accepted this information. It also looks like the Pareto 80/20 rule does not apply to Opto. And all the products of the company individually earn small revenue but collectively it becomes a big number. Moreover Opto has been able to introduce new products regularly without affecting profitability.

      Q. how many of us has seen or know someone who has physically seen Opto manufacturing facility in India.
      A. I do not, but I am sure some of our tribesman have. I am eager to converse with those who have seen it. Many of our tribesman work in banglore’s electronic city. It will be a good iidea for some of them to try to visit the facility and report back.
      Q How many amonst us know successful Opto employees other than the C level employees
      A. I have not. Many of our tribesman live in Bangalore may be they have come across. Lets see.

      I have many more such question but lets start with these and then someone else can build on them

      • That’s a pretty neat idea Atul! :-) Thanks for the same.

        Tribesmen in Bangalore, if someone is willing, can share his/her views on OCIL’s products (either by visiting the company’s office, or talking to a heart specialist or a medical device supplier). It would be really helpful

      • That’s a pretty neat idea Atul! :-) Thanks for the same.

        Tribesmen in Bangalore, if someone is willing, can share his/her views on OCIL’s products (either by visiting the company’s office, or talking to a heart specialist or a medical device supplier). It would be really helpful.

  27. Rajesh Sankar says:

    Hi Vishal

    I read your original post and this subsequent posts and also comments on these two posts (i would say discussions / debates) prompted me to investigate further on the OCIL.

    Since OCIL has mainly grown through series acquisitions made during last 10 years ( it has made 11 acquisition), hence it is imperative to understand the valuation of acquisition. The acquisitions also challenges valuation of companies as there are number of variables added to existing business valuation.
    The acquisitions also distorts the accounting and make difficult to read financials.

    Vishal also stressed on valuation of goodwill on the consolidated balance sheet of OCIL and impairment of the same.

    Here are my findings:
    The acquisition of Cardiac science made by OCIL was destructive to the OCIL consolidated balance sheet.

    OCIL has paid nearly 353% premium to acquire CSC for its book value of Rs.90 Crores.
    see the following numbers relating to CSC:

    Rs in Cr Source
    Investment 408 OCIL 2011 Standalone balance sheet (this is also sitting in Consol CFS as goodwill)
    GW 318 OCIL 2011 Consolidated balance sheet
    Book value 90 Balancing figure

    I also recommend to read valuation of valuation of goodwill, accounting inconsistencies posted by Prof. Aswath damodaran. on the following link.

    Before acquisition by OCIL, CSC was listed on Nasdaq and searched for their SEC filing and found the following facts:
    CSC was consistently making losses since 2005, except of one year,.
    It was having accumulated losses in its balance sheet before acquisition by OCIL (which close to 88% of its equity capital)
    It had negative cash flow from operation on 30the sep 2010 filing with SEC

    Find here CSC 30 sep 2010 quarterly filing with SEC.

    And also refer OCIL 2011 annual report for subsidiary details (page 96).
    The CSC has a capital of Rs 1066 Cr and accumulated loss of Rs. 932 Cr.

    This acquisition has increased the OCIL liability by 408 Crore and weakened the OCIL consolidated balance by consolidation of CSC balance sheet (as CSC balance sheet had huge inventory and stock) and eaten away the FCF of OCIL.

    Sources:
    1.OCIL annual report 2011
    2.Cardiac science corporation quarterly report filing with US SEC as of 30 Sep 2010
    3.ICRA report on suspension of OCIL fund based facilities rating (working capital)

    • I really appreciate this kind of “investigative” research on OCIL. That’s what makes this entire initiative worthwhile. Thanks Rajesh!

      Just one point – OCIL’s management has talked about the weakness in CSC’s business and this is what it aims to do broadly with the company and other similar acquisitions – turn them around (cutting losses and improving balance sheets) by shifting production from the western markets to India and Malaysia (tax free and low cost manufacturing zone).

      But yes, the pain (like goodwill write-off and working capital issues) will be inversely proportional to the speed at which they are able to turn around these acquisitions. Regards.

  28. Vishal,

    I posted this on facebook as well. I want to suggest something for your 20 point checklist. Under management, you evaluate Capital allocation under point 15. For me capital allocation is what the management does with the surplus cash the company generates. So, you can discuss (1) dividends (2) debt pay off (3) Buyback of shares (4) Growing the business. These are the 4 things a company can do with surplus cash. One should also consider the valuations paid for the acquisitions. If a company has constantly been paying high multiples of sales / profits / cash flows for its acquisitions, then that is value destroying. That means the management is more concerned about growing the sales rather than focus on profitability.

    If your own stock is cheap but you decide to acquire companies for 2-3x times your own stock multiples, its a bad sign. Your company in question should treat the money wisely.

    So, for me ROE is not capital allocation. Top line growth is not capital allocation. (Also ROE is meaningless for a company that employs a lot of debt as in the case of Opto). ROE is juiced up by use of Debt.

    Finally, I note in your report there has been dilution via warrants. This is a red flag but shows up as green in your report.

    adib

    • Thanks for your feedback and suggestions, Adib! In fact, I ask readers under each StockTalk reports if they can suggest modifications and improvements to the 20-Point Checklist. Yours’ is the first suggestion I’ve received for the same, so thanks a lot for the same. :-)

      What you’ve suggested makes a lot of sense to me, and thus I will work towards incorporating the same in the checklist. I have also received some suggestions from Prof. Bakshi, so will overhaul the checklist.

      Let me know in case you have any more suggestions for the 20-point checklist and also for the “final evaluation checklist” that I recently used in the BHEL report (Sorry for asking for too much!) :-)

      As for the point on warrants, yes it was meant to be “red” but I forgot to correct the html code. Have done it now. Thanks for pointing out! Regards.

  29. One more important question that comes to mind in this case.OCIL has been frequently involved in aquisations for the past five years, in some cases more that one or two every year.Forget about turning around this aquired companies, does the management have the enough bandwidth to atleast manage so many companies efficiantly so that they do not slip into further losses.

    Perhaps we could use this question as a general checklist item in analysing this kind of companies in the future.

  30. why forum is not crowded .. are many not aware of it????

  31. I have heard the CMD Mr Ramnani mention that all the acquisitions are currently profitable at the operating level. So that speaks something about the turnaround capabilities of the management. But that surely does not justify going on an acquisition spree. Just because you have done something right does not make it a guarantee that the same will happen in the future.

    At such times, one thing I look for is whether promoter is confident of the state of the company given the turbulent times. Is he buying shares from the market if there is under valuation of shares. Management is in the best position to understand the pressure that the company is going through and their actions will indeed speak louder than words.

    I came across this on money control.

    HSBC has also increased its stake by 12 lakh shares following the fall and now has close to 4% stake.

    I am not saying that what HSBC has done is right. Merely stating the facts.

    I do feel that with Opto, there is lot of conviction due to the past performance of the company. There was a very high FII holding as per the shareholding pattern last quarter (around 35%). The stock can fall a lot further than this due to the high FII holding.

    A key trigger for the stock would be FDA approvals in the US considering the high obesity levels and the huge market out there but this is a rather lengthy process. Unlike medicines, medical devices have a rather long approval process and you need marketing muscle as well to convince hospitals and medical service providers that your product is just as good as that of the competitors.

    • Nelson

      I also heard mr ramanani say that they are profitable at the operational level at erstwhile Cardiac sciences. But that is surprising because if you look at subsidiary performance on page 110 of opto 2012 annual report then Opto cardiac care which is almost entirely old Cardiac Science reported a turnover of Rs 1036 cr and net profit before tax of Rs 79 cr. In fact if you look at 2011 annual report then as per page 96 Cardiac science reported turnover of Rs 237 cr and profit befor tax of rs. 23 cr for the period for which accounts were consolidated. This mean either Mr ramanni is wrong or data in the annual report is wrong.!

  32. If one is bold enough to put one’s research up on the net, or on investor forums, one as to be ready to face the brickbats if things do not work out. It is part of life, and i think you would do well to accept it as such.
    Unless one suspects strongly that something has been written with a certain type of motivation (not so in your case) it is very wrong to turn on the writer. It would be sad to lose people who contribute their ideas to the investing community, just because things turned out differently from what they opined.
    But coming to Opto Circuits, here is what someone posted last year.

  33. I am surprised no reviews of the Opto Agm over the last weekend. Such a masala big budget Hindi movie gone bad balance sheet and none of the avid followers of have visited the Agm. Any views from the management discussed at the AGM are welcome if any of the readers have attended.

  34. Any update from the new rating agency!!!

  35. Has any shareholder received dividends in their bank account yet? Please confirm the same it has already been more than 2 weeks that the AGM is over.

  36. Hi Vishal, I read your blog. I love its “Investing for dummies” kind of simplicity. I thank you for you painstaking efforts and admire your large heartedness in trying to make a difference by educating the lay investor. Its a wonderful platform.
    My feeling is that if one follows technicals (technical analysis) to fundamentals it could tweak the results to a significant extent.
    With Respect, Sanjay. : )

  37. Kudos to this post !!! Searching all fundamental details for Opto Circuit investment, I came across this post and was so impressed that
    1) Immediately subscribe to your posts
    2) Start reading all your archives
    3) And most important I stated your 2 Year course for starting investment (Even though I already read “Intelligent Investor thrice and many others)

    Can you do a favor.
    As of now I am searching details of “Cox & Kings” and NMDC but most of the blogs talk regarding day trading or most for a month.
    Can you provide your research on that. That will be great help
    Definitely I will take my own call after doing homework :)

  38. sarthak kumar says:

    Dear Sir,
    I have a question regarding opto circuits. I know what you might be thinking! But let me assure you I did not buy it based on your “advice”. Nevertheless, I have ended up investing a good part of my portfolio in it. I wanted to ask if its intrinsic value remains at ~”Rs 130″ or has there been some development to alter the fundamentals.
    Hoping you will answer my questions inspite of the highly irritating and objectionable responses you received.
    Thanks and regards

    • Dear Mr. Sarath,

      The Managment integrity is in question. There are cash flow problems, terminated the agreement with the rating agency, even with the new agency they rejected a draft report (its only rumour) and the rating agency is yet to comeout with their report, above all they changed the co. sec. and they did not disclose it on time.

      Before checking anyother parameter, check the management quality and integrity. Unfortuantely not all of us (including me) can evaluate the management quality. So it is best to stayout of the stock irrespective of the valuation and its intrinsic value. I had invested significant amount in this stock and had booked recently loss of more than 50% value after hearing the company rejecting the crisil draft report (which may be rumour) but a confirmed but delay news of co. sec. resignation and new sec. appointment.

      In this market in last 2 years, stocks with poor managment quality are beaten down for the right reasons. We retail investors come to know at the end and end up loosing money. If you are holding the stock – get out of it. If you are planning to buy it ‘Forget That Idea’. Who know you may see this stock in single digit in a years time like Deccan Chronicle. To me it is another story like Deccan Chronicle….

      Regards

      Ajay

      • FII holding has gone slightly up but no. of FII reduced from 123 to 113 in Q4 . Only because of HSBC increased stakes substantially ( close to 10% including all HSBC entities) , the FII stake is showing higher. Stock has further chances of going down if FIIs continue to sell. But no analyst has come out with a sell rating so far.( Source – Reuters).

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