Q2FY13 Result Update
Prime Focus
Buy
Target Price: Rs71
CMP: Rs45
Upside: 57%
Raises funds for FCCB redemption
Prime Focus posted Q2FY13 results below expectation on the back of delay in 2D to 3D conversion projects coupled with forex loss of Rs69mn and higher employee cost. PFT continues to be one of the future growth drivers for the company. The company has successfully raised funds for FCCB redemption which would remove the overhang on the stock and balance sheet. We have lowered our estimates and price target on the back of dilution but maintain our BUY rating.
m Q2FY13 results below expectations: Prime Focus posted Q2FY13 results below expectations with topline at Rs1964mn (down 3% YoY) 4% below our expectations while operating profit was at Rs366mn (down 42% YoY) on the back of high forex loss and margin contraction while PAT was at Rs95mn, down 56% (down 64% YoY) from our expectations.
m PFT gaining traction: During the quarter PFT business was up 17%QoQ and is expected to post revenues of Rs789mn in FY13E. It is setting up a ~1lac sq.ft. facility at Andheri (East), Mumbai, to cater to the growing demand for its services at a cost of Rs750mn, to be commissioned by April 2013. It is expected to house the Digital Broadcast Hub and will be the new Global Headquarters for the company. During the quarter PFT signed a multi-million dollar deal with one of Hollywood’s leading film studios to supply media processing services to ensure full compliance with the FFCC regulations for new media.
m Margins under pressure: During the quarter margins of the company were under pressure as there was a delay in a couple of projects in 2D to 3D conversion while employee cost was higher by 15% YoY. Coupled with that Rs70mn forex loss further impacted margins.
m Funds raised for FCCB redemption: Prime Focus has successfully raised $35mn through preferential issue of equity shares to Standard Chartered PE at Rs51.75. Further $35mn were raised through issue of unsecured NCD (zero coupon, 13.4% YTM) to Standard Chartered PE. The company is also planning to issue warrants to promoters worth $20mn at Rs51.75 and take term loan of a small amount. With this raising of funds, Prime Focus would be able to fully redeem its FCCB by paying $79mn.
m Maintain BUY: We have lowered our FY13 and FY14 estimates on the back of lower than expected revenue, margins and high interest cost. The stock is currently trading at 10.5x and 7.8x FY13E and FY14E adj EPS of Rs4.4 and Rs5.9 respectively. Post the payment of FCCB we expect the stock to re-rate given its strong business model, global dominance in 2D to 3D conversion and PFT gaining acceptance & scale. Hence we maintain BUY rating on the stock with target price of Rs71 (12x FY14E).
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