Prime Focus - Buy - Road Show Key Takeaways - Awaiting big ticket orders:: Centrum

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:

Q2FY13 Result Update Prime Focus Buy Target Price: Rs71:: Centrum

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.

Prime Focus Ltd: Traction in 3D and CLEAR to provide significant growth opportunities: BP Wealth

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.

Prime Focus: Operationally a strong quarter: Centrum

Operationally a strong quarter
Prime Focus posted Q1FY13 operating results in line with expectation. Apart
from the post production business which got impacted in UK, we believe the 2D
to 3D conversion business along with PFT would be future growth drivers for
the company. Forex gain of Rs125mn boosted PBT while higher tax muted
profitability. We maintain our BUY rating.
Q1FY13 results in line with expectations: Prime Focus posted Q1FY13 results inline
with expectations. Topline was at Rs1882mn (up 12.4% YoY) 1.4% below our
expectations while operating profit was at Rs572mn (up 24.3% YoY) on the back of
higher forex gain and margin expansion while PAT was at Rs210mn, down 16.4%
(down 26% YoY) from our expectations due to higher than expected tax rate.
Post production business under pressure: Post production business was under
pressure and down 41% QoQ following the slowdown in Europe and UK. Olympics
further impacted TV advertising and triggered a marked downturn in expected
activity levels across the post-production industry in UK. This impacted the
profitability of its UK subsidiary which posted losses during the quarter and is
expected to be under pressure for the next couple of quarters.

Prime Focus - Q4FY12 - Result update - Centrum

Prime Focus

Buy

Target Price: Rs95

CMP: Rs48         

Upside: 100%

Value unlocking on cards

Strong revenue growth on the back of 2D-3D conversion helped the company post 53% YoY growth in revenues in FY12. Healthy operating margins at 30.3% following an increase in global sourcing boosted PAT by 22% during the year. We believe the strong order book in 3D conversion and high growth opportunity from PFT will drive revenues and margins going forward. With an opportunity to unlock value in its subsidiary, we expect the stock to re-rate from current levels. Maintain BUY 

Prime Focus: BUY Target Price: Rs95 : Centrum

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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.

52 week Blockbuster - Prime Focus:: Business Line

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The stock of Prime Focus has been on fire with an 84 percent gain in the last one year as the company benefitted significantly from the revival in the movie industry over the last 18 months.

The company offers visual effects, post-production and digital asset management services among other offerings to several production houses overseas, who outsource the non-core work to studios in countries such as India.