If a follower of Indian stock market is queried whether he has come across an Indian multinational entertainment company one should not fault him for answering in the negative. It is a little known truth that Prime Focus has met morphed itself from a $ 10 million (March 2006) Mumbai centric niche player to a $ 85 million (March 2010) multinational with presence in India, America, Canada & UK .The company is offering world sourcing solutions for clients across the world access to the best global talent and the most cost effective solutions. Now the company is sourcing work in US and then it reviews how much of it has to be executed in the US itself and what portion will be worked upon  by the visual effects team in Mumbai . It could also be an advertisement campaign which has been won in London and the work is being shared between Prime Focus studios in Los Angeles and Khar, Mumbai. The company can already boast of being part of the team that has provided sound effects and 3D effects for the biggest grosser of all times “Avatar” that has also won the Oscar Award for visual effects. While competition is still doing few frames special effects for the domestic market (where Prime Focus enjoys the dominating 65% market share) the company is independently converting the recent Warner Bros release “Clash of the Titans” from 2D into 3D using proprietary software. The company has also won the Emmy Award for outstanding sound effects for the documentary “The Story of Us “in the current year.  

In a year when studios were being closed and their staff was being retrenched Prime Focus was doing just the reverse, they hired exceptional talent and built on its already strong talent pool. It was in this period that it hired people like Michael Fink(Oscar award winner for “The Golden Compass”) Terry Clotiaux (credited with VFX for ‘Alexander’ ‘The Matrix Reloaded’ ‘Independence day’) Michael Constantine (Ex-Leo Burnett agency leader) and Larry Birstock . Most of these stalwarts were part of the acquisitions made by prime focus .  The above growth has come at a cost . The company was generating an earning per share in excess of Rs 20 till March 2008 but since then the earnings have more than halved. the main reason for this is the acquisitions of VTR (London ) ,Frantic Films and Post Logics (USA) Unfortunately these were done at the peak of the economic cycle when  the valuations were touching the skies. The acquisitions have been financed by a $ 55 million FCCB issue. this instrument will  be converted in Dec 2012 into shares  at Rs. 1388 or will be treated as debt with interest payable from day one . For  a company which is already generating $ 5 million  per project this does not seem to be a big ask . The Company is working at current operating margin of 20 %  which is down from 61 % in March 2006 . The performance at the net level has been deteriorating because of high interest and depreciation  which were at Rs 14 cr and Rs 18 cr for the year ended 31st of March 2009 .   The market has factored in all the negatives and refuses to look at the positives which are growing by the day. (Though the market thinking has changed since the time this report  was written but there is still a lot of value discovering which the CMP of Rs 620 is not doing ) The company has stated in its 2008-09 balance sheet that given the growth in its foreign subsidiaries it is fairly confident of repaying the FCCB if the same is not converted into shares by December 2012.

FINANCIAL SNAPSHOT (RsCr)         

The company has two important triggers which could provide it good volume growth in years to come. These triggers are in shape of two proprietary products ,the first one being View D which is a platform used to convert 2D into 3D (stereo ) films . the company is lucky that this conforms to the recent trend in Hollywood .where there is growing preference for 3D post the phenomenal success of Avatar .The other boost will come from the digital asset management platform called “Clear” which is used for managing and storing digital media as well as retrieving and restoring  earlier movies – again for which there is growing demand. The investment of Rs 32 cr in  a new 65000 sq feet Royal Palm 300 seat facility will yield good results as more work will be worldsourced to it.

The company needs to keep working on getting more work out sourced to India so that it can return to operating profit margin of 60%. If the current revival of the world economy continues then the company would be able to pay back its Rs 162 Cr debt ( besides FCCB of Rs 216 Cr ) which could result in  a saving of Rs 20 Cr paid as interest during 2008-09. But before you decide not to invest in this debt laden company just keep in mind that it also owns 55000 sq feet of prime property in Hollywood.

The company has come out with results much higher than expected whereby it has reported diluted quarterly EPS of Rs 16. The turn around has taken place at much faster pace than expected. After interacting with the company, it is clear that they have visibility for the next three quarters and according to them one should multiply these results by three to get a conservative annual EPS of around Rs 50 which the CMP of Rs 620 discounts  by 12 times. Given the kind of growth one is anticipating the PE multiple should be around thirty. 

Non Banking

Remarks: 

1.Other Expenditure= General & Administrative Expenses of Rs. 4686.27 lacs + Exchange Loss/Gain of Rs. 26.09 lacs + Bad Debts of Rs. 54.62 lacs