Analysis of Opto Circuits Annual report 2012 Background: OCILs is in field of critical and high value medical products

products are distributed and sold in 56 countries in the European Union, North and South America, Middle East, Asia and AsiaPacific through a set of ~1,300 distributors. OCIL has manufacturing sites and R&D centres in US, India, Germany and Malaysia. OCIL has more than 100 certified products, around 20 internationally recognized brands, 160 product patents (and 53 pending patent applications) and addressable market opportunity of more than $20 billion. OCILs sales and marketing networks in India presently consists of 379 third-party distributors, and 106 sales personnel. The company has a network of approximately 800 third-party distributors and 42 sales personnel in Europe, United States and other parts of the world. OCIL has grown inorganically with 10 Acquisitions in 11 years, dividends in the range of 30-45% in the last 10 years, 8 Bonus issues in 9 years and shareholders have seen good returns in past on same. The company has maintained cash balance of 8% of its total assets and spent ~11% on capex as a % to sales from FY08 to FY12E. OCIL has bought 10 companies in the past 11 years across different geographies. Historically (FY08-FY12E), OCIL has had its EBITDA margins in the range of 27-32%.

Acquisitions have been made at an average Price/sales multiple of 2x. While a few of the acquisitions like Eurocor and Cardiac Science have brought new products in OCILs portfolio, there are other acquisitions which are made keeping in mind their marketing reach and distribution network (mainly AMD, Criticare and Medaid). OCIL also bought NS remedies which makes bare metals stents that could be used as raw material for its Eurocor stents. OCIL has spent approximately Rs.6Bn in last five years on acquisitions. OCILs competitors are mostly large cap global players based out of Europe or US. These companies have huge economies of scale, high market share, established distribution network, and high levels of capital for R&D. in Invasive products, J&J and Boston Scientific are big companies and in the global non-invasive business, Segment globally dominated by GE Healthcare, Philips Medical Systems, Siemens Medical, Omron Healthcare, Dragger Medical and Abbott . Key takeaways: Frequent Bonus issues and High Dividend Payouts accompanied by Frequent Fund Raising It declared bonus shares every year from FY02 to FY08 with the latest in FY12 and constantly paid Div in range of 3 to 4.5 rs per share. Also It has taken sales growth from 251 cr in 2007 to 2356 cr in 2012, a jump of 9.3 times to produce double EPS on consolidated basis and this is in spite high reported margins and ROCE. One wonders why company has to pay so many dividends and then dilute equity frequently by issuance of shares. If company is so profitable and has products of such high value addition why would it be diluting to raise money from stock markets or need to borrow as Opto has done and yet continue to pay extremely high dividends unless you want to play to investors gallery? Despite of healthy numbers, the promoters stake stayed less than 30% is to be noted

Year 2012 2008 2007 2006 2005 2004 2003 2003 2000

Ratio 03:10 07:10 01:02 01:01 05:10 03:10 02:10 01:10 18:10

Book Value (Unit Curr) 50.06 33.49 34.25 27.19 29.80 30.04 28.24 28.24 32.54

EPS Curr) 9.69 12.61 11.71 13.08 10.66 9.49 6.60 6.60 12.64

(Unit

Year End Mar2012 Mar2011 Mar2010 Mar2009 Mar2008 Mar2007 Mar2006 Mar2005 Mar2004 Mar2003 Mar2002 Mar2001

Dividend Amount 72.70 84.03 81.73 64.04 48.22 30.81 12.32 6.26 4.12 3.41 2.99 2.87

Dividend % 30.00 45.00 40.00 40.00 50.00 50.00 40.00 35.00 30.00 30.00 30.00 30.00

Dividend Yield % 1.47 1.63 1.84 3.97 1.51 1.68 1.42 2.35 6.27 9.45 9.66 7.17

Dividend per Share(Rs) 3.00 4.50 4.00 4.00 5.00 5.00 4.00 3.50 3.00 3.00 3.00 3.00

Face Value(Rs) 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00

Equity on

as

No of Shares Subs 242319407 186399544 183274544 182899544 161469060

Equity Capital (Subs) 242.32 186.40 183.27 182.90 161.47

No Shares added 55919863 3125000 375000 21430484 837000

of Price 210.00 210.00 186.65 Premium 200.00 200.00 176.65

Inc/Dec in Reserves 0.00 62.50 7.50 378.57 0.00

Reason Bonus Conversion of Warrants Conversion of Warrants QIB Equity Shares Unspecified

29-Mar-12 27-Jan-11 14-Jun-10 15-Sep-09 31-Mar-09

12-Jan-09 03-Nov-08 25-Oct-07 14-Jul-07 30-Oct-06 24-Apr-06 16-Aug-05 20-Oct-04 05-Jan-04 10-Nov-03 14-Jan-03 30-Nov-02 04-Nov-00 11-Jul-00 24-May-00 01-Oct-99 31-Mar-99 29-Mar-99 01-Mar-97 14-Dec-94 14-Dec-94 02-Nov-94 08-Jun-92

160632060 160092060 94171800 62781200 61616580 30808290 26808290 17872193 13747841 13646741 11372284 10338440 10439540 7999440 7601440 2714800 2000000 1504050 790395 159808 790295 113414 20

160.63 160.09 94.17 62.78 61.62 30.81 26.81 17.87 13.75 13.65 11.37 10.34 10.44 8.00 7.60 2.71 2.00 1.50 0.79 0.16 0.79 0.11 0.00

540000 65920260 31390600 1164620 30808290 4000000 8936097 4124352 101100 2274457 1033844 -101100 2440100 398000 4886640 714800 495950 713655 100 46394 630487 113394 20

270.00

260.00

50.00 50.00

40.00 40.00

104.00 0.00 0.00 0.00 0.00 0.00 0.00 9.76 1.59 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Conversion of Warrants Bonus Bonus Allotment of Equity To Oth Bonus Public Issues Bonus Bonus Reissue of Forfeited Share Bonus Bonus Forfeited Shares Public Issues Allotment of Equity To Oth Bonus Allotment of Equity To Oth Acquisitions Allotment of Equity To Oth Allotment of Equity To Oth Allotment of Equity To Oth Acquisitions Acquisitions Subscription to the Memor

MAT not provided on SEZ profits

Company also has not paid Dividend Distribution tax in past Company pays dividend but no Dividend Distribution tax. For FY12, the company has shown Rs. 26.39 crs under other current liabilities and Rs. 11.79 crs under short term provision. These totals up to Rs. 38.18 crs. The liabilities of Rs. 26.39 crs as shown under current liabilities as provision for dividend tax nearly equals to liabilities for FY10 and FY11 which the company should have paid during FY11 and FY12. The argument for is that there is no DDT on companys distribution because earnings are tax

exempt due to SEZ location. We have not come across companies in SEZ not paying DDT. Better would have to pay and claim refund. (Rs in Crs) Mar-09 DIVIDEND DIST TAX AS PER P & L A/C PROVISION FOR DIVIDEND DIST TAX AS APPEARED UNDER CURRENT LIABILITIES & PROVISION IN BALANCE SHEET 10.88 Mar-10 13.89 Mar-11 13.96 Mar-12 11.79

20.81

30.87

26.39

38.18

Sell from the place where tax rate is ZERO!!! No taxes (presumably trading in tax heavens and R&D claims) . Even tax paid in 2010 & 2011 was reversed in 2012. Opto doesnt pay taxes anywhere in world. Not where it produces goods due to location in tax shelter manufacturing which is understandable and neither where it sells where we wonder dont they get hit by transfer pricing issues where it is liable to show margins in distributions and sales in target country However the M&A are all loss making, have tax shelters and no tax liability. Arent overseas companies generating profit and liable to taxes in their countries of operations? How come all profits are attributable to only Indian operations where taxation in zero and no profits in overseas companies where OCIL has paid large sum over their book value to acquire themone would have paid premium only if they had significant value addition and then if they have that value addition how come it is not being taxed under transfer pricing laws of that country If OCIL targets M&A Company are valuable and profitable as reflected in premium paid by OCIL in acquiring them, how come they are selling it to OCIL? Also why OCIL competitors are not buying them? Arent overseas companies generating profit and liable to taxes in their countries of operations? How come all profits are attributable to only Indian operations where taxation in zero and no profits in overseas companies where OCIL has paid large sum over their book value to acquire themone would have paid premium only if they had significant value addition and then if they have that value addition how come it is not being taxed under transfer pricing laws of that country (Rs in Crs) Mar-08 Sales from E.O.U. S.E.Z D.T.A 271 57 0 188 213 1 115 355 1 28 575 0 N.A. N.A. N.A. Mar-09 Mar-10 Mar-11 Mar-12

TOTAL

329

401

472

603

N.A

Mar-09 TAX (Excl Def Tax) PBT 1 141

Mar-10 16 164

Mar-11 3 247

Mar-12 3 238

TAX / PBT

0.6%

10.1%

1.2%

1.3%

Till FY05, OCIL was having Unit I, Unit II and Software division. Each unit was contributing to the revenue. During FY06, OCIL transferred all the assets of Unit I to Unit II and also merged the fixed assets related to software division into the total fixed assets. Isnt shifting of existing EOU units to new units for tax consideration a tax violation? It is difficult to assess the purpose of the same. Even the directors report is silent on the same.As E.O.U came under tax net, the company shifted its production base to SEZ in Vizag (Cost Rs. 62 crs). For FY12, the company has stopped giving details. But where is the SEZ? AR 2007 Directors Report for FY07 mentioned about developing a specialized facility mainly for health care industry and planned to set up of SEZ near Mysore over 200 acres land. AR 2008 Directors Report for FY08 did not mention about the SEZ. Addition to Block during FY08 was Rs. 2.87 crs of which major items were plant and machinery Rs. 1.63 crs and vehicles Rs. 0.97 crs. The net result sale of Rs. 57 crs from SEZ !! (As per AR of for FY09, the SEZ asset size was less than 17 lakhs (P & M Rs. 0.08 crs, Furniture Rs. 0.08 crs and others Rs. 0.01 crs ) and without any electrical installation) !! AR 2009 Further, it seems to have come up at VIZAG and not in Mysore. OCIL, during FY09, added Rs. 4.55 crs (P & M Rs. 4.54 crs) to the existing SEZ assets of less than Rs. 17 lakhs. Again there is no electrical installation. Still, the sales from SEZ shot up to Rs. 213 crs and sales from EOU declined and thus it continued to enjoy huge tax exemption.

AR 2010 Come FY10, OCIL added Rs. 52.83 crs (p & M Rs. 47.38 crs) to its block. At last it got electrical installation of Rs. 0.09 crs !!!. Net result, the sales shot up further to Rs. 355 crs with more decline in the sales from EOU. Earning Rich but Cash flows poor company Highly working capital intensive - Though highly profitable, business is highly working capital intensive. (Rs in Crs) Mar-09 TOTAL INCOME 442 Mar-10 460 Mar-11 639 Mar-12 671

INVENTORIES DEBTORS

100 246

115 199

245 229

265 257

SUNDRY CREDITORS

30

Further, its aggressive acquisition strategy has resulted in rising debt level. Also exposure to group companies has also gone up. (Rs in Crs) Mar-09 DEBT SHORT TERM OTHER 514 N.A. N.A. Mar-10 195 N.A. N.A. Mar-11 724 576 148 Mar-12 657 649 8

INVESTMENTS IN SUBS LOANS TO SUBS OTHER O/S WITH SUBS

518 (8) 40

518 4 15

1114 (85) 21

382 519 215

Add to this, OCIL had given guarantees of Rs. 490 crs on behalf of its subsidiaries and only forms part of contingent liabilities (they could become real if you keep reading below about product recall)

The working capital requirements for Opto Circuits are more chronic due to higher debtors collection period and due to large inventory levels. How come Optos debtor days are way above industry norms with Nihon Koden, Medtronics, Seimens and J&J etc while margins and ROE are three times competitors? Opto Circuits competes against huge companies with finances and resources far greater than it itself can assemble. Nihon Koden (10x), Boston Scientific (90x), Medtronics (150x) bigger in annual revenue sizes. On the other hand Opto enjoys margins/returns almost twice and in some cases several times its competitors. How this is possible given that you have grown through M&A and same companies would have sounded out your competitors also for buyouts. Are we saying they let go of this opportunity and OCIL could encash it? For such M&A to succeed, Opto management needs ability to grow and nurse them to profitability and positive cash flows. The jury is yet out on same.

Opto India Stand alone operations: Is it manufacturing or trading company? The company claims to engage in the design, development, manufacturing, marketing and distribution of medical electronic devices and medical monitoring products. More than 90% of the raw material is imported while close to 99% of the revenue is derived from exports. (Rs in Crs) Mar-12 REVENUE 670 % of Rev Mar-11 603 % of Rev

INPUT COST STAFF COST OTHER COST TOTAL COST OPERATING PROFITS

364 8 19 390

54% 1% 3%

338 7 17 362

56% 1% 3%

279

42%

241

40%

With overall overheads of just 4%, it is hard to believe that the OCIL is the manufacturing company. Also, it does not give product wise sales

Unbelievably low salary, wages and power cost for such High Profitable company in IP and manufacturing. It is difficult to digest the low level of salaries paid by the company who is into manufacturing and having R & D Unit. One needs to figure the source of High value addition in terms of EBIDTA margins but employee cost extremely low.

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Total Salary & Wages Paid (Rs in Crs)

No of Employees (as per AR)

447

207

196

424

500

Avg Sal & Wages /Emp (Rs)

91018

213043

209694

123821

128128

Indicative Payment to New recruit (Rs p.a)

50000

152158

Mar-05

Mar-06

Mar-07

Mar-08

Mar-09

Mar-10

Mar-11

Mar-12

Sales E.O.U. S.E.Z D.T.A TOTAL 1 81 1 118 78 115 115 355 1 473 271 57 0 331 188 213 1 403 115 355 1 474 28 575 0 609 N.A. N.A. N.A. 670

Power and Fuel Labour / Job Work R&D

0.62 0.83 0.09

0.75 0.89 0.16

0.85 1.08 0.00

0.86 1.10 0.08

0.84 1.12 0.11

0.77 0.96 0.49

0.72 1.04 3.66

0.91 1.22 1.19

How does one earn such large profits and margins when employee spending is 5 to 7 % of sales only? Even Distribution requires sales and developing technology or IP requires costly scientific and engineering staff.

Advance for Capital Goods how long will it stay with supplier and not get added to GB? It seems they are really purchasing some goods which is taking extremely long to make and deliver. Further, nothing was mentioned in the capital commitments under the head contingent liabilities nor there was any mention of expansion in the annual report of FY11 and FY12.OCIL continued to add amount under this head. As on 31st March 2012, advance for capital goods stood at Rs. 155 crs on existing net block of Rs. 74 crs Mar-09 Advance for Capital Goods 42 Mar-10 6 Mar-11 44 Mar-12 155

Subsidiaries Others Compare this with .. Addition to Block during

35 6

5 1

5 40

105 50

13

48

Purchase of Fixed Assets from related parties

Advance for Supplies and Services supply of what and which service? OCIL shows sundry creditors and trade payable separately. Outstanding against these items as on March 2012 was Rs. 8.68 crs. But outstanding amount as on 31st March 2012 towards advance for supplies and services was Rs. 291.53 crs. Compare the advance to subsidiaries with the related party transactions. Purchases from the subsidiaries, during FY12, were less than a crore !! So why huge amount is paid to subsidiaries!!! Further, even if the advance is related to RMC and consumables, it amounts to 277 days of requirements paid in advance!!! Against this, the company provides credit period of 140 days to its customers leading to minimum 317 days of working capital cycle!!. Mar-09 Advance for Supplies & Services Subsidiaries 6 4 Mar-10 125 10 Mar-11 154 16 Mar-12 292 110

Others

115

138

182

RMC Purchase No of Days paid in advance Debtors No of Days credit given

282

254 180

467 120 229 138

384 277 257 140

246 224

199 154

Some observation from Consolidated Financials It has subsidiaries in Germany, USA, Malaysia. It reported PBT of Rs 516 crs (Rs. 394 crs) on total income of Rs. 2370 crs (Rs. 1616 crs). Indicative break-up of sales is as under Mar-12 Cosumables/Accessories Equipments & Devices Services Cardiac Stents Drug Coated Balloons Urology related Products Orthopedic related Others Total Sales 33% 42% 4% 13% 5% 2% 0% 1% 100% Mar-11 37% 34% 2% 15% 4% 5% 0% 2% 100%

Total income consisted of sales - Rs. 2269 crs (Rs. 1555 crs) and service income Rs. 87 crs (Rs. 29 crs). Further, the other current liabilities in the balance sheet reflected Rs. 55 crs (Rs. 36 crs) as income received in advance. Employee cost (1840 employees at consolidated level against 500 at stand alone) stayed at 8% as compared to 1% at stand-alone level. Average salary per employee works out to Rs. 941240/- p.a. as against Rs. 128128/- p.a. at stand-alone level. It also paid labour charges and Job work Rs. 75 crs (Rs. 37 crs) close to 3% (2%) of revenue from operation. PBT Margins, though declined, stayed high at 21.8% (24.4%). At consolidated level also, Tax / PBT ratio stays low at 5.2% (6.4%). During FY12, it added Rs. 87 crs to intangibles (development expenses in Opto Cardiac Care Group) in accordance with AS 26. Net Block of intangibles (brands, trade mark, customer relationship, recipes, formulae, models, design etc) in the consolidated books is Rs. 254.60 crs as on 31st March 2012.

The debt level at consolidated level is even higher at Rs. 1172 crs (Rs. 899.72 crs) with short term debt of Rs. 875 crs (Rs. 637.18 crs). This is on the net worth of Rs. 1699 crs (Rs. 1367 crs). Add to this the corporate guarantees issued by 507 crs (Rs. 167 crs) The company continued to keep sizable in the current account Rs. 163 cs (Rs. 229 crs) as on 31st March 2012. Yielding no interest Advance towards capital goods were at Rs. 243 crs (Rs. 123 crs) against which capital commitments were only Rs. 134 crs. Advance to supplies and services stayed higher at Rs. 410 crs (Rs. 320 crs).

Restructuring Jugglery: Direct Debits of write-offs to Reserves without flowing through P&L During the financial year 2011-12, OCIL restructured its investments in the overseas subsidiaries. It transferred investments in the overseas subsidiary companies to two of its wholly owned subsidiary companies. In process, it made additional investments of Rs. 190 crs in these two subsidiaries (in addition to existing Rs. 74.45 crs) The entire process seems to have many adjustments and thus raises doubts on the genuineness of the restructuring. Nothing flew-back to OCILs books in this entire process. Look at the following table (Rs in Crs) AMOUNT TRANSFER OF INVESTMENTS IN SUBS 923.54 INCREMENTAL OUTFLOW ADV - CAP GOODS - SUBS ADV - CAP GOODS - OTHRS ADV - SUPPL & SERVIC - SUBS TRANSFER OF BORROWING TO SUBSIDIARIES (NET OF ADDITIONAL BORROWINGS) AMOUNT 99.99 10.21 94.17

197.61

ADV - SUPPL & SERVIC OTHRS REDUCTION IN LIQUID ASSETS ICDs - SUBS INVESTMENTS SUSBSIDIARIES IN

43.70 71.86 468.50

190.75 979.18

1121.15

In process: OCIL has stopped providing data related to step down subsidiaries. Deleted goodwill Rs. 177.30 crs from consolidated goodwill Rs. 626.43 crs at the consolidated level.

Debited Rs. 271.28 crs to profit and loss account in the balance sheet as impact of restructuring of investments in Opto Cardiac Care Ltd and Opto Eurocor Healthcare Ltd (as discussed above).

Had company provided the same in the profit and loss account for the year, the profits would have declined to 244.96 crs from reported Rs. 516.24 crs. However, the company maintains that the said treatment is as per the accounting standard 21. Performance of the following companies disappeared from the report for FY12. Their performance for FY11 is given for the reference. (Rs in Crs) Total Assets 414

Capital Eucrocor GMBH Criticare Systems Inc N S Remedies P Ltd Unetixs Vascular Inc Cardiac Science Corp 65

Reserves 159

Oth Liab 190

T Inc 322

PBT 105

PAT 85

236

105

343

182

17

16

22

31

24

1067

(932)

589

724

237

24

22

During FY12, in consolidated report, it created deferred tax liabilities Rs. 462 crs including Rs. 379.33 crs towards net operating loss c/Fd (could be referring to negative reserve of Rs. 932 crs of Cardiac Science Corp). However, the net amount was brought down to Rs. 58 crs by debit of Rs 404 crs towards valuation allowance Debt & poor Cash flow situation leading to downgrade to B from AAhttp://www.icra.in/Files/Reports/Rationale/Opto%20Circuits%20_r_09082012%20.pdf

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 Optos 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 utilisation of its working capital facilities and servicing of its debt obligations. Further, Optos 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 OCILs Rs. 538 crore line of credit. We have been told that ICRA did not distinguish between Indian and global accounts and company has fired agency. ICRA is not new to concept of standalone and consolidated numbers of companies as they rate several companies having large overseas operations. Also they are owned by MOODYs which is a global rating agency and have capability to do rating on your global subsidiaries, consolidate and give ratingWhy they would want to lose business by not evaluating on consolidate business. Our talks with them indicate that OCIL was not ready for rating your subsidiaries and were not willing to share data forcing them to suspend rating. ICRA has stated such in its Rating note. http://beta.bseindia.com/corporates/anndet.aspx?newsid=fc960efe-2f86-4c84-bc90-14b912347796
http://www.optoindia.com/pdf/OCI_Management_Statement_August_14_2012.pdf

OCIL disclosure states that they have large cash and bank balances. But In March 2012 you had suddenly taken short term borrowings of 864 crores.. What was need to borrow 864 cr when OCIL had 174.39 in bank. Fund raising plans be impacted given Rating agency has downgraded you to B from AA- and that CRISIL would have same issue that ICRA has unless one is implying CRISIL willingly encourages shopping of favorable ratings. Questions regards to liabilities, loss of business and reputation loss form product recall of Cardiac Science Automated External Defibrillators (Powerheart, Cardiovive, CardioLife models) Opto bought Cardiac Science for cheap as Cardiac Science Corporations problems with defibrillators (used for resuscitation of heart attack and other trauma victims). The 2009 release announcing the recall talked of issues with resistors, but announced that a software fix would be available. It then recalled 24,000 defibrillators, at a cost of $18.5 million. Customers and shareholders lost confidence, and, in 2010, the company was sold. However there has been fresh recall in 2012 and company has made no disclosure or provision of contingent liabilities. This loss of operations, cost of recall, and resulting unwillingness of large reseller like GE to now distribute its product and possibility of legal claims which has potential to drain Optos cash flows which are already poor further. Refer press release dated January 13, 2012. http://www.fda.gov/MedicalDevices/Safety/ListofRecalls/ucm294452.htm Based on following it seems Distributors were GE Healthcare, LLC & Nihon Kohden Corporation..Now they are upset for faulty product sales and recall and resultant collateral damage: http://www.dhses.ny.gov/ofpc/alerts-bulletins/safety/text/2012/20120030.cfm Also refer http://www.cardiacscience.com/assets/023/7751.pdf http://www.accessdata.fda.gov/scripts/cdrh/cfdocs/cfRES/res.cfm?id=107002 http://spectrum.ieee.org/biomedical/devices/the-shocking-truth-about-defibrillators/0 Based on the following report, The Company estimates this plan will add between $10 and $15 million to the $18.5 million expense previously accrued for the November, 2009 recall http://www.prnewswire.com/news-releases/cardiac-science-addresses-fda-recall-concerns98748064.html?utm_expid=43414375-18 Cardiac Science recalls a suite of automated external defibrillators over defective circuit boards and Flight Medical pulls ventilator cables that may cause electrical shortages. Cardiac Science's voluntary field correction for a suite of automated external defibrillators got Class I recall status from the FDA over concerns that a failed component may keep the device from providing life-saving therapy during a

heart attack. The company's PowerHeart G3 AEDs are mobile devices, often found in hospitals, schools or physicians' offices, intended to be used by trained personnel to deliver defibrillation therapy to someone suffering sudden cardiac arrest. Due to a defective circuit board component, which the company explained was the result of a supplier manufacturer issue, the devices may suddenly fail to provide defibrillation. The issue was detected at the Cardiac Science factory through the company's quality-control processes, according to a press release. As yet, there have been no reported instances of the devices failing to deliver shock therapy. There are currently about 11,000 units active around the world, according to an FDA release. The Food and Drug Administration and Cardiac Science have announced a Class I recall of several types of the company's defibrillators. According to the FDA, the Automated External Defibrillator (AED) models were recalled because of a component that may unexpectedly fail due to a supplier manufacturing defect. This may lead to the medical device not delivering the proper defibrillation therapy to a patient and potentially cause serious adverse side effects or death. The AED's self test may also not detect an impending failure or failure of the device. AEDs are used during emergency situations to treat victims showing symptoms of sudden cardiac arrest who are unresponsive and not breathing. The affected models include CardioVive, Cardiolife, and Cardiac Science Powerheart. The FDA notes that Class I recalls are "the most serious type of recall and involve situations in which there is a reasonable probability that use of these products will cause serious adverse health consequences or death." How does investors assess impact of this is moot question over and above cash flow situation. More importantly a transparent and forward looking management has not chosen to highlight this material event to investors. How do you factor this in your decisions? In addition to losses from recall and refurbishing of product and other legal liabilities, company now has capex of 250 cr, dividend outgo and inability to access debt till rating issue is resolved. Interestingly AR has Bold one pager note on how a 12 year old girl was saved by AED but VERY small fine print of 45 cr liability and warranty on product Recall as per management estimate.

VERY small fine print of 45 cr lia ability and wa arranty reserv on product Recall und heading o 9(b) ves der of provision for volunta field service corrective action liabilit ary ty.once aga not passin through P& All ain ng &L. along in past resta atement of a acquired com mpanies, rese erves have b been created for warranty and y liabilitie and expen es nses set off directly against reserves wit t thout flowing t through P&L

OCIL C Consolidated Cash Flow DESC CRIPTION Profit Before Tax Adjus stment Chang ges In working w Capita al Cash Flow after changes in Wo orking Capital Int terest Paid Ta Paid ax Other Direct Ex xpenses paid Ex & Other It xtra tem Cash From Op perating Activit ties Cash Flow from In nvesting Activit ties Cash from Fin nancing Activit ties Net C Cash Inflow / Outflow O Opening Cash & Cash valents Equiv Closin Cash & Ca Eq ng ash Mar-12 516 6.24 31.83 -47 78.55 69.52 57.16 Ma ar-11 393.64 94.14 -33 32.06 155.71 -25 5.09 Mar-10 293.2 24 23.77 7 -106.04 210.9 97 -29.6 64 Mar-09 9 220.31 1 97.73 -191.77 126.27 7 -7.50 Mar-08 137.12 16.30 -108.01 45.41 -3.81 Mar-07 76.43 9.65 -91.77 -5.70 -2.14

-3.19 9 126 6.68 -33 37.30 0.74 150 -59 9.87 4.18 234 174 4.31 130.62 -59 96.17 577.40 111.85 122.33 234.18 178.15 -115.88 28 -31.2 30.99 9 91.33 3 122.3 33

-3.53 115.25 5 -417.47 324.98 8 22.75 68.58 91.33

-1.96 39.64 -49.25 39.47 29.86 38.47 68.33

-0.96 -8.80 -30.36 67.47 28.31 10.15 38.47

To summarize, in case of OCIL Intangibles, WIP and Goodwill and receivable are key Assets, accounting is not forthright and Debt is for real. Also ROCE/ROE looks good as PAT is boosted by not accounting for writ offs and other expenses like warranties and Equity and capital employed shrinks due to direct debits.

'

Market has becom bullish on Stent laun t me n nch in India and one like in USA b things ar far ely but re from rosy Latest announceme by Opto ci ent ircuits pertain ning to launch of stents coa h ated with Siro olimus also k known as Rap pamycin in IndiaSpoke to few ex xperts and fo ound that glo obally they h have stopped this d altoget ther because of side effect and better alternatives. Experts feels that Opto un ts s nlikely to be a able to sell to Pvt hospitals Some sales to governm s. s ment hospitals at extremely low margins possible through s y s push. The Current players well entrenched a extreme aversion to t new things in this area. Also and try s Johnso & Johnson will stop selling similar drug-coated heart stents a former p on s, profit driver fo the or diversif fied healthcare company t that has stum mbled due to safety concerns and fierce competition from e n rival pr roducts.

Refer t side effects and product withdrawal b J&J to s t by http://e en.wikipedia.o org/wiki/Sirolim mus

Sirolim (INN/USA mus AN), also known as r rapamycin, is an immu unosuppressa drug use ant ed to preven rejection in organ transp nt plantation; it is especiall useful in k ly kidney transp plants. It pre events activation of T cells and B-cells b inhibiting th response to interleukin (IL-2). by heir e n-2

Coronary stent coating The antiproliferative effect of sirolimus has also been used in conjunction with coronary stents to prevent restenosis in coronary arteries following balloon angioplasty. The sirolimus is formulated in a polymer coating that affords controlled release through the healing period following coronary intervention. Several large clinical studies have demonstrated lower restenosis rates in patients treated with sirolimus-eluting stents when compared to bare metal stents, resulting in fewer repeat procedures. A sirolimus-eluting coronary stent is marketed by Cordis, a division of Johnson & Johnson, under the tradename Cypher.[4] It has been proposed, however, that such stents may increase the risk of vascular thrombosis.[5] J&J to quit struggling heart stent business (Reuters) - Johnson & Johnson will stop selling drug-coated heart stents, a former profit driver for the diversified healthcare company that has stumbled due to safety concerns and fierce competition from rival products. J&J said on Wednesday that it would end development of its Nevo heart stent and cease manufacturing its Cypher stent, widening the field for rivals like Abbott Laboratories Inc and Boston Scientific Corp. The company's Cordis unit will stop selling the drug-coated stents -- tiny mesh tubes that prop open heart arteries -- by year's end. It will continue to sell its far less lucrative bare metal stents. "The stents were kind of an albatross," said Gabelli & Co analyst Jeff Jonas, adding that "the remaining cardiovascular business is attractive." J&J expects to take a second-quarter charge of $500 million to $600 million related to restructuring plans for Cordis. It will close manufacturing facilities in San German, Puerto Rico, and Cashel, Ireland, and expects to cut up to 1,000 jobs. Cypher, which was introduced with great fanfare in 2003, once had annual sales of $2.6 billion, but the stent was on track for only about $400 million this year, according to Jonas. Its sales generate about 1 percent of company profit, he said. J&J has also had trouble developing new stents, including Nevo. Jonas said Cordis now has potential for double-digit annual sales growth, based on devices to treat atrial fibrillation and stents placed in the neck, the legs and other parts of the body to prevent conditions such as stroke. He estimates that Boston Scientific, which has about $1.5 billion in annual stent sales, stands to gain about half of J&J's stent business, representing an extra $200 million in annual sales. Abbott's Xience will likely attract the rest of J&J's lost sales. J&J shares fell 1.4 percent to $66.14 in afternoon trading. Abbott shares were little changed, while Boston Scientific gained 3.9 percent. SAFETY QUESTIONS Johnson & Johnson has been beset with quality-control lapses at its factories in the past two years, forcing repeated recalls of Tylenol and other consumer products, artificial hips, insulin cartridges and contact lenses. Cypher was the first stent that released a drug designed to prevent re-clogging of arteries after being implanted in patients -- a common issue with earlier bare-metal stents. But there is controversy over whether Cypher and other drug-coated stents cause dangerous blood clots months or years after being implanted in heart arteries. Shares of SurModics Inc, which makes the drug-delivering polymer used in Cypher, were down 15 percent. The company receives royalties from sales of the stent. J&J acquired Nevo through its $1.4 billion purchase of cardiac stent maker Conor Medsystems in 2007. The stent was designed to minimize the risk of clots, by releasing its drug directly into heart arteries rather than into the bloodstream. But it has been plagued by development delays and redesigns of its delivery system. In addition, U.S. regulators in February warned J&J that it had failed to ensure that Cypher and other heart devices made at the San German plant met specifications and were otherwise manufactured

with consistency. "The warning letter had no impact on our decision" to stop selling Cypher, said Sandra Pound, a spokeswoman for the New Brunswick, New Jersey-based company. Global Cypher sales plunged 41 percent in the first quarter, excluding the impact of foreign exchange. Market share for the product, which was once the top global brand, slipped to 12 percent, down 6 percentage points from the year-earlier period. The company's total medical device and diagnostics sales rose slightly, mainly because of the weaker dollar. J&J's consumer product sales have suffered due to the Tylenol recall and others, falling 2.2 percent to $3.68 billion in the first quarter. At the same time, its prescription drugs business has enjoyed a revival, with sales rising 7.5 percent to $6.1 billion in the first quarter. Wall Street is counting on recently approved J&J drugs and promising ones in development to bolster its results, after two successive years of declining global company sales.