PRIME FOCUS LTD : CREATING A WHOLE NEW WORLD !!!

Scrip Code: 532748 / PFOCUS

CMP:  Rs. 48.35; Buy at current levels.

Short term Target - Rs. 53.00; Medium to Long term Target – Rs. 70; STOP LOSS – Rs. 44.50 Market Cap: Rs. 719.77 Cr; 52 Week High/Low: Rs. 64.15 / Rs. 37.10.

Total Shares: 14,88,67,446 shares; Promoters : 7,57,87,712 shares –50.91 %; Total Public holding : 7,30,79,734 shares – 49.09 %; Book Value: Rs. 21.93; Face Value: Rs. 1.00; EPS: Rs. 2.14; Div: NIL % ; P/E: 22.59 times; Ind P/E: 29.86; EV/EBITDA: 17.43.

Total Debt: Rs. 116.22 Cr; Enterprise Value: Rs. 1,211.15 Cr.

PRIME FOCUS LTD: Prime Focus Ltd was incorporated as in 1997 and is based in Mumbai, India. Prime Focus Limited, a visual entertainment services company, provides creative and technical services to the film, broadcast, advertising, and media industries primarily in India, the United States, the United Kingdom, and Canada. The company offers various services, including on-set supervision, production assistance, motion control, data lab, VFX, animation, motion graphics, animatics, pre visualization, image science, digital intermediate, telecine, editing, audio, stereo 3D post, versioning, duplication, encoding, DVD authoring, digital distribution, restoration, digital archiving, and digital YCM services. It also provides CLEAR, a hybrid cloud multi-platform content operations solution that enables the management of content operations, such as content preparation and processing, content management, content production, multi-platform content delivery, and rights management and monetization. In addition, the company offers View-D, a system for the conversion of 2D moving images to stereo 3D images; SPF WORLDVERSIONING, a service to assist with the smooth rollout of global and media marketing campaigns; and CLEAR CPM, which is a campaign management tool that provides interface for TV, online, and print management delivery. Further, it is involved in the digital content management, camera rentals, media and other investments, and post production of television commercials; and digital asset management, as well as provision of graphics for feature films. The Company is compared with Balaji Telefilms ltd and with Eros International Media Ltd , DQ Entertainment International Limited, Crest Animation Studios Limited, Colorchips (India) Limited   locally and with British Sky Broadcasting, Antena 3 de Television SA, Meredith Corp, ITV PLC, Mediaset SpA, Time Warner, News Corp, Walt Disney Co, Lagardere SCA, Aegis Group and RealD Inc globally.

Investment Rationale:

Prime Focus Ltd is a  global visual entertainment company in the technical services in film & entertainment industry that offers end-to-end services ranging from pre-production to final delivery including visual effects, three dimension conversion, animation. Prime Focus Limited generates revenue about 40.6 % from the 2D to 3D conversion; about 19.3 % comes from Visual Effects (VFX); Post production contributes about 35.8 % in the revenues and finally the Content Infrastructure Management contributes about 4.4 % to the revenue of PFL. Prime Focus Ltd (PFL) is a global visual entertainment services company providing end-to-end services ranging from visual effects (VFX), 3D conversion and complete post-production services to a worldwide clientele and has worked in 10 of the world’s top 30 blockbusters movies in the past three years. Over the years, it has successfully acquired companies in the UK and North America, turned them around and consolidated its position in the global market. It has operations in North America, UK and India and has built a ‘state-of-the-art’ facility at Royal Palms, Mumbai, and Chandigarh with 3,000+ seats to convert existing 2D films to stereoscopic 3D format. It has 15 global facilities with total employee base of 4,500. PFL’s VFX business is witnessing strong growth and they are focused on continuously increasing their share in $5 billion market by making investments in Vancouver and London. In FY12, the VFX business contributed Rs. 149.30 Cr to the top line, which is an 80% increase over the previous year and is expected to grow at 33% in the coming years. PFL is the market leader in the 3D conversion business with a market share of nearly 50% and few international competitors, thus enjoying a benefit of off-shoring resulting in higher margins of nearly 40% at EBIDTA level and is targeting a 30% growth in FY13E and FY14E. Considering the strong potential of these business vertical, we expects it to be a major growth driver for the company going forward. PFL offers a cloud based technology platform CLEAR through its subsidiary prime focus technologies (PFT) to the media and entertainment industry. It helps manage content, workflows, supply chain logistics, interactions, and production and operations management tool for clients like Associated Press, British Films Institute, Sony Music, Netflix, Viacom, and National Geographic Channel. CLEAR is the world’s first hybrid Cloud technology platform managing over 150,000 hours of content for Broadcasters, Studios & brands worldwide. It has registered robust growth of 205.3 % y-o-y in FY12 (contributed 4.4 % to revenues) and stood at Rs 33.60 Cr. We expect the platform to grow at 100 % in FY13 to Rs 70 Cr on account of its strong order book of US$ 12 mn executable in the next 12-18 months.

Outlook and Valuation:

Prime Focus Ltd’s current order book is about $90 million, which is executable over the next 18 months and is bifurcated into the conversion business and CLEAR, with 2D to 3D conversion and VFX accounting for $80 million and CLEAR comprising of the remaining $12 million. In addition, PFL has an order book of $150 million in the pipeline from a long term perspective of 4-5 years which provides revenue visibility. 

Major Contributor in Hollywood blockbuster Movie "Avatar"  :

Prime Focus Added Graphic Dimension to ‘Avatar’ 

PRIME FOCUS had contributed a number of shots to James Cameron's stereoscopic 3D feature film "AVATAR" which featured numerous stereo graphics & 'Holotable' displays, animated graphics for immersive environments and other visual effects which were created by PRIME FOCUS. Its VFX team created displays called Immersives that provided a 180 degree stereo perspective allowing actors acting as military personnel to control air traffic flow in 3D. The recent KPMG report anticipates the market size of Indian Music & Entertainment sector to touch Rs 1,45,700 Cr (US$ 25.51 billion) by 2016. It is expected that the PFL’s revenues and profitability can grow at a CAGR of 29.7 % - 33.9 % to Rs. 1300 Cr over FY12-14E driven by strong order book in the 2D-to-3D conversion space, traction in CLEAR platform and expansion in margins. It is expect that the company to witness robust traction and value unlocking in the US and UK business which contributes 85 % to total revenues. The company operates at healthy EBITDA margins of 30% which we expect to expand going forward with the increase in revenues from non linear streams like 3D-VFX and CLEAR platform which fetch higher margins. There are only 68 movies in the world which are available on 3D and there is huge opportunity left in this space. The cost of converting a movie from 2D to 3D ranges between $10 million to $15 million while in return it fetches huge cash flows due to higher ticket prices, no piracy and lower distribution costs. Further, with rise in demand for 3D Movies, the current growth momentum is expected to continue in the next two years. PFL’s track record of providing various technological offerings to content owners through efficient execution has led to clients like Warner Bros, 20th Century Fox, Sony etc become a part of its global clientele PFL enjoys a leadership position in the 3D conversion business with a global market share of 50 %. PFL’s off shoring advantage enables it to operate at higher margins as compared to its global peers and hence provide it a competitive advantage. Global network of integrated studios provides time and cost benefits to clients, giving PFL and edge over competitors of FY15E. PFL has set up 3000+ seat capacity ‘View D’ technology center at Goregaon Mumbai and Chandigarh locations to cater to the outsourcing need of 3D conversion and VFX Global strategic client base like Warner Bros., DreamWorks Animation, Paramount, Twentieth Century Fox, Walt Disney, Summit Entertainment PFT. The concerns would be the FCCB's which would raise debt levels to Rs. 434.6 Cr. The company to decide in the EGM today to issue & allot on preferential basis warrants not exceeding 2,01,12,164 in number representing the right to subscribe to 2,01,12,164 equity shares of face value of Re.1 for an aggregate amount of Rs. 104 Cr. The company trades at a P/E of 5.9x times its FY13E earnings which is believe is at a steep discount to its peers, considering its higher return ratios RoE of 29.3 %, robust revenue and PAT CAGR for FY12-14E, expanding margins and immense growth potential in 2D-3D conversion market space and strong global presence. In my view PFL could report FY13E EPS of Rs. 7.90/sh and for FY 14E of Rs. 10.60/sh. The stock could be bought for the target price of Rs. 54 & recommend to Accumulate the stock on every dip.

KEY FINANCIALS	FY11	FY12	FY13E	FY14E
SALES (Rs. Crs)	503.00	771.90	1,007.20	1,294.90
NET PROFIT (Rs. Crs)	76.10	99.20	132.80	178.00
EPS (Rs.)	5.30	6.10	7.90	10.60
PE (x)	24.14	7.90	5.90	4.40
P/BV (x)	2.34	1.60	1.90	1.30
EV/EBITDA (x)	18.43	5.00	4.50	3.20
ROE (%)	29.80	23.70	29.30	35.70
ROCE (%)	13.90	13.70	16.30	17.30

I would buy PRIME FOCUS LTD with a price target of Rs. 54 for the short term and Rs. 85 for the 6 month target. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 44.50 on your every purchase


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