Prime Focus Ltd (Rs 87)

(BSE Code- 532748 NSE Code- PFOCUS)

(P/E- 4.1, Equity- 12.72 cr. Market Cap-110 cr.)

Outsourcing of entertainment technology (ET) services is a huge opportunity for low-

cost countries like India. As a global ET player, Prime Focus (PFL) is poised to
profitably scale up its business with low risks. PFL offers the full range of ET services
in India, and has built strong relationships with both customers and vendors. In May
2006, it acquired VTR Plc, UK. PFL's business model is robust. It is fairly predictable,
scalable, highly profitable and sufficiently derisked. Aggressive depreciation keeps
profit muted; but margins are high enough to keep operating cash flow strongly
positive and rising. PFL has an estimated 60% 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%, although
higher employee costs have moderated margins in recent quarters.

PFL 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. 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. International acquisitions offer
PFL the opportunity to work on more sophisticated projects, gain exposure to the
latest technology and allow them to capitalise on the outsourcing opportunity in
India. From a financial perspective, the very size of the companies proposed to be
acquired may substantially boosts revenues. 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.

For the nine months ended Dec. 2008, PFL posted net sales of Rs 266 cr.(up 56%)
and net profit of Rs 18.2 cr.(down 27%) on consolidated basis. For the year ended
March 2008, PFL had posted net profit of Rs 29.53 cr. on net sales of Rs 222 cr. on
consolidated basis. On a equity of 12.72 cr.(Promoters' stake-54%, FII/MF's stake-
30%), the EPS stood Rs 23.22. Going forward, PFL plans to strengthen its position in
the domestic and international markets. by building scale in high growth areas such
as visual effects. It already has about 400-450 visual effect artists and plans to add
200 within a year. This would facilitate PFL in supporting its outsourcing model,
building capability and providing scale to its business.

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(PFL) is a preferred pick within the media sector. A substantial correction in
recent months has the stock trading at about 4 times its likely FY '09 consolidated
earnings per share, which is low given the high visibility in earnings growth. At the
CMP of Rs 87, the stock trades at 4.1x FY09E and 3x FY10E earnings. The upside
triggers to the stock can come from: a) outsourcing opportunity from the US and
Canada and b) growth in VTR revenue. 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. An investment can be considered in the stock with
a 12-18 month perspective. Accumulate on declines.