Over the past 12 months, ICICIdirect kept a ‘buy’ rating on Opto Circuits with unbelievable target prices even as two other major brokers were cautious and the stock was tumbling because of extremely stretched balance sheet. And when ICRA suspended its debt rating, Crisil lent its support
ICICIdirect, one of the country's largest brokerages, has kept a ‘buy’ rating on Opto Circuits (India) while the company’s shares are on a freefall for the last one year. On Wednesday morning, Opto Circuits hit Rs43.15, a fall of 8.6% over its previous close. The stock was over Rs200 April last year, a fall of 80%, even as ICICI direct maintained its ‘buy’ rating with extraordinary target prices.
Here is a short history of ICICIdirect’s atrocious (motivated?) call on Opto. On 8 February 2012, ICICIdirect recommended a ‘buy’ on Opto Circuits with a 12-month target price of Rs309 and a potential upside of 15%. At that time, Opto Circuits was trading at Rs268.
The report said, “New product launches and tapping new geographies for existing products augurs well for the company (Opto Circuits) to maintain the growth tempo. Commissioning of the Vizag and Malaysian facilities post approval will give further boost to the improved performance. Stretched working capital cycle, however, still remains a drag on the valuation. We expect sales, EBITDA and PAT to grow at a CAGR of 30%, 28% and 19%, respectively, during FY11-13E. We have valued the stock at 11x FY13E EPS of Rs28.1. We maintain our BUY recommendation.”
After the report, Opto Circuits hit Rs218.93 on 14 March 2012, and then the freefall started. But the ‘smart’ analysts at the ICICIdirect kept the faith, herding retail investors like sheep to the slaughterhouse. In a report as late as 19 November 2012, it again revised its price target to Rs181 (as against the market price of Rs108 at that time) with a potential upside of 68% and target period of 15-18 months.
“After showing an improvement in back-to-back quarters (Q4 & Q1) the working capital cycle once again slipped, vindicating market fears that have weighed on the stock price (of Opto Circuits) for quite some time. On the bright side, new product launches in various geographies are expected to keep the growth momentum going. The shift of production to the confined three locations is expected to improve the operating leverage. However, this is likely to take some time. We have reduced our FY14E EPS to Rs28.5 from Rs25.9 on account of some revenue slippages and reduced the PE multiple by one notch to reflect concerns about WC cycle. We value the stock at Rs181, 8x FY14E EPS of Rs25.9 and maintain BUY rating with a lightweight bias,” the research report said.
As www.alphaideas.in, a must-read blog on Indian stocks, said, over the past one year, ICICIDirect revised its price target on Opto Circuits but kept its rating as ‘buy’. “The price of Opto Circuits kept on falling and Dalal Street’s finest kept revising their target price downwards in sync with the falling stock price. The stock is now trading around Rs50. This is around 16% of the original target price set one year back by the helpful folks at ICICI direct!”
Normally, brokerages are reluctant to put a stock on ‘hold’, and rarely on sell. But even as ICICIdirect was gung-ho about the stock, Edelweiss Securities downgraded Opto Circuits to ‘hold’ from ‘buy’ in a report on 16 August 2012, due to the company’s stressed balance sheet and concerns about free cash flow. “We believe that though the company has been able to post topline growth and improve margin, the bigger worry is the stressed balance sheet. Though the stock is trading at cheap valuation we await its annual report for FY11-12 to get more clarity on how the financials are shaping up. Hence, we downgrade to ‘HOLD’ with revised target price of Rs159,” the report had said. The CMP of Opto Circuits at that time was Rs144. A hold is good as sell in brokerage parlance, since 90% of stocks a broking company covers are a ‘buy’.
Motilal Oswal Securities, in its report on 17 August 2012, maintained its ‘neutral’ rating on Opto Circuits with a target price of Rs173. It said, “...large accumulated goodwill in the books (on account of past acquisitions), high working capital requirements leading to high debt, inadequate free cash flow generation remain our major concerns (for Opto Circuits). Potential fund raising in Eurocor could dilute earnings, with the commensurate benefits from the equity dilution accruing only over the long-term (since the funds are likely to be utilized for financing clinical trials for key products which could be time-consuming). Based on our revised EPS estimates, the stock trades at 6.4x FY13E and 5.7x FY14E EPS. We maintain Neutral with target price of Rs173 (7x FY14E EPS),” the brokerage had said.
This clearly raises doubts about serious malfeasance by ICICIdirect, something that the market regulator should investigate but most likely will ignore.
Rent a rating?
During the same period, ratings agency ICRA, an associate of Moody’s, suspended its rating assigned to the Rs538 crore fund based facilities of Opto Circuits. “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. Given the absence of the requisite information from the company, ICRA has suspended the rating assigned to Opto Circuits’ Rs538 crore line of credit,” the ratings agency had said in its August 2012 report.
However, Opto Circuits’ management in a meeting with MOSL analysts clarified that there was no slippage in debt servicing except for a few days delay for one payment resulting out of exchange rate fluctuations. The management also indicated that it had disengaged ICRA’s services in July 2012 and appointed CRISIL as its new ratings agency, MOSL said in its report. ICRA’s action should have been a red flag for CRISIL and ICICIdirect, but presumably both the rating agency and the brokerage were firmly focused on their bottomline alone.
For the quarter to end-December, Opto Circuits reported a net profit of Rs113.3 crore compared with Rs125.1 crore, same period last year. During the December quarter, the company said, its total revenues rose to Rs623.1 crore from Rs607 crore a year ago period.
Speaking with a TV channel, after the results, Vinod Ramnani, chairman and managing director of Opto Circuits, had said that there are working capital problems and the company is looking at solutions.
Rapid change in food consumption habits in India has spurred domestic and foreign quick service restaurant (QSR) chains to implement aggressive expansion plans. According to a Rabobank report, this growth is set to accelerate
“QSRs (Quick Service Restaurants) will be a double-digit growth story in India in the medium- to long-term, as food consumption habits in India are changing fast,” commented Rabobank India Head F&A Research & Advisory (FAR), Asitava Sen.
According to the Rabobank report, “A younger population, higher rate of urbanisation, larger disposable incomes, higher protein consumption, increased participation of women in the workforce and exposure to western lifestyles are leading to the experimentation with, and adoption of, new dietary habits and more occasions to eat out for all levels of society”.
“As a result, we believe the time is right for both global and Indian QSR chains and their supply chain partners to expand in India. This growth will support the development of a new generation of Indian food processors and supply chain partners. We believe that there is significant potential for commissaries to establish themselves as a link between QSRs and food producers and processors”, Sen added.
To sustain the growth, while focusing on quality and profits, QSRs will have to build collaborative and dedicated supply chains from the ground up—connecting local business partners, high quality vendors, the right commissaries and state-wide or nation-wide supply chain solution providers.
Total industry size for the Indian foodservice sector was Rs460 billion ($8.6 billion) in 2011 and is expected to grow at a compound annual growth rate (CAGR) of 10% until 2015. Out of this, the QSR segment is worth Rs33 billion ($600 million) and is expected to grow at a CAGR of 30% over the same period.
At present, according to the National Restaurants Association of India, 50% of the consumers are eating out at least once every three months, and this shift is epitomised by the growing presence of QSR concepts, including many global QSR players.
An efficient supply chain will help provide standard product quality to customers across stores, but supply fragmentation in India is significant, creating quality issues at the ‘back-end’. Limited modern storage and transportation infrastructure adds to the problem, which is even more pronounced in perishable products. As such, capital investments in the upstream and midstream processing parts of the supply chain are critical, especially since food production, processing and preparation on a large scale are just beginning in India.
Relationships between QSRs and their channel partners have worked well in categories such as cheese, poultry and frozen foods in India and there is room for such partnerships to flourish in other key categories of commodities and processed foods.
QSR players prefer to have multiple supplier options to diversify the risk and help in price negotiations. In segments such as poultry, cheese and French fries there are only a few processors currently, but QSRs may look at either developing small players as vendor partners or even consider backward integration into the business.
As we suggested yesterday, the market staged a minor rally today. The Nifty remains oversold and the weak rally may continue but there will be sellers at higher levels