Wednesday, June 13, 2012

>Prime Focus: Entered the Animation Services market

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

Robust Q4FY12 results: Prime Focus posted robust 146% YoY growth in revenues to Rs1891mn in Q4FY12 and 53% YoY revenue growth in FY12 on the back of 89% YoY growth in 2D-3D conversion business. Operating profit in Q4FY12 was up 57%YoY while in FY12 it was up by 39.3%YoY on the back of strong topline growth. Adj PAT was up by 104% in Q4FY12 to Rs209mn while for FY12 this was up by 22.9% to Rs1021mn.

2D to 3D conversion driving growth: During FY12, the company posted Rs3130mn in revenues from 2D to 3D conversion, up 89% YoY on the back of strong slate of movies. During the year the company converted movies such as Transformers, Green Lantern, Ra.One, Immortals, Star Wars-1, Clash of the Titans 2, MIB3 among others. Projects currently under execution include Wizard of Oz, Frankenweenie and Star Wars 2 & 3.

PFT- future growth driver: During the year this business contributed Rs336mn in revenues, up 205% YoY on the back of strong order book. Recent client wins like Associated Press, British Films Institute, Sony Music, Netflix, Viacom, and National Geographic Channel have given strong visibility for FY13 and FY14. We expect this business to contribute Rs798mn and Rs1381mn in revenues for FY13 and FY14

Other highlights: 1) Company entered the Animation Services market in Q4 FY2012 after it bagged a large animation T.V. project (an entire network season) by a leading global toy manufacturer. 2) It has launched a new full-service, creative post-production facility in New York. 3) Promoters have converted 10mn warrants into equity shares at a price of Rs. 55.47 per share.

Maintain estimates; Strong BUY: The stock is currently trading at 5.4x and 4x FY13E and FY14E EPS of Rs8.76 and Rs11.9 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 Rs11.9 and arrive at a target price of Rs95, 100% upside from current levels.