Prime Focus - IPO

Background:

• Prime Focus Ltd. (PFL) was incorporated in 1997 as a Private Limited Company by the merger of proprietary concerns of its directors viz. Video Works' of Mr. Naresh Malhotra and 'Video Workshop' of Mr. Namit Malhotra. The company was converted into a Public Ltd. in April 2000.
• PFL is an integrated company providing end-to-end post-production and visual effects and digital intermediate services.
• The company has a studio in Mumbai and a facility in Chennai has been commissioned to cater to South Indian film market.
• Adlabs Films Ltd. is a strategic partner in the company with 4.67% of shareholding while Reliance Capital Ltd. holds 14.53% shares.
• PFL derives revenue from Films, Ad Films and Television & Music Videos. Revenue contribution from Films is maximum and has increased year on year. The same has grown at a CAGR of 74.34% from FY2001 to FY2005. CAGR for revenue from Ad Films and Television & Music Videos i15.33% and 9.9% respectively for the said period.

Object Of The Issue

PFL intends to raise Rs.100 crore from this issue. There shall be a green shoe option (GSO) of Rs.15 crore, aggregating the amount to Rs.115 crore. The objects are:

• Finance Domestic expansion.
• Setting up high and digital studios at Los Angeles, London and Dubai.
• Setting up a studio at Hyderabad.
• 
  
General Corporate purposes, meet working capital requirements and expenses of issue.

Strengths

• PFL is geographically expanding its business. It has drawn up plans to setup the latest technology kit, to service the local markets in London, Los Angeles and Dubai, and to take advantage of its backend visual effects and animation facility in India. This would create a unique position for the company at a global level.
• This move is aimed at building up outsourcing business from these markets. London and Los Angeles are the key markets in the field of post-production and visual effects. Los Angeles is the main business centre for film based productions whereas London provides access to key advertising markets. The UK government is also offering tax incentives. PFL has identified Dubai as a potential market. The Dubai government has laid down plans for setting up of Dubai Studio city. The Dubai Studio city would provide several incentives such as good infrastructure, tax free zone, availability of cheap power to studios and production houses. PFL foresees great potential to be reaped from outsourcing & having a presence in the respective local markets. The company would have the early mover advantage to tap a fair market share and would also benefit from cost savings.
• PFL has recently acquired a 55 % stake in VTR Group, a 20 million pound, UK-based media services company with over 20 years of post-production and visual effects experience. The stake has been acquired at an estimated cost of 4.7 million pounds (approximately Rs.39 crore) where 4.2 million would be paid through cash and balance would be for buying out equipment. PFL has taken a bridge loan of Rs.35 crore from Reliance Capital Ltd. against the Issue proceeds, for a period of 30 days at an interest @ 9% p.a. The acquisition will lead to Namit Malhotra, Managing Director of PFL, to join the VTR board as chairman, while PFL's chairman Naresh Malhotra, and director Rivkaran Chadha would be appointed as non-executive directors on the VTR board.
• PFL is also focusing on expansion in the domestic market. It is setting up a studio at Hyderabad, one of the fastest growing film markets in the South India. With studios at Hyderabad, Chennai and Mumbai, the company will be diversifying its risk across different geographical markets, each of which goes through its own cyclical phase of up and down, thus ensuring that PFL will not be subjected to the swings of a single geographical market.
• The Indian entertainment industry, largely comprising films, television, music, radio and live shows stands at over Rs.20,000 crore today. It is expected to grow at a CAGR of 18% per annum over the next five years to reach over Rs.45,000 crore.

Weaknesses:

• PFL has long collection period. Average Collection period from FY2002 to FY2005 has increased from 88 days to 126 days. Besides, the company faces the risks of incurring bad debts. Bad debts written off during FY2004 and FY2005 are Rs.113 lakhs and Rs. 89 lakhs respectively. The same being 5.53% and 2.77% of income for the said period. Bad debts written off for nine months ending 31 st December 2005 are Rs.83.5 lakhs being 2.49% of income.
• VTR Plc., in which PFL has acquired 55% stake has posted losses amounting to Rs.5.26 crore and Rs.3.77 crore for the previous two financial years ending on August 31, 2005 and August 31, 2004 respectively.

Valuation:

• PFL's income and profits have grown at a CAGR of 29.95% and 49.22% from FY2001 to FY2005 respectively.
• Return on Networth for PFL as in FY2005 is 26.58%. Book value for the same period is Rs.35.15 per share.
• EPS for FY2005 is Rs.9.34. Post issue EPS if the GSO is exercised will be in the range Rs.11.4 to Rs.11.6, else it would be in the range of Rs.11.7 to Rs.12 for a price band of Rs.450 to Rs.500. Post issue PE will be in the range of 39 – 43 if GSO is exercised, else it would be in the range of 38 – 42 for the price band.