Prime Focus
Buy
Target Price: Rs71
CMP: Rs47
Upside: 51%
Awaiting big ticket orders
We hosted a road show for Prime Focus where the company was represented by its Promoter, Mr. Namit Malhotra and CFO, Nishant Fadia. The following are the key takeaways from the roadshow discussions:
m Focus on VFX business: In the current year Prime Focus is set on demonstrating its core abilities to clients in terms of VFX business and is hopeful on garnering big ticket orders from studios in the coming years. The company has started cross selling VFX on the back of 2D to 3D conversion to the studios. A case in point is their bagging of a contract from Sony Pictures for VFX work on ‘Total Recall’ after their successful 2D to 3D conversion of ‘Men in Black 3.’ This was despite Sony Pictures having its own VFX and animation company Sony Imageworks. Similarly, the company is in talks with most studios for high end VFX works. VFX industry is currently ~$1.8-2bn and may consume ~30-40% of the budget of major films that could exceed $50mn for major studio films. We are confident that Prime Focus will easily double its revenues in this highly fragmented industry from current $24mn in FY12.
m 2D to 3D conversion on growth path: The management remains very confident of being rewarded with new movies going forward not only from existing players but also from new studios. The company has also raised its quality standards in the past six months which could help garner big ticket projects from top studios. The company has also started to woo clients for conversion only for television where the quality could be lower but conversion faster, where realization is less than $4mn/movie. This will help the company increase capacity utilization and volume multi-fold by targeting new customers.
m Animation services opportunity: Prime Focus entered into animation service market in Q4FY12 and has recently been awarded a large animation TV project (an entire network season) by a leading toy manufacturer. We believe Prime Focus’ highly skilled global workforce and state of the art facilities make the company ideally positioned to grow this business.
m PFT – next growth pillar: The management believes that PFT could be the next growth pillar for the company and is confident of its hybrid cloud based platform providing managed services around CLEAR delivering multi-platform content operations to the business. The company recently bagged multiple projects across the globe with the management expecting revenues to touch Rs1bn for FY13E and Rs1.5bn for FY14E from mere Rs0.33bn in FY12. Operating margins in this business are ~40%.
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 the issue of unsecured NCD (zero coupon, 13.4% YTM) to Standard Chartered PE. With this raising of funds, Prime Focus has fully redeemed its FCCBs by paying $79mn. Now the current debt of the company stands at $120mn of which $35mn is NCD, $50mn is for working capital, $22mn is for property and remaining is term loan. Management continues to scout for opportunities to reduce debt by unlocking value in its subsidiaries.
m Valuations: The stock is currently trading at 10.7x and 7.9x 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, increasing outsourcing to India, focus on VFX along with global dominance in 2D to 3D conversion and PFT gaining scale. Hence we maintain BUY rating on the stock with a target price of Rs71 (12x FY14E).
m 2D to 3D conversion on growth path: The management remains very confident of being rewarded with new movies going forward not only from existing players but also from new studios. The company has also raised its quality standards in the past six months which could help garner big ticket projects from top studios. The company has also started to woo clients for conversion only for television where the quality could be lower but conversion faster, where realization is less than $4mn/movie. This will help the company increase capacity utilization and volume multi-fold by targeting new customers.
m Animation services opportunity: Prime Focus entered into animation service market in Q4FY12 and has recently been awarded a large animation TV project (an entire network season) by a leading toy manufacturer. We believe Prime Focus’ highly skilled global workforce and state of the art facilities make the company ideally positioned to grow this business.
m PFT – next growth pillar: The management believes that PFT could be the next growth pillar for the company and is confident of its hybrid cloud based platform providing managed services around CLEAR delivering multi-platform content operations to the business. The company recently bagged multiple projects across the globe with the management expecting revenues to touch Rs1bn for FY13E and Rs1.5bn for FY14E from mere Rs0.33bn in FY12. Operating margins in this business are ~40%.
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 the issue of unsecured NCD (zero coupon, 13.4% YTM) to Standard Chartered PE. With this raising of funds, Prime Focus has fully redeemed its FCCBs by paying $79mn. Now the current debt of the company stands at $120mn of which $35mn is NCD, $50mn is for working capital, $22mn is for property and remaining is term loan. Management continues to scout for opportunities to reduce debt by unlocking value in its subsidiaries.
m Valuations: The stock is currently trading at 10.7x and 7.9x 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, increasing outsourcing to India, focus on VFX along with global dominance in 2D to 3D conversion and PFT gaining scale. Hence we maintain BUY rating on the stock with a target price of Rs71 (12x FY14E).
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