Prime Focus - Initiation - Centrum 20042012.pdf - all-mail-archive

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Prime Focus - Initiation - Centrum 20042012.pdf - all-mail-archive

INDIA

Media

BUY

Target Price: Rs95

CMP: Rs51

Upside: 86%

*as on 19 April 2012

Ankit Kedia

ankit.kedia@centrum.co.in

+91 22 4215 9634

Prime Focus

Initiation 20 April 2012

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.

Key Data

Bloomberg Code

PRFO.BO

Reuters Code

PRIF IN

Current Shares O/S (mn) 138.9

Diluted Shares O/S(mn) 138.9

Mkt Cap (Rsbn/USDmn) 7.1/137

52 Wk H / L (Rs) 78/33

Daily Vol. (3M NSE Avg.) 523,139

Face Value (Rs) 1

USD = Rs52.0

Shareholding Pattern

Others

34.5%

DII

1.7%

FII

14.1%

as on 31 December 2011

Promoter

49.7%

One Year Indexed Stock Performance

150

140

130

120

110

100

90

80

70

60

50

Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12

PRIME FOCUS LTD

Price Performance (%)*

NSE S&P CNX NIFTY INDEX

1M 6M 1Yr

PRIF 10.3 (7.8) (21.6)

NIFTY 1.1 4.7 (8.9)

*as on 19 April 2012

Source: Bloomberg, Centrum Research

Y/E Mar (Rsmn) Rev YoY (%) EBITDA EBITDA (%) Adj PAT YoY (%) EPS (Rs) RoE (%) RoCE (%) P/E (x) EV/EBITDA (x)

FY10 4,528 27.8 1,196 26.4 472 501.8 3.2 25.6 8.8 15.8 9.9

FY11 5,030 11.1 1,681 33.4 831 76.2 5.6 29.8 13.5 9.0 7.0

FY12E 7,781 54.7 2,305 29.6 989 19.1 6.6 23.9 13.0 7.5 5.3

FY13E 9,366 20.4 2,936 31.4 1,304 31.8 8.8 27.3 16.3 5.7 4.3

FY14E 11,223 19.8 3,768 33.6 1,771 35.8 11.9 30.6 20.6 4.2 3.0

Source: Company, Centrum Research Estimates

Please refer to important disclosures/disclaimers inside

Centrum Equity Research is available on Bloomberg, Thomson Reuters and FactSet


Shareholding pattern (%)

Q4FY11 Q1FY12 Q2FY12 Q3FY12

Promoter 49.7 49.7 49.7 49.7

FIIs 14.1 12.1 9.0 9.3

Dom. Inst. 1.7 1.7 1.7 1.4

Public & Others 34.5 36.5 39.6 39.6

Total 100.0 100.0 100.0 100.0

Source: BSE

Company Background

Prime Focus is a global visual entertainment services company offering

complete end-to-end visual effects (VFX), 3D and post-production

services to marquee clients worldwide. The company started operations

in 1997 in Mumbai. 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, the UK and India. It operates 15 facilities and has a staff

strength of about 4,500 people globally.

Organisation structure

Founders*

Public

49.73% 50.27%

Indian parent Listed on Bombay

Stock Exchange And National

Stock Exchange of India.

Prime Focus

Limited

(India Regd)

100%

100%

65.04%

PF World

Limited

100%

(Mauritius)

PF Investments

Limited

(Mauritius)

Prime Focus

London PLC

(UK Regd)

100%

AIM

Listed

Prime Focus

Technologies

(76 % Owned)

Prime Focus

Luxembourg

S.a.r.l

(Lux)

Operating

Subsidiaries

(UK Regd)

99.99%

0.01%

Operating

Subsidiaries

(UK, North

America & India)

Source: Company, Centrum Research

Key management personnel

Name Designation Profile

Namit Malhotra Global CEO and Founder Namit is highly tech savvy, and his deep understanding and passion for technology has ensured that the company is

always ahead of the technology curve. His decisions to invest in cutting edge and latest technologies have ensured that

the company is always able to deliver world class projects and successfully tiding over the risk of technological

obsolescence. As the global leader of Prime Focus, he is responsible for all decision-making with respect to business,

people and technology

Ramki

Sankarnaryan

CEO of Prime Focus India

and President & CEO of

Prime Focus Technologies

He has over 15 years of rich experience performing technical, strategy, customer service, marketing, sales & general

management roles in the IT industry. Prior to Prime Focus, Ramki was the CEO of Subex Technologies. Prior to joining

Subex, he was General Manager & Head of worldwide sales and marketing in Tata Elxsi for the Product R&D Services

division. He holds a Bachelors Degree in Engineering from B.I.T.S Pilani, India along with a MBA

Nishant Fadia CFO Nishant is involved in structuring finances, cost control and maintenance of cash flows on a day-to-day basis.

Additionally, he is also involved in business strategy, identifying new expansion opportunities, acquisitions, fund raising

etc. In addition to being a CA, he has also completed his CPA degree from the AICPA in the United States.

Merzin Tavaria

Chief Creative Director and

Co-Founder of Prime Focus

He has been with the company since its inception and has been integral in the set up of the Film VFX and Animation

division. Some of Prime Focus' biggest and most recognized projects has been executed under his direction. He has

been instrumental in setting up the Indian View-D team. Besides working on feature films; in his career spanning over

15 years, Merzin has also been involved with some of the most prestigious ad film projects produced in India.

Anshul Doshi Global COO Based in London, he is responsible for the management of the UK and North American companies. He joined the Prime

Focus group in 2004, as a finance analyst for the Indian operations, and over the years was involved in acquisation of UK

and North America companies. Previous to his time at Prime Focus, he was employed by KPMG in India as a Corporate

Finance analyst. He holds a law degree from GLC Mumbai, and is a certified CA.

Parminder

Chaddha

Terry Clotiaux

Chief of Film Technology &

Color Science

President - Global

Production

He has 12 years of experience with Prime Focus, and previously worked for Equinox Films. He has handled innovative

special effects projects for Prime Focus and his specialization is in digital film applications. He was also instrumental in

the set up of the digital film lab at Filmcity, Goregaon

He is responsible for building out the company’s international VFX and View-D operations, and establishing its LA and

Vancouver offices. He is a 30-year industry veteran with visual effects credits that include Independence Day, for which

his team won an Oscar, The Matrix Reloaded, The Matrix Revolutions, Godzilla and Spiderman 3. He joined Prime Focus

after serving as executive producer at Digital Domain.

2

Prime Focus


Investment Rationale

Increasing share of US operations

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.

Well-positioned to capitalize on its 3D and VFX capabilities: The increasing use

of visual effects (VFX) and 3D for the success of a movie opens huge market

potential for Prime Focus. Given its highly differentiated offering and its high

execution track record, the company has been able to garner some of the most

important projects from studios.

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 the in 2D-to-3D conversion.

Operating margins are set to expand from 29.6% in FY12E to 33.6% in FY14E on 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

100%

80%

60%

40%

20%

0%

FY10 FY11 FY12E FY13E FY14E

USA UK India PFT

Summary Financial

Source: Company, Centrum Research

Y/E March (Rs mn) FY10 FY11 FY12E FY13E FY14E

Key Income Statement Data

Revenue 4,528 5,030 7,781 9,366 11,223

(YoY Growth) 27.8 11.1 54.7 20.4 19.8

Operating Profit 1,196 1,681 2,305 2,936 3,768

(YoY Growth) 121.2 40.5 37.1 27.4 28.3

Operating Margin 26.4 33.4 29.6 31.4 33.6

Depreciation 426 546 613 651 707

Interest expenses 218 263 358 594 774

Other Income 88 139 46 76 81

PBT 503 942 1,381 1,767 2,368

Provision for Tax 109 60 376 449 588

PAT (Adj.) 472 831 989 1,304 1,771

YoY Growth 501.8 76.2 19.1 31.8 35.8

PAT Margin 10.4 16.5 12.7 13.9 15.8

Key Cash Flow Statement Data

Cash Flow from Operating 998 1,022 1,410 2,257 2,613

Cash Flow from Investing (1,041) (1,498) (1,538) (874) (719)

Cash Flow from Financing (232) 561 (108) (1,239) (1,774)

Key Balance Sheet Data

Shareholder's Funds 1,926 3,644 4,633 4,905 6,675

Deferred Tax Assets 98 189 189 189 189

Total Debt 4,634 4,613 4,863 5,250 4,250

Total 6,942 8,862 10,116 10,789 11,569

Fixed Assets 5,557 6,745 7,716 8,014 8,107

Investments 2 3 3 3 3

Inventory 20 3 20 20 20

Sundry Debtors 1,230 1,694 2,345 2,823 3,382

Loans & Advances 898 1,111 1,323 1,311 1,571

Cash & Bank Balances 212 298 62 206 326

Liab. & Provisions 1,041 1,048 1,353 1,588 1,841

Net current assets 1,383 2,058 2,397 2,772 3,458

Total 6,942 8,862 10,116 10,789 11,569

Key Ratios

RoE 25.6 29.8 23.9 27.3 30.6

RoCE 8.8 13.5 13.0 16.3 20.6

Per Share Ratio

EPS 3.2 5.6 6.6 8.8 11.9

Book Value 12.9 24.5 31.1 32.9 44.8

Valuation Parameters

P/E (Fully Diluted) 15.8 9.0 7.5 5.7 4.2

P/BV 3.9 2.0 1.6 1.5 1.1

EV/EBITDA 9.9 7.0 5.3 4.3 3.0

Source: Company, Centrum Research Estimates

3

Prime Focus


Investment Rationale

Unique global network of integrated studios

The company has offices in 3 continents in all-time zones. Its 15 facilities, 4,500+ people, 24x7, 365-

day work schedule give it major time and cost benefits. Clients get the maximum benefit as the

work gets world sourced to different studios globally depending on the manpower strength and

needs along with major cost benefits as most of the work is done in India at significantly lower cost

giving Prime Focus an edge over competitors. Most projects today are executed in multiple stages

across geographies to ensure seamless and cost effective delivery to clients with one studio dealing

with clients with the others doing back end work. Most 2D-to-3D and VFX work is done in this

manner while the post production work is mostly done in the same studio.

Exhibit 1: World Sourcing: Key to profitability

Source: Company, Centrum Research

End-to-end services

These studios are one stop shop for any movie producer as they offer a host of services from preproduction

to final delivery that includes pre-visualization, equipment hire, VFX, video and audio

post-production, digital intermediates, digital asset management and distribution and other

services. Prime Focus operates across segments at various points in the value chain to give greater

convenience and freedom to producers. As a pioneer in the end-to-end model, the company is

expected to get significant economies and drive up profitability and cross sell services and expertise

to different geographies and encourage world sourcing which would reduce cost and improve

margins.

4

Prime Focus


Exhibit 2: Present across value chain

Film Production

Prime Focus Value

Film Shooting

Equipment Renting

Film Processing

Digital Processing (DI, Telecine)

Film Visual Services

VFX, View D

Sound

Recording, Mixing

Value Generation across the chain

Source: Company, Centrum Research

Exhibit 3: One stop shop for all needs

Create

• Animation

• Motion graphics

• Animatics

• Pre-visualization

• R&D

• Image science division

Capture

• On-set supervision

• Production assistance

• Motion control

• Equipment rental

• Data lab

Products

Crafts

• Clear

• VFX Software

• View-D TM

• Digital intermediate

• Telecine

• Editing

• Audio

Conserve

• Digital archiving

• Digital YCK

Circulate

• Duplication

• Encoding

• DVD authoring

• Digital distribution

Source: Company, Centrum Research

5

Prime Focus


Set to capitalize on the strong demand for visual effects and 3D

Of the top 30 world wide box office collection movies (excluding animation) in last 3 years, more

than 85% were VFX extravaganzas with VFX contributing to their success. We believe VFX addition is

now the norm for most movies and is considered as an integral part in the film production process.

Addition of 3D and VFX content in the movies gives studios and producers global reach and success

and connect them with audiences instantly. As more and more VFX-centric movies start gaining

popularity and increase the ROI for the studio, demand for this kind of work will only increase and

benefit companies such as Prime Focus. The global VFX market is currently at ~$2 billion and

growing at 8-10% as it consumes 30%-40% of a film’s budget and on absolute terms can be as high

as $80mn-100mn for a particular project.

Prime Focus has already started to create a mark globally by working on 10 blockbusters in the past

3 years including the projects, Harry Potter and Transformers which were the biggest box office

successes of 2011, apart from five of the top 10 in 2010.

Prime Focus contributed services to 5 of the top 10 Oscar contenders which were shortlisted for the

Visual Effects Oscar for the 84th Academy Awards. The work ranged from creating complex VFX

shots for Tree of Life and X-Men: First Class, to being lead 3D conversion facility on Harry Potter and

the Deathly Hallows Part 2, to completing 3D conversion and delivering stereoscopic VFX shots for

Transformers: Dark of the Moon and supplying on-set equipment for Hugo.

Exhibit 4: Worldwide Box office top grosser are VFX heavy films

Top 2011 WWBO Top 2010 WWBO Top 2009 WWBO

Harry Potter and the Deathly Hallows

(Part two)

$1,328 Alice in Wonderland $1,024 Avatar $2,782

Transformers: Dark of the Moon $1,123 Harry Potter and the Deathly Hallows $955 Harry Potter and the Half Blood Prince $934

Pirates of the Caribbean: On Stranger Tides $1,044 Inception $826

Transformers: The Revenge of the

Fallen

$887

The Twilight Saga: Breaking Dawn $705 The Twilight Saga: Eclipse $699 2012 $770

Mission Impossible - Ghost Protocol $693 Iron Man 2 $622 The Twilight Saga: New Moon $710

Fast Five $626 Clash of the Titans $493 Sherlock Holmes $524

The Hangover Part II $582 Narnia: Dawn Treader $415 Angels and Demons $486

Sherlock Homes: A Game of Shadows $534 The Kings Speech $414 The Hangover $468

Rise of the Planet of the Apes $481 Tron: Legacy $400

Night at the Museum: Battle of the

Smithsonian

$413

Thor $449 The Karate Kid $359 Star Trek $386

Source: www.boxofficemojo.com; Note: Excludes wholly animated films

3D movies - The way forward

We believe Avatar provided the push to 3D – A paradigm shift in 3D display, content and delivery. It

was a game changer with advanced effects to give the audience an immersed feel into the movie.

With opening week-end collections of 3D prints exceeding that of 2D prints, 3D is a more exciting

option for producers as 3D tickets are ~20% more expensive than 2D tickets. US/Canada box office

touched US$10.2bn in 2011, down from US$10.6bn in 2010. But 3D market was the key driver and

accounted for 17.6% or US$ 1.8 billion of the revenues. The pipeline of 3D movies has increased with

the number of 3D movies releasing in 2011 at 45 against 26 in 2010. The movies released are a mix

of those shot in 3D and converted to 3D from 2D. 3D digital screens in service have increased by

57% worldwide to 35,479 in 2011 from 22,411 in 2010. We believe there is a rapid transition to

digital screens globally to take advantage of the 3D phenomena and this is expected to continue

going forward.

We believe studios are more than willing to invest in 3D as it reduces their distribution cost of

movies, curbs piracy, increases the ticket prices and brings audiences back to the theatre for the

quality experience. On the back of this, studios are producing or converting more and more movies

into 3D which increased their RoI. Conversion to 3D gives them the best capital efficient method to

capture this trend in an effective manner. For the first time the entire ecosystem of in-home

platforms such as cable channels on broadcast TV, on mobile devices and game consoles and web

based channels are demanding the 3D experience as the consumer wants to experience this in their

in-home entertainment. Hence there ought to be demand for such compelling and engaging

content.

6

Prime Focus


Exhibit 5: 3D industry development scenario

Source: Future Source Consulting

Exhibit 6: 3D movies released

(nos)

50

45

40

35

30

25

20

15

10

5

0

45

26

20

6

8

2007 2008 2009 2010 2011

Source: Rentrak Corporation – Box Office Essentials (Total), MPAA (Subtotals)

Exhibit 7: Worldwide Digital 3D screen growing at robust rate

2007 2008 2009 2010 2011 Digital (%)

U.S./Canada 994 1,514 3,548 8,505 13,695 50

EMEA 211 594 3,510 8,143 11,642 61

Asia Pacific 80 344 1,584 4,659 8,116 58

Latin America 12 84 362 1,104 2,026 97

Total 1,297 2,536 9,004 22,411 35,479 57

Source: IHS Screen Digest

7

Prime Focus


Exhibit 8: Growth in 3D US/Canada box office collection

Exhibit 9: Increase in 3D TV units worldwide

(US$bn) (%)

12

10

8

6

4

2

0

2.1

0.2

10.4

1.1

20.8

2.2

17.6

1.8

9.4 9.5

8.4

8.4

2008 2009 2010 2011

U.S./Can. box office 3D Box office 3D Share (RHS)

25.0

20.0

15.0

10.0

5.0

0.0

(mn)

100

80

60

40

20

0

91.5

68.4

42.1

18.0

3.2

2010 2011 2012E 2013E 2014E

Source: Rentrak Corporation – Box Office Essentials (Total), MPAA (3D)

Source: Display Search

Prime Focus at the forefront of opportunity

Increasing dependence on VFX and 3D for the success of a movie opens huge market potential for

Prime Focus. Prime Focus has built a ‘state-of-the-art’ facility at Royal Palms, Mumbai as well as

Chandigarh, with 1,500+ seats to cater to its revolutionary technology – ‘View D’. View D is a process

of converting an existing 2D film to stereoscopic 3D format. It is the first company in the world to

have successfully completed an entire movie, Clash of the Titans, produced by Warner Bros from 2D

to 3D in a record 12 weeks simultaneously across 7 facilities worldwide. It has set up 250+ VFX seats

in the same facility to cater to the ever increasing demand for VFX content in movies. Along with

this, the company has also set up a new facility in Chandigarh to cater to the outsourcing

opportunity in 3D conversion and VFX with 1,500 seat capacity.

Exhibit 10: 2D to 3D conversion work done by the company

Title Customer Release Date

Harry Potter and the Half-Blood Prince Warner Bros.

December 8, 2009 (home

entertainment)

Clash of the Titans Warner Bros. April 2, 2010

Resident Evil Davis Films April 26, 2010

Cats & Dogs: The Revenge of Kitty

Galore

Warner Bros. July 30, 2010

My Soul to Take Universal October 8, 2010

Shrek

Dreamworks Animation

The Chronicles of Narnia: The Voyage

of the Dawn Treader

Stag Night

Harry Potter and the Deathly Hallows:

Part 1

December 7, 2010 (home

entertainment)

Twentieth Century Fox/ Walden Media December 10, 2010

Repremiere

February 15, 2011 (home

entertainment)

April 15, 2011 (home entertainment)

Warner Bros.

Green Lantern Warner Bros. June 17, 2011

Transformers: Dark of the Moon Paramount July 1, 2011

The Smurfs Columbia Tristar July 29, 2011

RA. One Red Chillies & Eros Entertainment October 26, 2011

Immortals Relativity Media November 11, 2011

Star Wars: Episode One - The Phantom

Menace

Lucasfilm February 10, 2012

Clash of Titan 2 Warner Bros. March 30, 2012

Project 1 Under NDA To be released

Project 2 Under NDA To be released

Source: Company

8

Prime Focus


Exhibit 11: VFX work done by the company in USA

Title Customer Release Date

The Ruins Dreamworks Animation April 4, 2008

X-men Wolverine Twentieth Century Fox January 5, 2009

Dragon Ball Evolution Twentieth Century Fox April 10, 2009

G.I. Joe: The Rise of Cobra Paramount August 7, 2009

The Twilight Saga: New Moon Summit Entertainment November 20, 2009

Avatar Twentieth Century Fox December 18, 2009

Tooth Fairy Twentieth Century Fox January 22, 2010

A-Team Twentieth Century Fox June 3, 2010

The Twilight Saga: Eclipse Summit Entertainment June 30, 2010

TRON: Legacy Walt Disney December 17, 2010

Sucker Punch Warner Bros. March 25, 2011

Scream 4 Dimension Films April 15, 2011

The Tree of Life Summit Entertainment/Fox Searchlight May 27, 2011

Final Destination 5 Warner Bros. August 12, 2011

The Big Year Twentieth Century Fox October 14, 2011

RA. One Red Chillies & Eros Entertainment October 26, 2011

Immortals Relativity Media November 11, 2011

Mirror MIrror Relativity Media March 30, 2012

Source: Company

Key growth drivers

Cost effectiveness

Cost advantage in India – Akin to the IT industry, outsourcing of 3D content and VFX content

based on Prime Focus’ rich talent pool will reduce costs while ensuring quality. The proprietary

View-D platform is expected to bring in more VFX based projects to India and boost margins.

Exhibit 12: Cost differential / 30 minute content

($ '000s)

800

800

600

400

200

0

200

360

270

200

122

90

68

80

50

20 27

India Korea,Phllipines North America

2D Hand drawn 3D Backend production Flash Animation

Source: FICCI KPMG 2010

Strong focus on technology

Prime Focus had developed two proprietary technologies which gives it an edge over

competitors. View D technology has been developed by a robust in-house R&D team. Projects

are managed and distributed via the Global Digital Pipeline, with seamless integration of all

facilities worldwide via its proprietary CLEAR technology.

9

Prime Focus


View D: A proprietary process for the conversion of 2D moving images to stereo 3D images. It

offers many advantages over other conversion methods, including superior quality of

converted imagery, significantly shorter production timeframes, more iterations and control

over virtually every pixel in the frame.

CLEAR: CLEAR allows taking control of digital assets and associated business processes, and

managing them throughout the entire content life-cycle, from creation, through processing

and distribution, to preservation. It is a ready-to-use, cost effective and feature-rich content and

workflow management platform, which is accessible from anywhere in the world.

We believe Prime Focus is currently in a position to innovate and expand the options for these

products and at the same time scale up quickly with increasing slate of projects. CLEAR also

gives flexibility to the company to effectively world source the work seamlessly round the clock

across studios.

Experienced manpower

We believe film making is a very creative field and having the same mindset and speaking the same

language of the film maker is very critical for any success because these technologies require

significant inputs from artists that do the work. We believe Prime Focus has a deep understanding

of this with its years of experience dealing with production houses. The company regularly trains its

workforce across geographies and gives creative freedom to the artists.

Exhibit 13: Number of Employees

Country Business No of Employees

India View D 2,687

Post Production 985

Prime Focus Technologies 521

North America 130

UK 240

Source: Company

Strategic partner for content owners

Over the years, Prime Focus has become a strategic partner for content owners given its proven

track record. With its highly differentiated offering, Prime Focus has been able to establish its brand

equity in the mind of studios. Given its high execution track record, the company has been able to

garner some of the most important projects from studios. The company is focusing on widening and

deepening studio partnerships across 2D to 3D conversion and VFX along with making these

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.

It has also worked with some of the world’s leading film makers including George Lucas, David Yates

and Michael Bay.

Exhibit 14: Strategic partner to studios on marquee projects

Star Wars Episode 1 Harry Potter 7B Immortals RA. One

Studio Lucasfilm Warner Brothers Relativity Eros Intl Media

Release Date Feb-2012 Jul-2011 Nov-2011 Oct-2011

PF’s Client-facing HQ Los Angeles London Los Angeles/London India

PF Production location Los Angeles/India London/India Vancouver (VFX)/India London/India

2D to 3D conversion

VFX work

Source: Company

Exhibit 15: CLEAR clients

Business Area

Broadcast

Films

Brands

Sports

Advertising

Clients

Sony, ESPN Star Sports, Star Group, MTV

EROS International, British Movietone Library, Balaji Telefilms

Hindustan Unilever

IPL (Global Cricket Ventures), BCCI

Saatchi & Saatchi, WPP (Group M / JWT), Schawk!

Source: Company, Centrum Research

10

Prime Focus


Financials

Revenues to grow at a CAGR of 30.7% over FY11-14E

We expect revenues to grow at a CAGR of 30.7% to Rs11.2bn over FY11-14E on the back of strong

growth in the in 2D-to-3D conversion. We believe the North America operations will drive growth

where VFX and 2D to 3D conversion business is mostly located. North America business is expected

to grow at a CAGR of 35% over FY11-14E to Rs6716mn and contribute 60% to total revenues from

39% in FY10. Prime Focus Technologies which has CLEAR technology is expected to grow at a CAGR

of 132% over FY11-14E to Rs1381mn and have more than 12% share of total revenues. We believe

these two businesses will be major contributors to revenue growth going forward.

Exhibit 16: Revenues to grow at healthy rate

(Rsmn)

12,000

10,000

8,000

6,000

4,000

2,000

0

1,381

864

789

847

329

2,261

832

2,114

1,921

110

858

-

817

1,518

6,716

1,926

5,616

4,699

1,744

2,583

FY10 FY11 FY12E FY13E FY14E

USA UK India PFT

Source: Centrum Research

Exhibit 17: Increasing share of USA operations

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

FY10 FY11 FY12E FY13E FY14E

USA UK India PFT

Source: Centrum Research

11

Prime Focus


Outsourcing to increase to India

We believe the world sourcing model is leveraged at its full potential going forward with more View

D & VFX work being outsourced to India. We believe more than 75% of the contract value work of

View D will be world sourced to India while for VFX it will increase marginally from 5% to 7%.

We have modelled in transfer pricing at 25% for VFX and 30% for ViewD (i.e. North American

company will have 70% gross margins for the outsourced work while 30% will be revenue for the

Indian company for VFX). We believe the company has already proven its competence in terms of

quality, execution efficiency and experience in the Indian operations to take it to the next level

which will be tested when it begins to outsource more VFX work to India. We have been very

conservative in our estimates for the VFX, but believe there is huge upside potential considering the

vast opportunity in this space.

Exhibit 18: Outsourced share to increase

Outsourced Share (%) FY 11 E FY 12 E FY 13 E FY 14 E

ViewD 70 75 75 80

VFX 5 5 6 7

Source: Centrum Research

Exhibit 19: Outsourced revenue to India

(Rsmn)

1,600

1,400

1,200

1,000

800

600

400

200

0

1,356

1,033

831

538

95

FY10 FY11 FY12E FY13E FY14E

Source: Centrum Research

Margin to expand

We expect consolidated operating margins to expand from 29.6% in FY12E to 33.6% in FY14E on the

back of increase in outsourcing to India coupled with increasing View-D work. Net profit margins are

expected to expand from 12.7% to 15.8% in FY14E. We have modeled View-D margins to expand

from 35% in FY11 to 40% in FY14E on the back of outsourcing while VFX and post production

margins in USA and UK will be between 8-12%. Domestic operations will have margins of ~34%

while margins of Prime Focus Technologies will grow to 38% in FY14 from 22% in FY12E.

Exhibit 20: Expanding Margins

(%)

40

35

30

25

20

15

10

5

0

Source: Centrum Research

26.4

7.4

33.4

15.1

29.6

12.7

31.4

13.9

33.6

15.8

FY10 FY11 FY12E FY13E FY14E

Operating Margin

Net Profit Margin

12

Prime Focus


Profitability to grow at a CAGR of 28.7%

We expect the profitability of the company to grow at a CAGR of 28.7% to Rs1771mn over FY11-14E

led by strong topline growth and margin expansion. Profitability could have been higher but we

have factored in the increase in debt on the back of FCCB payout in December 2012.

Exhibit 21: Improving Profitability

(Rsmn)

2,000

1,800

1,600

1,400

1,200

1,000

800

600

400

200

0

76%

1,771

1,304

989

831

32%

36%

472

19%

FY10 FY11 FY12E FY13E FY14E

Net Profit % Growth

80%

70%

60%

50%

40%

30%

20%

10%

0%

Source: Centrum Research

Return Ratios to improve

We believe the return ratios will improve steadily with RoCE increasing from 8.8% in FY10 to 20.6%

in FY14E while RoE is set to increase from 25.6% in FY10 to 30.6% in FY14E.

Exhibit 22: Increasing RoE and RoCE

(%)

35

30

25

25.6

29.8

23.9

27.3

30.6

20.6

20

15

10

8.8

13.5 13.0

16.3

5

0

FY10 FY11 FY12E FY13E FY14E

RoE RoCE

Source: Centrum Research

13

Prime Focus


To become FCF Positive from FY13

We expect the company to become free cash flow positive from FY13E onwards as the capex

requirement is expected to become less from Rs1350mn in FY12E to Rs800mn in FY14E. With strong

operating profit growth coupled with margins expansion and working capital under control, we

expected the company to have FCF of Rs1813mn in FY14E.

Exhibit 23: FCF to the firm

2,000

1,813

1,500

1,307

1,000

500

236

0

(500)

(1,000)

(615)

(173)

FY10 FY11 FY12E FY13E FY14E

Source: Centrum Research

14

Prime Focus


Valuations

The stock is currently trading at 5.7x and 4.2x FY13E and FY14E EPS of Rs8.76 and Rs11.89

respectively. We believe the current valuations do not reflect

(i) High return ratios with RoCE to improve from 8.8% in FY10 to 20.6% in FY14E while RoE would

improve from 25.6% in FY10 to 30.6% in FY14E;

(ii) Strong 30.7% CAGR in revenue growth and CAGR of 28.7% in profitability over FY11-14E;

(iii) Positive cash from operations and free cash flow to the firm to be generated from FY13E on the

back of lower capex requirement;

(iv) Potential value-unlocking in North America business or UK business operations;

(v) Promoter expected to convert 10mn warrants at ~Rs56 showing strong commitment in the

business at current valuations.

Indian media companies trade 8-16x FY14 P/E with broadcasting companies trading at a premium

to print media companies due to high revenue visibility and high margins. 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. Even on

global peer comparison, Prime Focus is trading at a significant discount to their 8-14x P/E range.

We value Prime Focus at 8x FY14E EPS of Rs11.89 and arrive at a target price of Rs95, 86% upside

from current levels.

Exhibit 24: 1 Year rolling forward PE (x)

Exhibit 25: 1 year rolling forward EV/EBIDTA (x)

120

100

80

60

40

20

0

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Feb-10

Apr-10

Jun-10

Aug-10

Oct-10

Dec-10

Feb-11

Apr-11

Jun-11

Aug-11

Oct-11

Close Price 4x 7x 10x 13x

Dec-11

Feb-12

20,000

18,000

16,000

14,000

12,000

10,000

8,000

6,000

4,000

2,000

-

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Feb-10

Apr-10

Jun-10

Aug-10

Oct-10

Dec-10

Feb-11

Apr-11

Jun-11

Aug-11

EV 3x 4x 5x 6x

Oct-11

Dec-11

Feb-12

Apr-12

Source: Centrum Research

Source: Centrum Research

Exhibit 26: International peer comparison

Company

Curr

EBIDTA

Margins (%) NPM (%)

Revenue

Growth (%) RoE (%)

PE EV/EBIDTA Mcap/Sales

Mcap

(mn) CY12 CY13 CY12 CY13 CY12 CY13 CY12 CY13 CY12 CY13 CY12 CY13 CY12 CY13

British Sky Broadcasting^ GBp 10,853 13.0 11.6 7.7 7.0 1.6 1.5 22.9 23.2 12.1 12.7 4.5 5.0 88.7 87.7

Antena 3 de Television SA EUR 891 13.3 11.5 10.5 8.7 1.1 1.0 11.8 13.2 7.9 8.8 6.7 6.5 23.1 25.9

Meredith Corp^ USD 1,449 12.4 10.5 7.2 5.9 1.1 1.0 18.0 19.5 8.4 9.2 (1.7) 6.3 14.3 16.2

Mediaset Espana EUR 1,656 15.2 10.5 13.3 8.7 1.6 1.6 12.2 18.1 10.4 14.8 3.1 1.0 7.6 10.9

ITV PLC GBp 3,327 10.4 9.9 6.1 5.6 1.5 1.5 23.4 23.9 14.5 15.0 3.0 2.1 27.7 22.1

Mediaset SpA EUR 2,254 9.8 7.9 3.4 2.9 0.5 0.5 27.1 29.8 4.9 5.9 0.5 1.7 8.5 10.9

Time Warner Cable USD 25,391 14.6 12.1 6.3 6.2 1.2 1.2 36.6 36.8 8.3 8.8 6.6 4.1 32.2 46.7

News Corp^ USD 48,435 14.1 11.5 7.8 7.1 1.4 1.4 20.0 21.3 10.1 10.9 2.0 4.4 11.8 14.0

Walt Disney Co# USD 77,215 14.5 12.6 8.1 7.2 1.8 1.7 25.8 27.0 12.5 13.2 4.0 5.6 14.0 14.9

Lagardere SCA EUR 2,850 10.1 9.2 6.8 6.9 0.4 0.4 8.2 8.2 4.2 4.7 (4.1) (0.1) 9.4 10.6

Aegis Group GBp 2,108 14.9 13.5 8.6 7.8 1.6 1.5 19.7 20.0 11.2 11.6 13.9 5.8 25.7 26.2

Ascent Capital USD 673 NM 182.8 3.0 2.8 2.0 1.9 67.3 67.5 (0.1) 1.1 7.7 7.1 NM NM

Digital Domain USD 222 NM NM NM 6.9 1.3 0.7 (2.5) 11.8 (20.4) 2.0 79.5 82.5 NM NM

RealD Inc* USD 694 24.9 17.3 6.8 5.0 2.5 2.1 32.5 31.7 10.6 12.2 15.0 20.8 8.1 10.4

Source: Bloomberg; Note: ^June Ending, # Sept Ending, * Mar Ending

15

Prime Focus


Exhibit 27: Domestic peer comparison

Company

PE (x) EV/EBIDTA (x) Mcap/Rev. (x) EBIDTA Margins NPM (%) Rev. Growth (%) RoE (%)

Mcap

(mn) FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14 FY13 FY14

Sun TV 118,220 15.3 13.6 7.2 6.3 5.8 5.1 76.8 76.9 37.5 37.4 11.7 12.6 31.7 34.4

Zee TV 127,149 18.6 16.2 12.4 10.6 3.8 3.4 26.9 27.5 20.3 20.8 13.3 12.1 17.3 17.6

Jagran Prakashan 31,626 12.6 10.4 7.4 6.2 2.1 1.8 27.7 28.4 16.5 17.7 13.0 13.3 31.5 32.8

HT Media 32,432 14.2 12.2 6.2 4.8 1.4 1.3 17.4 18.5 10.5 11.2 13.5 9.1 15.0 15.1

Eros Intl* 17,554 9.0 8.0 6.2 5.2 1.6 1.4 25.3 25.9 17.3 17.3 22.5 13.9 21.3 20.5

InfoEdge 39,578 34.2 28.3 22.4 17.6 9.5 7.9 35.3 35.6 27.9 28.1 12.9 20.4 18.6 18.9

DB Corp* 38,339 15.0 12.8 8.8 7.5 2.3 2.1 26.1 26.6 15.7 16.5 13.7 12.9 23.6 24.4

Prime Focus 6,950 5.7 4.2 4.2 3.0 0.8 0.6 31.4 33.6 13.9 15.8 20.4 19.8 27.3 30.6

Source: Centrum Research Estimates; *Bloomberg

Key Risk

Sharp fall in pricing for 2D to 3D conversion due to increase in competition. The primary

competitors for 2D to 3D content conversion are Legend3D, Inc. and Stereo D LLC (recently

acquired by Deluxe Entertainment). With respect to VFX services, it competes with numerous

mid-size companies.

Technology getting obsolete since Prime Focus is expected to generate significant revenues

from ViewD and CLEAR

Sharp currency movements that could impact profitability considering that major revenue is

from UK and North America

Prime Focus not being able to retain and attract talent

Outstanding FCCB of USD55mn which it is expected to re-pay before December 2012 with 43%

premium amounting to a total of ~USD79mn.

16

Prime Focus


Financials

Exhibit 28: Income Statement

Y/E March (Rsmn) FY10 FY11 FY12E FY13E FY14E

Net Sales 4,528 5,030 7,781 9,366 11,223

Growth (%) 27.8 11.1 54.7 20.4 19.8

Employee Cost 2,001 2,047 3,754 4,314 4,895

%of Sales 44.2 40.7 48.3 46.1 43.6

Admin & other expenses 1,331 1,301 1,721 2,116 2,560

% of sales 29.4 25.9 22.1 22.6 22.8

EBIDTA 1,196 1,681 2,305 2,936 3,768

EBIDTA Margins (%) 26.4 33.4 29.6 31.4 33.6

Depreciation 426 546 613 651 707

Interest expenses 218 263 358 594 774

PBT for operations 552 873 1,335 1,691 2,287

Other non operating income 88 139 46 76 81

Exceptional item (137) (70) - - -

PBT 503 942 1,381 1,767 2,368

Provision for tax 109 60 376 449 588

Effective tax rate (%) 21.6 6.4 27.2 25.4 24.8

Net Profit 394 882 1,005 1,318 1,780

Minority interest 59.7 121.0 15.5 14.3 9.1

Reported Net Profit 334 761 989 1,304 1,771

Adj Net Profit 472 831 989 1,304 1,771

Source: Company, Centrum Research Estimates

Exhibit 29: Balance Sheet

Y/E March (Rsmn) FY10 FY11 FY12E FY13E FY14E

Share Capital 128 139 139 149 149

Reserves & Surplus 1,798 3,505 4,494 4,756 6,527

Total Shareholders Funds 1,926 3,644 4,633 4,905 6,675

Minority Interest 284 416 432 446 455

Secured Loans 2,472 2,451 2,700 5,250 4,250

Unsecured Loans 2,163 2,163 2,163 - -

Loan Funds 4,634 4,613 4,863 5,250 4,250

Deferred Tax Liab 98 189 189 189 189

Total Capital Employed 6,942 8,862 10,116 10,789 11,569

Fixed Asset

Gross Block 7,432 9,694 11,044 12,044 12,844

Less:- Depreciation 2,616 3,065 3,678 4,329 5,036

Net Block 4,816 6,628 7,366 7,714 7,807

Capital WIP 741 116 350 300 300

Total fixed assets 5,557 6,745 7,716 8,014 8,107

Investments 2 3 3 3 3

Inventory 20 3 20 20 20

Debtors 1,230 1,694 2,345 2,823 3,382

Loans & advances 898 1,111 1,323 1,311 1,571

Cash & bank balances 212 298 62 206 326

Other Current Assets 62 56 - - -

Total current assets 2,424 3,162 3,750 4,360 5,299

Current liabilities & provisions 1,041 1,048 1,353 1,588 1,841

Net current assets 1,383 2,058 2,397 2,772 3,458

Misc Expenditure 1 1 1 1 1

Total 6,942 8,862 10,116 10,789 11,569

Source: Company, Centrum Research Estimates

Exhibit 30: Cash flow

Y/E March (Rsmn) FY10 FY11 FY12E FY13E FY14E

CF from operations

Profit before tax 503 942 1,381 1,767 2,368

Depreciation & amortisation 426 546 613 651 707

Others 247 240 312 518 693

CF before WC changes 1,176 1,728 2,305 2,936 3,768

Working capital changes (131) (645) (519) (231) (567)

Cash inflow from operations 1,045 1,083 1,787 2,705 3,201

Income tax paid (47) (60) (376) (449) (588)

Cash from Operations 998 1,022 1,410 2,257 2,613

Cash from investing

Capex (762) (1,638) (1,584) (950) (800)

Investments (429) 1 - - -

Other Income 150 139 46 76 81

Cash from investing (1,041) (1,498) (1,538) (874) (719)

Cash from financing

Procds from Issues/Equity shares - 845 - (1,033) -

Borrowings/ repayments 26 (21) 249 387 (1,000)

Dividend paid (0) - - - -

Interest paid (258) (263) (358) (594) (774)

Cash from financing (232) 561 (108) (1,239) (1,774)

Forex Gain /Loss (23) - - - -

Net change in cash (299) 86 (236) 144 120

Source: Company, Centrum Research Estimates

Exhibit 31: Key Ratios

Y/E March FY10 FY11 FY12E FY13E FY14E

Margin ratios (%)

EBIDTA Margins 26.4 33.4 29.6 31.4 33.6

PBIT Margins 17.0 22.6 21.8 24.4 27.3

PBT Margins 11.1 18.7 17.8 18.9 21.1

PAT Margins 8.7 17.5 12.9 14.1 15.9

Growth ratios (%)

Revenues 27.8 11.1 54.7 20.4 19.8

EBIDTA 121.2 40.5 37.1 27.4 28.3

Adj Net Profit 501.8 76.2 19.1 31.8 35.8

Return Ratios (%)

ROCE 8.8 13.5 13.0 16.3 20.6

RoIC 7.3 10.9 10.6 12.6 16.2

RoNW 25.6 29.8 23.9 27.3 30.6

Turnover Ratios

Avg. collection period(days) 91.2 106.1 94.7 100.7 100.9

Avg. payment period (days) 96.2 113.6 79.8 83.3 83.8

Working Capital Cycle (days) (5.0) (7.5) 14.9 17.4 17.1

Per Share (Rs)

EPS 3.2 5.6 6.6 8.8 11.9

CEPS 5.2 7.6 11.4 15.3 20.6

Book Value 12.9 24.5 31.1 32.9 44.8

Valuations (x)

PER 15.8 9.0 7.5 5.7 4.2

P/BV 3.9 2.0 1.6 1.5 1.1

EV/EBIDTA 9.9 7.0 5.3 4.3 3.0

EV/Sales 2.6 2.3 1.6 1.3 1.0

M-cap/Sales 1.6 1.5 1.0 0.8 0.7

Source: Company, Centrum Research Estimates

17

Prime Focus


Appendix A

Disclaimer

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research professionals are our employees and are paid a salary. They do not have any other material conflict of interest of the research analyst or member of which the research analyst

knows of has reason to know at the time of publication of the research report or at the time of the public appearance.

While we would endeavor to update the information herein on a reasonable basis, Centrum, its associated companies, their directors and employees are under no obligation to update or

keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent Centrum from doing so.

Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or Centrum

policies, in circumstances where Centrum is acting in an advisory capacity to this company, or any certain other circumstances

Key to Centrum Investment Rankings

Buy: Expected outperform Nifty by>15%, Accumulate: Expected to outperform Nifty by +5 to 15%, Hold: Expected to outperform Nifty by -5% to +5%, Reduce: Expected to underperform

Nifty by 5 to 15%, Sell: Expected to underperform Nifty by>15%

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Centrum Broking Limited

Member (NSE, BSE, MCX-SX), Depository Participant (CDSL) and SEBI registered Portfolio Manager

Registration Nos.

CAPITAL MARKET SEBI REGN. NO.: BSE: INB011454239, NSE: INB231454233

DERIVATIVES SEBI REGN. NO.: NSE: INF231454233 (TRADING & SELF CLEARING MEMBER)

CDSL DP ID: 12200. SEBI REGISTRATION NO.: IN-DP-CDSL-20-99

PMS REGISTRATION NO.: INP000000456

MCX – SX (Currency Derivative segment) REGN. NO.: INE261454236

Website: www.centrum.co.in

Investor Grievance Email ID: investor.grievances@centrum.co.in

Compliance Officer Details :

Mr. Praveen Malik; Tel: (022) 42159703; Email ID: praveen.malik@centrum.co.in

Registered Office Address

Bombay Mutual Building ,2nd Floor,

Dr. D. N. Road, Fort,

Mumbai - 400 001

Correspondence Address

Centrum House

6th Floor, CST Road,

Near Vidya Nagari Marg, Kalina,

Santacruz (E), Mumbai 400 098.

Tel: (022) 4215 9000

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