Wednesday, August 22, 2012

>PRIME FOCUS: Q1FY13 Result Update

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.

2D to 3D conversion continues to expand: This segment grew by 60% QoQ to 

Rs832mn on the back of a strong pipeline of movies. The company is currently  working on Wizard of Oz and Star Wars 2 & 3. Prime Focus delivered close to 400  shots for the recently released Total Recall, endorsing its ability to cross-sell VFX  services to the 3D conversion client base in Hollywood. We believe VFX would help  the company to gain more business and increase margins going forward.

PFT continues to gain traction: Company engaged with Sony Music to transition  its video operations to the Cloud on the CLEAR platform and had several client wins in South Africa including becoming the leading TV Spot Distribution supply chain solution in that market. It has also extended its content localization offering- Language Dubbing services, complementing its existing subtitling/captioning service offering. During the quarter PFT business was up 16.8%QoQ and is expected to post revenues of Rs789mn in FY13E.

Maintain BUY: The stock is currently trading at 5.2x and 3.8x FY13E and FY14E EPS 
of Rs8.76 and Rs11.9 respectively. We believe the company is at an advanced stage  to repay the FCCB of USD79mn which we believe is the biggest hangover on the stock. Post this we expect the stock to re-rate given its strong business model and global dominance in 2D to 3D conversion. Hence we maintain BUY rating on the stock.