Company Overview
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 world wide
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.
Investment Rationale
Increasing demand for VFX & 2D to 3D conversion to drive growth going forward
PFL’s VFX business is witnessing strong growth and they are focused on continuously increasing their
share in $5bn market by making investments in Vancouver and London. In FY12, the VFX business contributed
Rs. 1,493mn to the top line, which is an 80% increase over the previous year and is expected to
grow at ~33% in the coming years. PFL is the market leader in the 3D conversion business with a market
share of nearly 50% and few international competitors, thus enjoying a benefit of off-shoring resulting
in higher margins of nearly 40% at EBIDTA level and is targeting a 30% growth in FY13E and FY14E.
Considering the strong potential of these business vertical, we expects it to be a major growth driver for
the company going forward.
Prime focus technologies (CLEAR Platform) to register exponential growth
PFL offers a cloud based technology platform CLEAR through its subsidiary prime focus technologies
(PFT) to the media and entertainment industry. It helps manage content, workflows, supply chain logistics,
interactions, and production and operations management tool for clients like Associated Press, British
Films Institute, Sony Music, Netflix, Viacom, and National Geographic Channel. CLEAR is the world’s
first hybrid Cloud technology platform managing over 150,000 hours of content for Broadcasters, Studios
& brands worldwide. It has registered robust growth of 205.3% y-o-y in FY12 (contributed 4.4% to revenues)
and stood at Rs 336 mn. We expect the platform to grow at ~100% in FY13 to Rs 700 mn on account
of its strong order book of US$ 12 mn executable in the next 12-18 months.
Healthy order book position to aid future revenue earning
PFL’s current order book is about USD90mn, 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
~USD80mn and CLEAR comprising of the remaining USD12 mn. In addition, PFL has an order book of
~USD150mn in the pipeline from a long term perspective of 4-5 years which provides revenue visibility.
Valuation and Outlook
We expect revenues and profitability to grow at a strong CAGR of 29.7%/33.9% to Rs 13.0 bn and Rs 1.8
bn over FY12-14E driven by strong order book in the 2D-to-3D conversion space, traction in CLEAR platform
and expansion in margins. We expect 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 a 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. 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. We initiate
the company with a “BUY” rating and assign a P/E of 8x (industry average) FY13E earnings to arrive at
a target price of Rs 63 (upside of 35.2% from current levels).
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