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3-D to propel growth
Prime Focus is a market leader in 2D to 3D conversion and has
created a mark globally by working on 10 of the top 30 worldwide
blockbusters in the past 3 years. Its global world sourcing model
from its 15 facilities, 4,500+ people, 24x7, 365-day work schedule
makes it a strategic partner to global studios. Favourable industry
trends along with strong management team give us confidence
on 30.7% revenue CAGR over FY11-14E. Initiate coverage with a
BUY on the stock with an upside of 86%.
Unique global network of integrated studios: Prime Focus has
offices across 3 continents in all time zones. Its 15 facilities, over
4,500 staff, 24x7, 365-day work schedule give it major time and
cost benefits. This unique platform offers all services under one
roof – right from pre-production to distribution for clients across
the film, broadcast and commercials space worldwide.
Well-positioned to capitalize on its 3D and VFX capabilities:
The increasing use of visual effects (VFX) and 3D in movies opens
huge market potential for Prime Focus. It has built a ‘state-of-theart’
facility at Royal Palms, Mumbai, and Chandigarh with 3,000+
seats to convert existing 2D films to stereoscopic 3D format. It is
the first company worldwide to successfully complete an entire
movie, Clash of the Titans from 2D to 3D in a record 8 weeks
simultaneously across 7 facilities worldwide.
Technological leadership makes it strategic partner for
content owners: Given its highly differentiated offering and high
execution track record the company has been able to garner
some of the most important projects from studios. It is focusing
on widening and deepening studio partnerships across 2D to 3D
conversion and VFX along with making the relationships global.
Its customers include Hollywood studios such as Warner Bros.,
Lucasfilm, DreamWorks Animation, Paramount, Twentieth
Century Fox, Walt Disney, Summit Entertainment, Relativity
Media and Sony.
Strong visibility on financials: We expect revenues to grow at a
CAGR of 30.7% to Rs11.2bn over FY11-14E on the back of strong
growth in 2D-to-3D conversion. Operating margins are set to
expand from 29.6% in FY12E to 33.6% in FY14E on the back of
increase in outsourcing to India. Profitability of the company will
grow at a CAGR of 28.7% to Rs1771mn over FY11-14E led by
strong topline growth and margin expansion.
Valuations: The stock is currently trading at 5.7x and 4.2x FY13E
and FY14E EPS of Rs8.76 and Rs11.89 respectively. Prime Focus
trades at a significant discount to its Indian M&E peers even
though it has higher revenue growth, high RoE, higher margins
and leadership in domestic operations along with strong global
presence. We value Prime Focus at 8x FY14E EPS of Rs11.89 and
arrive at a target price of Rs95, 86% upside from current levels.
Key Risks: i) Sharp fall in pricing for 2D to 3D conversion due to
increase in competition; ii) Sharp currency movements that could
impact profitability considering that major revenue is from UK
and North America; iii) Outstanding FCCB of USD55mn which it is
expected to re-pay before December 2012 with 43% premium
amounting to a total of ~USD79mn.
