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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