Transcript - Opto Circuits Circuits (I) Ltd...performance and then we will open the forum for Q&A. Jayesh, over to you now. Jayesh Patel: Thank you. Good afternoon everyone. Opto Circuits

Disclaimer: Statements made in this document describing the company’s objectives, projections, estimates, expectations may be “Forward-looking Statements” within the meaning of all applicable securities’ laws and regulations. Actual results could differ from those expressed or implied. Important factors that could make a difference to the Company’s operations include economic conditions affecting demand, supply and price conditions in the domestic and overseas markets in which the Company operates, changes in government regulations, tax laws, other statutes and other incidental factors. Opto Circuits (India) Ltd | # 83, Phase 1 - Electronics City, Bengaluru 560100 | +91 80 2852 1040/41/42

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Transcript Conference Call of Opto Circuits (India) Limited 15th November 2012, 12:30 PM IST Presentation Session

Moderator: Good afternoon ladies and gentlemen. I am Solomon, moderator for this conference. Welcome to the conference call of Opto Circuits India Limited. We have with us today, Ms. Namita Dandekar from Investor Relations. At this moment, all participants are in a 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 floor to Ms. Namita Dandekar. Over to you ma’am. Namita Dandekar: Thank you Solomon. Thank you investors and analysts for joining the Opto Circuits Q2 and H1 FY13 earnings call today. The Opto team is represented by Mr. Jayesh Patel, Co-Founder and Director and Mr. Valiveti Bhaskar, Director – Finance and I am also joined by my colleague from Investor Relations, Ms. Shalaka Parab. Please note that today’s call is copyrighted material of Opto Circuits India Limited and no part of the call and transcript can be reproduced or attributed to, without the company’s explicit written consent. I would like to remind everyone that statements made in this call maybe forward looking statements within the meaning of applicable securities laws and regulations. Actual results could differ from those expressed or implied. The duration of today’s call will be approximately one hour. Mr. Patel will begin by giving you an update on the business performance and then we will open the forum for Q&A. Jayesh, over to you now. Jayesh Patel: Thank you. Good afternoon everyone. Opto Circuits reported a YTD Y-o-Y revenue growth of 22% aided by the synergies accruing from the Group re-structuring exercise and the entry of new product variants in the market this year. During the same period, the non invasive segment grew by 21% and the invasive segment grew by 29% Y-o-Y. Weighted average Rupee depreciation against the USD and Euro during this period supported the growth rate by around 10 percentage points. Significant changes in the global regulatory framework, especially in compliance to new environmental laws, such as RoHS and IEC – 3rd Edition, have increased costs for components and assembly work. All medical electronics products in the consolidated portfolio have been impacted by these changes. Manufacturing expenses have therefore increased resulting in YoY Gross Margin decline to 44%. The consolidated gross margin is expected to be in a steady state with improvement, if any, of a few basis points only likely in the next few quarters. Y-o-Y, the net margin was impacted by the expensing of product development costs to the tune of Rs. 43 crore but overall overheads costs reduction helped achieve 19.23% PAT. Q2FY13 reflected a de-growth of 15% in comparison to Q1FY13. The Q-o-Q decline was partly on account of comparison to an above-average Quarter 1 performance and partly due to the impact of 3% currency appreciation. A few more factors are responsible for the


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decline: Sales execution in Q2 had, to some extent, be deferred to Q3 & Q4 owing to technical issues with specific input items at the suppliers end and this contributed to around 5% of the unfavorable growth percent. The issue has since been resolved and care has been taken to avert such supply-side interruptions in the future. Additionally, the management made a conscious decision to delay sales execution in certain markets and with certain customers considering the latter’s liquidity position and historical payment overdue status. These same market dynamics have impacted the trade receivables position of the consolidated entity and stretched the operating cycle of the company by 12% since the last balance sheet date. The management will continue monitoring the receivables position from its customers across segments and locations in the following months. Meanwhile, measures have been adopted to recover past dues without affecting customer equity and market share. I am happy to report that the company has repaid Rs.114 crores of bank debt in the six months following 31st March 2012. This was made possible by the Long term debt repayments being on schedule and control over the drawing of short term working capital debt. As on 30th September 2012, we achieved a Net debt to equity ratio of .49, an improvement of 17% over the last balance sheet date. Our investment plans for FY13 are on course. Advances worth Rs. 63 crores that were paid to Suppliers of Capital Goods, have moved to Gross block in the six month period since 31st March 2012. This capital was deployed as maintenance capex for the non invasive business. In the first half of this fiscal, the newly-launched G5 AED product has been very well received in the market. The prior generation G3 product also generated healthy business in Europe, India & Israel. The much-awaited CE mark certification also came through for our PAD diagnostic equipment, opening up an exciting market that can alter the way European doctors diagnose vascular disease. On the invasive side, Opto Circuits added its first Sirolimus stent to the portfolio, with a successful certification and launch in India. New product registrations and expansion of sales channels continued in this segment, helping counteract the slowing of certain existing markets. In the backdrop of a difficult global sales environment and a challenging trade receivables scenario faced by the Medtech Industry, in particular, and all businesses, in general, the Opto Circuits Group has managed to achieve reasonable business growth while maintaining Net working capital days @ March 12 levels i.e. at 215 days sales. The consolidated group has also posted minimal but positive operating cash flows and free cash flows as at 30th September 2012. We hold on to our optimistic estimation of annual business growth backed by a very strong order position as on date and the expectation of executing delayed sales. We also estimate business profitability to hold steady and the positive cash flow position to improve marginally. We are now open to questions from the audience. Thank you very much. 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 you would like to withdraw your request, you may do so by pressing * and 1 again.


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The first question comes from Mr. Prakash Kapadia from I Alpha Enterprises. Please go ahead sir. Prakash Kapadia: Thanks for taking my question. If you could give some sense on the non-invasive side where we have seen treatment and vascular has de-grown this quarter. When do we see growth coming back and what are we doing to bring growth back in this segment? That was the first question. On the AED side if you could give some quantification of recent order bagged, some order book and some visibility and if you could also highlight some of the India opportunity which you have mentioned in the presentation for cardiac science. So, those were the questions, if you could throw some light on that please. Valiveti Bhaskar: The AED side, the order book is very healthy. This quarter was like any other quarter. The first quarter was a bumper quarter of Rs. 715 cr. So, orders are pretty healthy and we still maintain our position in the US as number two as far as the AEDs are concerned. The order book is pretty good there. And on the vascular diagnostic side, there is a 1 crore drop. So, as a percentage, it looks high. These are basically orders that come in and now we see much better Q3 and Q4, because we have started selling this product for the first time in the non-US market, especially the European market, as Jayesh mentioned earlier, we got the CE on the product. We will be ramping up our sales in the next couple of quarters. Prakash Kapadia: And on the India opportunity for cardiac monitoring side if you could give some sense on the India side of this business there, where is it coming from and what is the plan for India? Valiveti Bhaskar: India, if you look at the cardiac monitoring side, we are selling quite well. We have gained entry into several new hospitals and the defense also. And as far as AEDs are concerned, marketing effort is on. We have a dedicated sales team handling this. And like you have seen in the update, we have got good orders from Defense and the Corporates are taking little longer. The first corporate to adopt this or use the AED will be the American corporations where it is mandatory for them in India to have this AED. Otherwise marketing effort is on to try and do it to the railways and the airlines. Shopping malls are taking a little longer, because for them it is not priority. We have started with the airport, for example Bangalore international airport and few other airports. What we have seen is lots of new tenders are coming up in this space. But, then a few incidents in the football clubs and in the gyms and things like that, we are seeing that people are coming and asking for the product. Sales of course are on, but it will take a little longer for us to catch up on the Indian market. Prakash Kapadia: Right. And one small thing for Jayesh, if you could just highlight what is the sense you are getting from US and Europe? Are now budgets going to be better, how is the healthcare in the scheme of things? So, some sense on that space. Jayesh Patel: Budgets are not changing at all as far as both Europe and US go. They will remain the same. You will see some uptake once Obama care is implemented. But, the implementation is still kind of hanging. Nobody knows what is going to happen to it. But, we don’t anticipate any drop as far as sales go, in the US and in Europe. Prakash Kapadia: Thank you and all the best. Jayesh Patel: Thank you Prakash.


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Moderator: Thank you sir. The next question comes from Mr. Bino Pathiparambil from IIFL. Go ahead sir. Bino Pathiparambil: Yeah, hi. Thanks for taking my question. So, with sales picking up in the second half, can we look forward to a 20% overall growth this year, which we have been expecting originally? Valiveti Bhaskar: If you take the currency also into account, yes. If you take out the impact of the currency, then of course it will probably be 10-12%. If you take the currency impact, we are not very sure how the dollar is going to move right now. But I will say 10-12% looks doable right now, without the impact of the currency. So, on top of that we have, I think overall I would say about 20%-22% growth. You will have to take 2200 as the base number for last year, because there was a currency impact in there too. There are lots of comments on the receivable cycle. We have tightened our credit period to our customers. And generally the macroeconomic scenario in Europe is not that great right now. So, we would rather protect our money, rather than harp on sales growth only. Bino Pathiparambil: Right. So, none of this will really change for FY14 also, right? So, a similar rate is what we should look for FY14 also? Valiveti Bhaskar: I would think so. Bino Pathiparambil: Okay. And the net debt number is now at 966 crores, so what was that as of 31st March and what is the impact of currency? Valiveti Bhaskar: Rs. 1154 cr., that’s the number. Bino Pathiparambil: Is there any impact of currency depreciation per se on that? Valiveti Bhaskar: No, in real terms, the term loans taken for acquisitions, we have started repaying that. I think we mentioned in the last call also. The currency depreciation is only 3%. But, actual repayments have been made to banks in India and in US; the term loans repayments and the short term working capital repayments have been made. That’s how it has come to Rs. 966 cr. Bino Pathiparambil: Sure. And this Malaysia facility, how much of the planned facility have we built so far, how much of that is operational and what is the plan going ahead? Valiveti Bhaskar: No, the facility has been built completely. We are waiting for the equipment. We expect the equipment in the month of December and probably we will start complete production. Right now what we are doing is only a portion of the manufacturing- sterilization, repackaging, the marking, all that is being done right now. So, we had to get the local manufacturing license for that and in fact we got it. The bulk of the equipment should land in probably the first week of December or the second week of December. And full-fledged manufacturing should start thereafter. Bino Pathiparambil: Okay. So, there won’t be any capex in Malaysia FY14 onwards, everything will be done in FY13?


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Valiveti Bhaskar: Yeah. Whatever is there will be marginal. It won’t be what we had in the last couple of years. We won’t have the 50 million odd kind of Capex requirement. It will be a very small number. Bino Pathiparambil: Okay, thank you. Valiveti Bhaskar: Thank you. Moderator: Thank you sir. The next question comes from Mr. Sanjaya Satpathy from DSP Merrill Lynch. Go ahead sir. Sanjaya Satpathy: Sir, my first question is relating to these receivable days which have gone up. Can you just tell us, remind us about the number for, what was the number at the end of June quarter? And as you said that you have tightened the conditions of credit, so is this something new initiative, so that means there will be that much more sluggish sales going forward? Valiveti Bhaskar: It is not sluggish sales. Why do we have to correct? Generally we do this correction only when people do not pay. For example, two invoices, they don’t pay, and then we try to correct it. It’s not done across the board. There are generally delays in certain markets anyway. So this correction is done only when we feel that there is a lot of delay in getting payments. So, it is not that just because a guy doesn’t pay one invoice, we will stop supplying. This is done very selectively and depending on the credit position that the customer enjoys with us. And like I said certain markets are dull, like Europe and I think all of us are aware of Spain, Italy and Hungary. We were at 135 days for Q1 2013. Sanjaya Satpathy: Okay. And sir, you also mentioned that you did some restructuring relating to your sales and distribution in various geographies, can you give us some specifics, exactly what has happened there and what will be the benefit of that? Valiveti Bhaskar: Restructuring, what we mean here is that there are certain distributors who are not performing, so we have got in new distributors in these areas. Certain distributors were weak financially, so we had to change them. That’s what we mean by restructuring. Otherwise, the entire sales team restructuring was done in last June itself that is 2011 June, between June and September restructuring was done. Here what we have done is, we have integrated, and consolidated because we had multiple distributors in some countries, so that has taken off and now we have single distributors in those countries. That is the restructuring we have done. Sanjaya Satpathy: Okay. And the other question was, I just want to kind of confirm with you what you have mentioned. When I look at the balance sheet and the capex number comes to something like 120 odd crores, whereas you have mentioned that part of it has moved from loans and advances to fixed assets. So, going forward, that is in the second half, you have already mentioned that your factory building is virtually ready and equipment probably you have already paid the advances. So, considering all that, total net cash outgo towards capex, how much do you think we will incur during the second half of the year?


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Valiveti Bhaskar: Cash out from our system could be between Rs. 30- 40 crores. Sanjaya Satpathy: How much is the number sir? Valiveti Bhaskar: If you see on 31st of March, Rs. 242 crores was the advance paid for capital goods, now that comes to Rs. 181 crores. For the whole year we expect the capex to be in the region of 50 million dollars, about Rs. 270 to 280 crores. So, I would say probably another Rs. 30-40 crores, would be spent between now and March. Sanjaya Satpathy: Sir, actually I couldn’t get some of these numbers. You said Rs. 242 crores have gone down to Rs. 118 crores, is that right? Valiveti Bhaskar: Rs. 181 cr. It is there in the March 12 annual report. Sanjaya Satpathy: So, you are saying that in the remaining half, second half that is, you are going to spend about 30 to 40 crores, is that right? Valiveti Bhaskar: Correct. Sanjaya Satpathy: Okay. And the last thing that I wanted to understand from you is that the kind of decline we have seen in various segments, you are saying that you would see a recovery in the second half compared to that of the first half, is it entirely because you have completed the restructuring of your sales network and also the supply disruption which you are talking about? And lastly, is that all? Valiveti Bhaskar: Supply disruption was one off that happened with one of our vendors. So, that has been fixed. And we have an excellent order book right now and that problem has been fixed. And we should see it getting better in the next few quarters. Sanjaya Satpathy: Okay. And sir, just last question just wanted to check with you is that we have kind of expected rating from CRISIL to have come out much earlier, but it looks like there has been some delay, is that something you can really give us some color on? Valiveti Bhaskar: What we have done with CRISIL, we have given them the Q2 numbers. I expect to get a favorable rating in a short time. What is happening is that each rating agency has got its own way of working. So, till now we have given them two quarter numbers and then they will work on it. Sanjaya Satpathy: Okay. And we have not anticipated this requirement earlier? Valiveti Bhaskar: No, no. See, what happens is report came out in August last. And after the August results, we gave them the August results. They said one more quarter, it is better to have it. So, we should get it very soon. Sanjaya Satpathy: Okay, got it. Thanks a lot and all the best. Valiveti Bhaskar: Thank you.


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Moderator: Thank you sir. The next question comes from Mr. Ranvir Singh from Sharekhan. Go ahead sir. Ranvir Singh: Thanks for taking my questions. Some of my questions have already been answered. Just following up the last question on CRISIL rating. Can we expect it by the end of this month or they will have further quarterly numbers to come out with? Valiveti Bhaskar: Generally, three quarters numbers should be good enough. So, we expect it very soon. Ranvir Singh: Okay. Because, in last concall we were expecting that this was to come by October and that was… Valiveti Bhaskar: Each rating agency has got a way of working and I cannot change that. It is better to have two quarters. So, we have already given the numbers to them and you should get it soon. Ranvir Singh: Okay. And secondly, is there any forex loss or profit that has been there in cost item somewhere, net forex loss or profit? Okay. So, this is in other income. So, for this Q2 I am asking, for Q2 what would have been the forex loss or gain included in other income? Valiveti Bhaskar: Yeah, it is there. It is included in the other income. Ranvir Singh: Okay. So, what is the number? Namita Dandekar: Ranvir, Namita here. I will send you that detail over email. Ranvir Singh: Okay. Then the product development cost you say included 43 crores in H1, so what it would have been in Q1 and Q2 that breakup? Valiveti Bhaskar: 20 and 23. 20 in the first quarter and 23 in the second quarter. Ranvir Singh: Okay. And just wanted some that supply disruption which you were talking in that presentation, so what kind of disruption is there for technical that what I get a sense is that this was perhaps outsourced and it was that technical deficiency? Valiveti Bhaskar: One of the components had an issue. It was detected at our inward inspection and that has been fixed. Ranvir Singh: Okay fine. And finally 20% growth rate we expect in FY13, so can you give any guidance on margins also and tax rate? Valiveti Bhaskar: I would say the margins would be pretty much same as where we are right now. And the tax rate like we have always said it will be under 10%. Ranvir Singh: 8% to 10%?


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Valiveti Bhaskar: Yeah. Ranvir Singh: Thanks a lot sir. Valiveti Bhaskar: Thank you. Moderator: Thank you sir. The next question comes from Mr. Bhavin Shah from Dolat Capital. Go ahead please. Bhavin Shah: Hi, thanks and good afternoon to the Opto management. Just reading through an article which was about Mindray doing a voluntary recall, just trying to connect the two dots, I don’t know if it is making sense, but maybe a clarification, they recall few anesthesia monitors from the market, anything to do with Opto in the same field? Valiveti Bhaskar: We don’t make anesthesia delivery systems. Bhavin Shah: You all are not into the same category, right? Valiveti Bhaskar: No. Bhavin Shah: Alright, thanks so much. Thank you. Valiveti Bhaskar: Thank you. Moderator: Thank you sir. The next question comes from Mr. Krishna Kiran from ICICI Direct. Go ahead please. Krishna Kiran: Thanks for taking my questions. Sir, a couple of questions. One, on margins. We said that we will be maintaining EBITDA margins in the same range. How much is the impact of margins on the EBITDA level? Valiveti Bhaskar: The forex like I said, the dollar impact has been only 3% from the last quarter to this quarter. It is a very marginal EBITDA level, very, very marginal EBITDA level. Krishna Kiran: So, the sustainability of 26% to 27% can be maintained? Valiveti Bhaskar: Yes, we are very confident of it. Krishna Kiran: Okay. And second from my side is like about integration of your facilities. Like we were looking around bringing around all our manufacturing activities to three facilities, so that when would it be completed or when you are aiming to complete that exercise? Valiveti Bhaskar: The process is on, like I said every quarter, you can’t just shut down everything on one day. So, every quarter there are things that are done with manufacturing, with procurement. It is a process that is going on. I think by March 31st we should be more or less done with that.


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Krishna Kiran: Okay. Post this exercise also we will be maintaining same margins or it can be some more improvement in your margins, just trying to understand your point? Valiveti Bhaskar: There will be a marginal improvement that is why we have guided you till March 2013. We should be at the same level as the first half in the second half of the year. Beyond that we don’t see how the market pans out, how the pricing pans out. Krishna Kiran: Okay. And any update on our AED business in Japan, how is it happening…? Valiveti Bhaskar: Growing quite well. In Japan it is growing. They have successfully launched the products in several places in Japan and they have appointed several sub-distributors in Japan. And they are pretty confident of keeping their numbers. Japanese are very, very conservative when they talk about numbers, but we see the uptake has been pretty good. Krishna Kiran: And as whatever the loss, maybe in the next one year we will get back all those numbers or we don’t want to talk about it? Valiveti Bhaskar: Whatever loss where? Krishna Kiran: Once we have, before we have distributor, maybe before appointing a new distributor, old distributor, some amount we will be used to getting from Japan, is that amount we are getting now? Valiveti Bhaskar: No, no, Japan we were number one, three years ago. It will take a couple of years, maybe two to three years, because that is what the distributor is saying, it will take about between two and three years to come back to a commanding position. Krishna Kiran: Okay. And Namita, can you send me the other income forex loss or forex gain which we have added in other income also? Namita Dandekar: Definitely, I will mail that to you. Krishna Kiran: Yeah, thank you. Thanks a lot. Valiveti Bhaskar: Thank you Krishna. Moderator: Thank you sir. The next question comes from Mr. Jiten Doshi from Enam Asset Management. Go ahead please. Jiten Doshi: Good afternoon. Couple of questions. Just wanted to know the business momentum Jayesh, have things slowed down in Europe and US basically in this segment or normally is it just a cautious outlook on your side? Jayesh Patel: Normally it is just a cautious outlook. It is not that it has really slowed down.


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Jiten Doshi: Okay. And segment wise there are some pockets where you haven’t seen, you have seen some amount of de-growth, do you expect to catch that up in the coming quarters, like in the medical equipment? Jayesh Patel: We will catch up in the next two quarters on those. Jiten Doshi: So, I believe just going through segmental breakup on the medical equipment side, in monitoring and measurement you have seen a 31% year on year growth in terms of this quarter, but treatment and vascular has gone down by 24% and 20%. So, what are the principle reasons for that also? Jayesh Patel: If you see the way the cycle works, you will have some quarters where some of our products do better, whereas in some quarters something else will go bad or you won’t have that much sale. But, if you go to the end of the year, if you add all the non-invasive together, they sort of kind of normalize. Jiten Doshi: So, you are expecting a pick up in the next session? Jayesh Patel: Yes. Jiten Doshi: Okay. And what about, again in the orthopedic side also you have seen some de-growth in the interventional device. Jayesh Patel: It is very small. The whole orthopedic business is so small. It is only based out of India. Any changes there are so miniscule, it really doesn’t add up to anything. Jiten Doshi: Alright. And basically from what I understood Mr. Bhaskar gave the guidance that roughly we will achieve 20% to 22% rupee denominated growth consolidated, is that correct? Jayesh Patel: That’s correct. Jiten Doshi: Alright. You think your EBITDA margins could be maintained at this level and what do you expect the entire year R&D cost which you are going to write off in the balance sheet, in the P&L account, I am sorry? Jayesh Patel: Somewhere around Rs. 80- 90 crores. Jiten Doshi: 80 to 90 crores vis-à-vis the last year that amount was zero, right? Jayesh Patel: Last year, zero, yeah. Jiten Doshi: So, your margins that you are showing now at 27% or so, are after writing the R&D cost? Jayesh Patel: That is correct, yeah.


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Jiten Doshi: Alright. And as far as your tax is concerned Bhaskar, the tax that you have shown is the tax that has been paid off entirely? Valiveti Bhaskar: Entire tax has been paid. Jiten Doshi: Alright. And all taxes paid have been provided for? Valiveti Bhaskar: Yeah. All taxes that have been paid are provided for, that’s correct. Jiten Doshi: Alright. And what do you expect your tax rate to go to in the effective tax rate to end up in the year, because it was a little higher in the Q1, it has dropped in the second quarter. Valiveti Bhaskar: I would say between 8% and 10%. Jiten Doshi: Between 8% and 10%. So, in India you are at MAT? Valiveti Bhaskar: No, MAT is taken below the line. This is the actual tax paid off. Jiten Doshi: Okay, so these are the actual taxes that are paid off. And is Malaysia basically more or less zero tax for you? Valiveti Bhaskar: Yeah, actually this quarter we had something, because the LMW came only in the middle of the quarter, the manufacturing license. So, from now on there will be no more tax. Jiten Doshi: Alright. And can I, the last few questions are that next year also I believe we are seeing a 20% rupee denominated growth? Valiveti Bhaskar: That seems to be the guidance right now, but we will amend it as we go along closer to the… Jiten Doshi: And can we say more or less the capex, cash capex this year will not exceed 50 crores as what you have guided for? Valiveti Bhaskar: That’s right. Jiten Doshi: So, that means whatever was shown under loans and advances is now getting delivered and adjusted? Valiveti Bhaskar: Correct. Jiten Doshi: So, the entire year what do you think the cash capex would be this and next year, cash outflow? Valiveti Bhaskar: This year like I said another 40 crores cash capex. Rs. 240 – 250 crores will probably become Rs. 270- 280 crores of capex. As on 31st March 12, Rs. 240 cr. was the advances paid. So, I would say another Rs. 30-40 cr. would be spent between now and March. Jiten Doshi: And next year?


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Valiveti Bhaskar: Next year, there are few projects that are coming up. So, we will have to work it out. Probably I would say roughly 25 to 30 million dollars. Jiten Doshi: Which areas are you spending that? Valiveti Bhaskar: Mostly I would say, 75% will be in the non-invasive side, in Cardiac Science, Unetixs and Criticare. And the rest of it will be the invasive space. Because, now we have got the sirolimus stent that is launched in India, so we will be working with CE for that, so lot of studies will be done on that. So, that will be part of the R&D spend. Jiten Doshi: Okay. And you expect next year’s margins to be again maintained at this current year level after writing off all the R&D cost. Valiveti Bhaskar: That’s right. We are not guiding higher right now, we are not sure about the macro economic scenario, but we are guiding about the same level. Jiten Doshi: Alright. Jayesh, do you believe that post this election, Obama coming in, you see a better spend on healthcare and do you get the feeling that outlook for 2013-14 could be better? Jayesh Patel: It is still a real grey area. We don’t know what is going to happen, because there are lots of States that have not signed up for it, so we kind of are also kind of in a waiting pattern to figure out what they will do. Even big States like California and Florida, they have not come up with this health exchange, so we really don’t know what is going to happen on that front. But, at least for the time being, for the coming year, we expect the business as usual. Jiten Doshi: Alright. So, that is giving you the confidence to say we could achieve 20% growth in the year ahead. Jayesh Patel: Yeah. Jiten Doshi: Alright. Thank you very much gentlemen and wish you all the best. Jayesh Patel: Thanks Jiten. Moderator: Thank you sir. The next question comes from Mr. V P Rajesh from Banyan Capital. Go ahead please. V P Rajesh: Thanks for taking my questions. Just following up on the previous questioners issue regarding the EBITDA margin, did I hear it right that your 27% EBITDA margin is after taking write off for the product R&D, so if you back that out and try to compare to the last year’s Q2, your EBITDA margin would have been higher? Valiveti Bhaskar: That’s correct.


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V P Rajesh: Okay. And then the second one is, on the last call you had shared the contribution to the EBITDA margin or EBITDA coming from different subsidiaries, could you provide an update for the same for this quarter? Valiveti Bhaskar: Not from different subsidiaries, I don’t think we have ever shared that. Basically it is invasive and non-invasive, basically it is shared on the invasive, non-invasive side of the business and it is never shared across the subsidiary. Invasive, non-invasive side, invasive side is slightly higher, but that is offset by the other studies and things that have happened. V P Rajesh: Right. If I remember correctly and I don’t have the transcript in front of me, but I think you were talking about 40% of the EBITDA coming from invasive side and then you were talking about 10% to 15% from some other segment, so I was just trying to get an update on that. Valiveti Bhaskar: I think if you send a specific question, we will give your answer Rajesh. V P Rajesh: Okay. And then on the working capital side, it has I believe gone up to 199 days from 178 days in the last quarter. So, could you just give us a color as to what specific area is it, given the restructuring that was going on, the debtors number were higher or something else that was responsible for this increase in the working capital days? Valiveti Bhaskar: Yeah, like I mentioned a bit earlier Rajesh, this is the operating cycle, not working capital cycle. This is the operating cycle that has gone up, primarily because there have been delays in certain payments coming in from our customers in certain markets. So, that is one of the main reasons. Otherwise you will see if you look at the inventory days has come down and main thing has been inventory and receivables, so we have tried to reduce that. We will get it better in the coming quarters. V P Rajesh: Sure. So, have those payments come in since the end of the quarter or what is the status on that? I am just trying to understand they will turn into bad debt in this quarter or the following quarter. Valiveti Bhaskar: It has been coming in. Like I said, next two quarters we should see quite a bit of improvement in the receivables side. V P Rajesh: Okay. And then my last question is on slide six, you talked about the debt numbers, the gross debt line and in the first footnote you talked about repayments of over 200 crores. So, if I look at the change in the gross debt number, it is about, I want to say around 70 or 80 crores. So, I was just trying to reconcile to the comment that there has been a repayment of 200 crores on the debt side, what did I misunderstand in that slide, I guess I am just trying to figure that out. Valiveti Bhaskar: When we say 200 crores, this is partly the long term debt that has been paid, some of the short term working capital loans that have been paid back and revolving lines, wherever the revolving lines have matured periodically, those again paid back. So, that includes everything there. If you see it, the net repayment is only 115 crores of bank loans. V P Rajesh: So, 200 crores are from the beginning of the year and 115 are for just this quarter, is that the way to understand it?


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Valiveti Bhaskar: No, no, March to September, the net payback to banks is 115 crores. V P Rajesh: Okay, alright, great. Thank you guys, I appreciate it. Valiveti Bhaskar: Thanks Rajesh. Moderator: Thank you sir. The next question comes from Mr. Amitabh Santhalia from SKS Capital and Research. Go ahead please. Amitabh Santhalia: Yeah, some of my questions have been answered. Just a quick one on the debtor days which have gone up significantly from March levels as per your presentation, from 130 to about 160 days. So, what is the, you mentioned some reasons why that has happened, but what is the outlook on that for the second half? Valiveti Bhaskar: Like I said earlier, we would keep improving. We have tightened up quite a bit on adding distributors and adding customers. So, we would see improvement. I would not hazard a guess on the number right now. Amitabh Santhalia: Okay. But, is that something that we are comfortable with or is that a large sort of risk factor as far as our business goes? Valiveti Bhaskar: There is no risk factor. It is normal business and macro-economic scenario is not good in some countries and we all know it, there is no point in talking about it again and again. But, these are the distributors who have been with us for very many years. And they have some difficulties, short term difficulties. We are accommodating them and I am sure we will get the money quick, because it is a strong relationship with them. Amitabh Santhalia: Okay. We don’t expect any write offs or any type of, what is our history in the past if any, bad debts or customer write offs? Valiveti Bhaskar: In the past twenty years we have written off about 62,000 dollars only. That is also when a company went bust in 2000. Otherwise we generally do our credit checks quite well on our distributors, because these are long term relationships, these are not one off relationships. Amitabh Santhalia: Okay alright. Thanks a lot, that’s all. Moderator: Thank you sir. The next question comes from Mr. Ajay Vora from Enam Asset Management. Go ahead please. Ajay Vora: Hi sir. Just one quick question, want to understand the further debt payment which is expected to happen in the second half and as well as next year? Valiveti Bhaskar: The schedule is pretty much the same Ajay. Like I said we have to pay back about 19 million dollars each year for the next 3½ years. There is no change in this, because no further debt has been taken, whatever update was there in the September quarter, remains same. Ajay Vora: So, by the end of next year, what can be our net debt position?


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Valiveti Bhaskar: End of next year, meaning, end of FY14? Ajay Vora: FY14, yeah. Valiveti Bhaskar: Ajay, too difficult to give. But, I would say it would be about 150 crores reduction… Ajay Vora: From current levels? Valiveti Bhaskar: That’s right. Ajay Vora: Okay. Sir, one thing, if you can just elaborate, when we say that there were certain issues because of which there were delays in sales and which got postponed to the second half. If you can elaborate on that, what exactly was the issue? Valiveti Bhaskar: As I said this earlier, it is only some component related issue. The quality of component has been fixed. These are some component related issues and that have been fixed and it can happen to any manufacturer. These have been fixed and we are moving on. Ajay Vora: But, we expect to compensate that in the second half? Valiveti Bhaskar: That’s right. Ajay Vora: Okay. Thank you very much. Valiveti Bhaskar: Thank you Ajay. Moderator: Thank you sir. The next question comes from Mr. Sanjaya Satpathy from DSP Merrill Lynch. Go ahead please. Sanjaya Satpathy: Thanks a lot for one more chance. Just wanted to re-understand this relationship that you have with the distributors, you said that you have more than twenty years of this. Change in receivable is not really a major concern for you in terms of bad debt or something. Just wanted to understand that how many of these kind of distributor with whom we have had this incremental problem, if you can say the number, at least want to understand like you have some kind of book with them and once their total amount of receivables goes beyond a point, then you stop supplying to them or how does it really work? And how does that influence your sales focus for the coming quarter? Valiveti Bhaskar: Sanjay, this is a very subjective question. What happens is, typically somebody does not pay two invoices, and then you don’t supply to that client, which generally is the rule. In tougher market, we give you a third invoice, where the distributor buys in bulk quantities and things like that. So, each case is different. The credit managers sitting in various countries and various locations take a call on that and then we have told them to tighten that.


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So, there is no standard fixed, if the guy doesn’t pay the first invoice, second invoice is not supplied. That is not done, because of the years of relationship. You have to take into account the market forces that come into play also. Sanjaya Satpathy: Sir, the reason why I am asking this question again and again is because at this point of time you have got couple of distributors who have not paid for say, two invoices or something like that and you are trying to kind of bring that down and then only you will start to supply them. So, in that kind of a circumstance normally we see decline in sales, but you are really saying that your sales will increase and your receivables will decline. So, both these things look very different from exactly what has happened. So, I just wanted to know what we are really missing in terms of the business situation. Valiveti Bhaskar: By tightening it is done. One, is you put pressure on the distributors, then they put pressure on their customers to pay them on time. This is normal business practice, nothing new that we are doing Sanjay. I think any business would do the same, if we are not getting paid they stop supplying or he says, okay, unless you guys pay me, I wouldn’t supply. So, that is what we are doing and wherever we feel that markets are little tougher, we give them a little more time. Sanjaya Satpathy: Okay. So, you are saying that maybe this is something which one need not really look too much into? Valiveti Bhaskar: Most certainly not. Sanjaya Satpathy: Okay, thanks. That’s all, sir. Moderator: Thank you sir. The next question comes from Mr. Prakash Kapadia from I Alpha Enterprises. Go ahead please. Prakash Kapadia: If I see the staff cost is down sequentially as well as year on year, so is that the trend we will see going forward, it is rationalized and is this sustainable or we will see some spike in the second half? Valiveti Bhaskar: Prakash, the staff cost will be up and down till like I said either March or June of next year, primarily because, typically every quarter some corrections are happening. Some people are being let go, some more people are getting hired in different locations. And suppose you have let go to say fifty people in one particular quarter, their settlements will have to be paid. So, you will see these up and down, but overall percentage will remain pretty much where they are. I think June next year you will have this. For example recently we closed Seattle in July, so there were payments made for these guys who have quit and gone. And some of these payments are not made one shot; they are paid in normal severance packages of six months and we would pay them on a monthly basis. So, that variance will be there till the total restructuring is completed. Prakash Kapadia: Okay. And we should expect this to remain at around 8% of sales or so? Valiveti Bhaskar: Yeah, 8% to 9%, that’s right. Prakash Kapadia: Okay. Thank you.


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Valiveti Bhaskar: Thank you Prakash. Moderator: Thank you sir. There are no further questions. Now, I hand over the floor to Ms. Namita Dandekar for closing comments. Namita Dandekar: Thank you everyone for joining us. If you have any further queries, please write to [email protected] and we will get back to you with your answers. Thank you. Moderator: Thank you ma’am. 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: This document has been edited to improve readability.

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Transcript - Opto Circuits Circuits (I) Ltd...performance and then we will open the forum for Q&A. Jayesh, over to you now. Jayesh Patel: Thank you. Good afternoon everyone. Opto Circuits