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.