Professional Documents
Culture Documents
Equity Research Prime Focus
Equity Research Prime Focus
Equity Research Prime Focus
Prime Focus
Company Overview
Prime Focus is a global Visual Entertainment Services group. Visual
Entertainment Services is a new definition for an industry where
technology, visual delivery platforms and content are converging and
evolving. Prime Focus offers a genuine end-to-end solution from preproduction to final delivery including visual effects, creative 3D
conversion, video and audio post-production, digital content management
and distribution, Digital Intermediate, versioning and adaptation, and
equipment rental.
Recommendation: Buy
Market Profile
Ticker
PFOCUS
Price
Rs. 49.5
Price Target
Rs. 61
Market Cap
Rs.
Crore
719
Outstanding
Shares
14.89 Crore
Face Value
Rs. 1.0
52 Week H/L
65.70/33
Average Volume
1 month
170437
3 months
101995
1 years
224528
Investment Rationale
2D to 3D conversion
business is expected to be a
major growth driver for
PFL for the next 2 years
considering
the
rising
demand for 3D movies
Page 2
Similarly, the demand for VFX is on the rise in the movie industry. In
FY12, the VFX business contributed Rs 1,493 mn to the top line, which is
an 80% increase over last year and is expected to grow at ~33% in the
coming years. In order to tap the huge potential created by increasing
usage on VFX and 3D effects in movies, PFL has set up a state of the art
facility for its new technology - View D at Goregaon and Chandigarh to
cater to the outsourcing opportunity in 3D conversion and VFX with 3000
plus seat capacity. View D is a process of converting an existing 2D film
to stereoscopic 3D format. View D is a proprietary process of PFL for the
conversion of 2D moving images to stereo 3D images.
Page 3
15 studios in 3 continents in
all-time zones
Company Overview
Marquee clientele include:
Warner Bros, Universal,
Paramount, 20th Century
Fox, James Cameron,
Ogilvy, JWT, BBC, Saatchi
& Saatchi, Yash Raj Films,
Dharma Productions, Red
Chillies Entertainment
Muder 2
Shaitan
Patiala
House
International
Star
Wars
Episode I: The
Phantom
Menace
Transformers
3: Dark of the
Moon
Green Lantern
No
One
X-Men:
Killed
Class
Jessica
Advertising
Projects
UK
Broadcast
UK
Advertising
Phillips
Grooming
Range
Great
British
Menu
Lucozade
Yes
Reliance
Digital HD
Dominos
Mexican
Wrap
First Samsung
Guru
The house
that made
me
America
the Story of
us
Stephen
Hawkings
Universe
Nokia
Happy
Navigators
Relentless
Virtues
Chanel
Gabrielle
Page 5
Page 6
Hyderabad
Mumbai- Khar
Mumbai
Cloud multi platform content operations platform CLEAR.
Parel
Mumbai
Palms VFX facility and employs in excess of 180 employees.
Royal
Mumbai Film
Provides Equipment Rental services.
City
DI & VFX work with strength of 40 people in which 20 are
Chennai
VFX artists.
Bangalore
Develops and manages CLEAR.
50000 sq ft facility with a space of over 3000 artists. Works
Chandigarh
for global projects. Currently employs 850 seats at this
facility.
U.S
Los Angeles
ViewD and 2D to 3D conversion, television and advertising.
Vancouver
VFX division
New York
Post production processes
UK
London
VFX division
Source: Company Website
Sector Overview
Source: KPMG FICCI Indian Media and Entertainment Industry Report 2012
Page 7
Source: KPMG FICCI Indian Media and Entertainment Industry Report 2012
Page 8
Financial Analysis
Revenue Growth
Revenues for FY12 stand at Rs. 771.91 Crore. The revenues have grown
at a CAGR of 20% for the past five years. This is mainly on the basis of
strong technological foundation that Prime Focus is based. Its ViewD and
CLEAR technologies are unique and have resulted in sound growth of the
company. This growth is in spite of economic turmoil that is pervading
the business scenario.
Revenues have grown at a
CAGR of 20% for the past
five years
Over the next three years, the company is poised to grow at a CAGR of
20.80%. The reasons for the same are as follows:
Page 9
Earnings
The Company operates in a cyclical industry.
indust
As a result of the
recessionary and inflationary pressures felt after the aftermath of the
recession, there was a steep drop in the EBITDA margins of the company.
The company was also using the time for building up scale and capacity
in its operations As a result the year FY09 saw a steep decline in the
EBITDA margins of the company. Post FY09, the margins have since
picked up. The company is expected
e pected to operate at a healthy margin of
40% post FY12.
Working Capital
The company is a services company with lower fixed assets and higher
current assets. As a result, the working capital needs have averaged at
66% of its Net sales. A spike in FY08 has been observed on account of
the higher loans and advances made during the period.
Free Cash Flows
Fir
ir calculating Free Cash
ash Flows, we have started from sales and
subtracted the total operating expenditures, incremental CAPEX and
a
incremental Net
N Working Capital. Till FY09, the FCFs are negative and
then they turn positive barring for FY11. Free Cash Flows calculations
have been shown in Exhibit C
Earnings
The earnings for the company have grown except for a dip in FY09. This
dip was primarily due to higher operating expenses for that year. The EPS
for FY12 stands at 7.4 and is expected to grow to 11.38 in FY13.
Page 10
Earnings Trend
120.00
99.25
100.00
76.09
80.00
60.00
40.00
33.42
28.83
14.58
20.00
0.00
FY08
FY09
FY10
FY11
FY12
Current Ratio
6.00
5.00
4.00
3.00
Current Ratio
2.00
1.00
0.00
FY07
FY08
FY09
FY10
FY11
Turnover Ratios
The company has a very low turnover ratio for assets. However it is
showing an improving trend. In FY11, the current ratio was 0.68. The
Accounts receivables turnover ratio is more or less constant within the
1.6x range.
Profitability ratios
All the profitability ratios are showing an upward trend due to the
increased margins. There was only one dip in FY09 in the profitability
ratios due to increase in the operating Expenditure
Page 11
We assume that free cash flow grows at 4% per year after 2015. We also
included a debt tax shield benefit to compute our equity value.
Our DCF analysis provides us with an intrinsic value of Rs. 60.91 per
share which is a 23% upside from the current stock price.
Sensitivity Analysis
A sensitivity analysis, w.r.t. the terminal growth rate and the discount
factor have been carried out. The terminal growth rates have been varied
from 2% to 4%, while the range for discount rates is 11.25% - 16.25%.
The sensitivity analysis has been shown in Exhibit F
Risk Factors
Redemption of FCCBs could lead to increase in debt of Rs. 4,346 mn
In Dec 2007, the company had issued FCCBs aggregating to USD 55 mn
amounting to Rs. 216.3 crore at the exchange rate of Rs. 39.3/USD
prevailing during that period. Holders have an option to convert FCCBs
into Equity Shares at a pre-decided conversion rate of Rs. 110.9 per
equity share. In the event the holders are unable to convert the FCCBs
into equity at the set price, PFL will have to redeem these bonds at the
end of five years from the date of issue i.e on December 13th 2012 at a
premium of 143.7%. In this case the total redemption value will amount
to USD 79.0 mn (USD 55mn + premium of 143.7%) which as per the
prevailing exchange rate of Rs. 55/USD would amount to Rs. 4,346 mn.
PFL is looking at divesting some of its stake in the US Subsidiary which
is into 2D to 3D conversion business to raise funds for redemption of
FCCB. We value its US subsidiary at ~225 mn (around 2.5x P/S which is
industry average). The company is looking to dilute 30% stake in this
business to raise about US$ 68 mn which will be used to pay back the
IAPM Student Research
Page 12
FCCB amount and the premium. Failing which the company will have to
raise a debt of Rs 434.6 mn to repay its FCCB, which will add an
additional interest burden of ~ Rs 300 mn on the P&L in FY13E. We
have accounted for that in our assumptions for FY 13E.
Premium on FCCB or MTM fluctuation of currency on FCCB has not
been accounted into P&L or B/S thus at the time of repayment, the
difference of Rs. 218.3 crores will be reduced from Net worth.
Visual distress
There are concerns of watching 3D content wearing special glasses. Much
is been already written in the media for health issues and remains a
concern. We expect some improvement in the technology which would
allow viewing 3D content without the glasses.
Macro Environment
Any major headwinds in the overall economy would see significant
impact in the production of movies and TV content.
Technology Obsolescence
Advent of newer technology would require timely investments by the
company.
Low Barriers of Entry
The company operates basically in the creative and technical services
sector, which does not have high entry barriers. This allows a lot of new
entrants to come and start offering same/similar services, and thereby,
increase competition.
Exchange Rate Risk
As the company has international operations and its revenues are also
received in currencies like GBP, USD and Euro, it is exposed to risks in
fluctuation of exchange rates which can affect its profitability.
Page 13
Year
SOURCES OF FUNDS :
Share Capital
Reserves Total
Equity Share Warrants
Equity Application Money
Total Shareholders Funds
Minority Interest
Secured Loans
Unsecured Loans
Total Debt
Policy Holders Fund
Other Liabilities
Total Liabilities
APPLICATION OF FUNDS :
Gross Block
Less: Accumulated Depreciation
Less: Impairment of Assets
Net Block
Lease Adjustment
Capital Work in Progress
Producing Properties
Investments
Current Assets, Loans & Advances
Inventories
Sundry Debtors
Cash and Bank
Loans and Advances
Total Current Assets
Less : Current Liabilities and Provisions
Current Liabilities
Provisions
Total Current Liabilities
Net Current Assets
Miscellaneous Expenses not written off
Deferred Tax Assets
Deferred Tax Liability
Net Deferred Tax
Other Assets
Total Assets
Contingent Liabilities
Balance Sheets
In Rs. Crores (Except where explicitly mentioned)
Mar FY07 Mar FY08 Mar FY09 Mar FY10 Mar FY11 Mar FY12E Mar FY13P Mar FY14P Mar FY15P Mar FY16P Mar FY17P
12.72
178.50
0.00
0.00
191.22
37.88
93.32
0.00
93.32
0.00
0.00
322.42
12.82
175.88
0.00
0.00
188.70
37.44
133.96
216.27
350.23
0.00
0.00
576.37
12.82
162.37
0.00
0.00
175.19
24.22
258.30
216.27
474.57
0.00
0.00
673.98
12.82
179.78
0.00
0.00
192.60
28.37
247.17
216.27
463.44
0.00
0.00
684.41
13.89
336.75
13.87
0.00
364.51
41.61
245.06
216.27
461.33
0.00
0.00
867.45
13.89
412.86
0.00
0.00
426.75
41.61
315.76
216.27
532.03
0.00
0.00
1000.39
14.89
452.22
41.61
0.00
508.72
41.61
334.59
216.27
550.86
0.00
0.00
1101.19
14.89
592.85
0.00
0.00
607.74
41.61
431.62
216.27
647.89
0.00
0.00
1297.24
14.89
712.46
0.00
0.00
727.35
41.61
548.83
216.27
765.10
0.00
0.00
1534.06
14.89
856.95
0.00
0.00
871.84
41.61
690.42
216.27
906.69
0.00
0.00
1820.14
14.89
1031.49
0.00
0.00
1046.38
41.61
861.46
216.27
1077.73
0.00
0.00
2165.72
394.57
220.38
0.00
174.19
0.00
29.22
0.00
15.16
476.18
234.66
0.00
241.52
0.00
55.04
0.00
6.98
733.96
281.07
0.00
452.89
0.00
45.21
0.00
1.76
743.16
261.55
0.00
481.61
0.00
74.06
0.00
0.20
969.35
306.53
0.00
662.82
0.00
11.64
0.00
0.28
1170.95
370.28
0.00
800.67
0.00
11.64
0.00
0.28
1210.22
382.70
0.00
827.52
0.00
11.64
0.00
0.28
1461.92
462.29
0.00
999.63
0.00
11.64
0.00
0.28
1765.97
558.44
0.00
1207.53
0.00
11.64
0.00
0.28
2133.26
674.58
0.00
1458.67
0.00
11.64
0.00
0.28
2576.93
814.88
0.00
1762.05
0.00
11.64
0.00
0.28
0.23
93.23
33.75
58.57
185.78
0.24
89.37
40.82
219.09
349.52
3.74
103.26
61.36
85.09
253.45
2.02
123.04
21.24
96.06
242.36
0.27
177.96
29.92
116.72
324.87
2.16
218.25
29.92
116.72
367.05
2.61
263.64
29.92
116.72
412.89
3.16
318.47
29.92
116.72
468.27
3.81
384.70
29.92
116.72
535.16
4.61
464.71
29.92
116.72
615.96
5.57
561.36
29.92
116.72
713.57
64.43
14.48
78.91
106.87
8.70
0.00
11.72
-11.72
0.00
322.42
77.34
64.12
2.07
66.19
283.33
0.00
3.32
13.82
-10.50
0.00
576.37
82.49
71.66
0.13
71.79
181.66
0.07
10.26
17.87
-7.61
0.00
673.98
113.65
103.92
0.15
104.07
138.29
0.06
7.96
17.77
-9.81
0.00
684.41
123.55
113.08
0.27
113.35
211.52
0.07
5.53
24.41
-18.88
0.00
867.45
135.81
154.90
1.55
156.44
210.61
0.07
6.68
29.49
-22.81
0.00
1000.39
135.81
187.11
1.87
188.98
223.91
0.07
8.07
35.62
-27.55
0.00
1035.80
135.81
226.03
2.26
228.29
239.98
0.07
9.75
43.03
-33.28
0.00
1218.25
135.81
273.03
2.73
275.76
259.39
0.07
11.78
51.98
-40.20
0.00
1438.64
135.81
329.82
3.30
333.12
282.84
0.07
14.22
62.79
-48.56
0.00
1704.87
135.81
398.41
3.98
402.40
311.17
0.07
17.18
75.84
-58.66
0.00
2026.48
135.81
Page 14
Year
INCOME :
Sales Turnover
Excise Duty
Net Sales
Other Income
Stock Adjustments
Total Income
EXPENDITURE :
Raw Materials
Power & Fuel Cost
Employee Cost
Other Manufacturing Expenses
Selling and Administration Expenses
Miscellaneous Expenses
Less: Pre-operative Expenses Capitalised
Total Expenditure
Operating Profit
Interest
Gross Profit
Depreciation
Minority Interest (before tax)
Profit Before Tax
Tax
Fringe Benefit Tax
Deferred Tax
Net Profit
Minority Interest (after tax)
Profit/Loss of Associate Company
Net Profit after Minority Interest & P/L Asso.Co.
Less Extraordinary Items
Adjusted Net Profit
Adjst. below Net Profit
P & L Balance brought forward
Statutory Appropriations
Appropriations
P & L Balance carried down
Dividend
Preference Dividend
Equity Dividend (%)
EPS before Minority Interest (Unit Curr.)
EPS before Minority Interest (Adj) (Unit Curr.)
EPS after Minority Interest (Unit Curr.)
EPS after Minority Interest (Adj) (Unit Curr.)
Book Value (Unit Curr.)
INCOME STATEMENT
In Rs. Crores (Except where explicitly mentioned)
Mar FY07 Mar FY08 Mar FY09 Mar FY10 Mar FY11 Mar FY12E Mar FY13P Mar FY14P Mar FY15P
Mar FY16P
Mar FY17P
195.54
0.00
195.54
8.13
0.00
203.67
222.13
0.00
222.13
9.43
0.00
231.56
354.37
0.00
354.37
24.90
0.00
379.27
452.78
0.00
452.78
23.37
0.00
476.15
502.96
0.00
502.96
14.98
0.00
517.94
607.57
0.00
607.57
20.15
0.00
627.71
733.93
0.00
733.93
27.10
0.00
761.03
886.57
0.00
886.57
36.45
0.00
923.02
1070.96
0.00
1070.96
49.02
0.00
1119.98
1293.69
0.00
1293.69
65.93
0.00
1359.63
1562.75
0.00
1562.75
88.68
0.00
1651.43
0.00
4.75
81.96
18.64
29.38
7.17
0.00
141.90
61.77
6.71
55.06
23.25
0.00
31.81
6.89
0.14
2.26
22.52
1.15
0.00
21.37
0.15
21.22
0.00
30.56
0.00
0.00
51.93
0.00
0.00
0.00
17.70
0.00
16.80
0.00
150.33
0.00
4.92
83.48
19.28
42.43
9.58
0.00
159.69
71.87
10.97
60.90
28.92
0.00
31.98
-0.30
0.20
0.32
31.76
2.22
0.00
29.54
-4.86
34.40
0.06
51.93
0.00
3.57
77.96
1.91
0.00
15.00
24.72
0.00
22.97
0.00
148.27
0.00
10.13
111.00
115.28
44.20
25.14
0.00
305.75
73.52
21.00
52.52
37.91
0.00
14.61
0.01
0.17
-1.33
15.76
1.18
0.00
14.58
9.37
5.21
-17.45
77.96
0.00
0.00
75.09
0.00
0.00
0.00
12.29
0.00
11.37
0.00
136.65
0.00
9.32
109.71
143.53
53.77
45.13
0.00
361.46
114.69
21.83
92.86
42.59
0.00
50.27
8.52
0.00
2.36
39.39
5.97
0.00
33.42
-10.11
43.53
0.00
75.10
0.00
0.00
108.52
0.00
0.00
0.00
3.07
0.00
2.61
0.00
15.02
0.00
11.44
110.53
116.15
65.56
39.20
0.00
342.88
175.06
26.30
148.76
54.56
0.00
94.20
0.00
0.00
6.01
88.19
12.10
0.00
76.09
-7.02
83.11
0.00
108.52
0.00
0.00
184.61
0.00
0.00
0.00
6.35
1.77
5.48
1.77
25.24
0.00
14.38
121.51
127.59
85.06
42.53
0.00
391.07
236.64
30.33
206.31
63.75
0.00
142.56
30.88
0.00
6.01
105.67
16.78
0.00
88.89
-7.02
95.91
0.00
184.61
0.00
0.00
273.50
0.00
0.00
0.00
7.61
0.00
6.90
0.00
30.72
0.00
17.37
146.79
154.12
102.75
51.37
0.00
472.41
288.62
31.40
257.21
12.42
0.00
244.80
53.02
0.00
6.01
185.76
23.28
0.00
162.49
-7.02
169.51
0.00
273.50
0.00
0.00
435.98
0.00
0.00
0.00
12.48
0.00
11.38
0.00
31.37
0.00
20.99
177.31
186.18
124.12
62.06
0.00
570.66
352.36
36.94
315.42
79.59
0.00
235.83
51.08
0.00
6.01
178.74
32.29
0.00
146.45
-7.02
153.47
0.00
435.98
0.00
0.00
582.43
0.00
0.00
0.00
12.00
0.00
10.31
0.00
40.82
0.00
25.35
214.19
224.90
149.93
74.97
0.00
689.34
430.63
43.62
387.02
96.15
0.00
290.87
63.00
0.00
6.01
221.86
44.78
0.00
177.07
-7.02
184.09
0.00
582.43
0.00
0.00
759.51
0.00
0.00
0.00
14.90
0.00
12.36
0.00
48.85
0.00
30.62
258.74
271.68
181.12
90.56
0.00
832.71
526.91
51.69
475.22
116.14
0.00
359.08
77.78
0.00
6.01
275.29
62.12
0.00
213.18
-7.02
220.20
0.00
759.51
0.00
0.00
972.69
0.00
0.00
0.00
18.49
0.00
14.79
0.00
58.55
0.00
36.99
312.55
328.18
218.79
109.39
0.00
1005.90
645.53
61.44
584.09
140.30
0.00
443.79
96.13
0.00
6.01
341.66
86.16
0.00
255.50
-7.02
262.52
0.00
972.69
0.00
0.00
1228.19
0.00
0.00
0.00
22.95
0.00
17.63
0.00
70.27
Page 15
FY07
FY08
FY09
195.54 222.13 354.37
141.90 159.69 305.75
15.16
6.98
1.76
67.33 211.37
106.87 176.46 -101.67
-68.39 -188.33
FY10
452.78
361.46
0.20
28.72
-43.37
FY11
502.96
342.88
0.28
181.21
73.23
127.45
154.02
1593.61
Page 16
WACC
Debt Weightage
Equity Weightage
WACC
Interest Rate
Tax Rate
Cost of Debt
I
T
Kd=I*(1-T/100)
Rf
8.50
Risk Premium
Beta
Cost of Equity
Rm
9.00
1.74
24.13
FY12
0.55
0.45
13.22
B
Ke=Rf+B*Rm
FY13
0.52
0.48
13.91
FY14
0.52
0.48
13.99
5.70
21.66
4.47
FY15
0.51
0.49
14.05
FY16
0.51
0.49
14.11
FY17
0.51
0.49
14.15
Page 17
Exhibit E: DCF
Free Cash Flows
Net Sales
Less Operating Expenditure
Less Investments
Change in Net Capex
Change in Net Working Capital
FCF
DCF
WACC
Enterprise Value
Debt
Fair EV
Outstanding Shares
Fair Value
FY07
FY08
FY09
195.54 222.13 354.37
141.90 159.69 305.75
15.16
6.98
1.76
67.33 211.37
106.87 176.46 -101.67
-68.39 -188.33
FY10
452.78
361.46
0.20
28.72
-43.37
FY11
502.96
342.88
0.28
181.21
73.23
127.45 154.02
86.06 1032.88
13.99
14.05
1593.61
1359.35
461.33
898.02
14.89
60.31
Page 18
D is co u n t R ate
(% )
Sensitivity Analysis
11.25
12.25
13.25
14.25
16.25
TV
Rs. Crore
1698.35
1532.66
1396.42
1282.43
1102.44
2
EV
FV/Share
TV
Rs. Crore
Rs.
Rs. Crore
1551.74 73.23 1804.20
1398.60 62.95 1619.16
1272.67 54.49 1468.54
1167.30 47.41 1343.55
1000.90 36.24 1148.13
TV
Rs. Crore
2056.88
1821.80
1634.95
1482.86
1250.26
3.5
EV
FV/Share
TV
Rs. Crore
Rs.
Rs. Crore
1785.79 88.95 2209.35
1580.72 75.18 1941.55
1417.68 64.23 1731.65
1284.93 55.31 1562.71
1081.84 41.67 1307.57
4
EV
FV/Share
Rs. Crore
Rs.
1885.33 95.63
1656.15 80.24
1476.46 68.18
1331.80 58.46
1113.22 43.78
Page 19
CPM (%)
APATM (%)
ROCE (%)
RONW (%)
1.13
1.36
2.18
1.4
Turnover Ratios
0.5
0.43
0
0
1.41
1.49
2.59
2.55
Operating
44.16 53.35
26.49 33.04
33.93 40.38
Profitability
32.25 33.67
14.58 13.36
5.82
5.44
7.48
6.19
ROE Analysis
PBIDT/Sales(%)
Sales/Net Assets
PBDIT/Net Assets
PAT/PBIDT(%)
Net Assets/Net Worth
ROE(%)
Fixed Assets
Inventory
Debtors
Interest Cover Ratio
PBIDTM (%)
PBITM (%)
PBDTM (%)
1.36
1.9
0.84
2.94
0.29
2.21
0.47
0
1.72
2.35
0.67
0
1.9
4.88
0.68
0
1.85
9.43
56.36
36.38
40.89
60.07
41.36
51.59
73.55
59.52
67.24
34.63
14.65
6.03
6.94
49.79
31.08
9.28
14.17
50.44
36.4
19.42
15.43
Dupont Analysis:
Page 20