Buy Prime Focus @ Rs.434/- dt. 6.7.08

With a strong presence in the niche area of post-production services for films, a unique cross-border business model and a good pipeline of film projects, Prime Focus is a preferred pick within the media sector. A substantial correction in recent months has the stock trading at about 15 times its likely FY ’09 consolidated earnings per share, which is reasonable given the high visibility in earnings growth. An investment can be considered in the stock with a three-year perspective.

Prime Focus has an estimated 60 per cent market share in India. With six facilities across Mumbai, Hyderabad and Chennai, its domestic business continues to grow at a fast pace, as the use of visual and special effects in Indian films is on the rise. The business is highly profitable with operating margins at 50-60 per cent, although higher employee costs have moderated margins in recent quarters. A large pipeline of 8-10 film projects in FY 09 should ensure a steady stream of revenues for the domestic operations.

Prime Focus has built an international presence with facilities spanning the UK, US and Canada. Its first acquisition in the UK (VTR) has paid off, with Prime Focus successfully turning around the company and the facility has begun to outsource work to India. As the London operation works more on advertising film projects, it has been affected by the advertising slowdown witnessed in these markets in recent times.

Prime Focus acquired Frantic Films and Post Logic Studios for $43 million in late 2007, which gave it access to facilities and talent pools in key markets of Los Angeles, New York, Vancouver and Winnipeg. The targets have combined revenue of $25 million (Rs 107 crore) and have been associated with films such as Spiderman 3, Fantastic Four and Superman Returns. These businesses are yet to be consolidated with Prime Focus and may not contribute to profits in the next one year. However, the presence of cross border facilities have helped create a unique business model, where a significantly higher amount of work can be carried out by facilities across time zones in a cost efficient manner. Prime Focus’s tie up with Warner Bros’ Motion Picture Imaging appears to be recognition of the merits of this international operation. The benefits of the strategy are likely to pay off from FY ’10. An unexpected slowdown in domestic operations is a key risk to earnings estimates. The stock’s small-cap status may call for careful timing of investments.

(Businessline dt. 6.7.08)