Action ahead

PENNY WISE

The pioneering efforts at Prime Focus are all set to bear fruits.

One may think of naming different segments of the Indian film industry analogous to Hollywood as a fad. But the new breed of Indian film-makers and a score of recent movies give us a gist of their ambitions to step up to competition from the west.

Films like Koi Mil Gaya, Krrish, Dus, Dhoom (and its sequel) which show awe-inspiring stunts, action sequences and special effects are just an effort to catch up with the Terminators and the James Bonds.

The result of this, still latent, is that a new industry segment of visual effects and digital post-production services has started evolving, with players like Prime Focus, Pixion, Prasad EFX, Famous Studios and Tata Elxsi vying to grab a share of this emerging segment.

Still to count
Although the film industry has been around for the past 100-odd years, it is difficult to ascertain the size of the visual effects and digital post-production industry, since the business is derived from the mainstream films, depending upon their nature.

"There could be a big budget film made with negligible digital special effects, while there could as well be a small film with a large part of it cost comprising of post-production services, which makes it difficult for one to estimate the size of this industry," says Namit Malhotra, managing director, Prime Focus.

However, an optimistic flipside is provided by the growing number of film-makers producing films with ever-increasing budgets, and experimenting with formats similar to those produced in the Hollywood.

Apart from this, such services come in handy when film-makers use visual effects to save costs of designing and erecting sets, shooting at different locations which could be replicated digitally within the four walls of a studio.

But, count big
Prime Focus is one of India's leading end-to-end post production and visual effects service provider.

The company has been in the business for about a decade, and works with prominent film makers like Sanjay Leela Bhansali, Ram Gopal Varma, Yashraj Films; advertising majors like O&M, Rediffusion, Trikaya Grey and the like and television content companies like UTV, TV 18, and Balaji Telefilms.

It provides services ranging from camera and equipment rentals, telecine (converting motion pictures from film into electronic form), editing and post-production, visual effects and digitising services for motion pictures and ad-films for enhanced colour and images.

The company is now in an expansion mode both in India and abroad, after acquiring VTR plc and Clear, two post-production houses in the UK, and Spirit DI, a Hyderabad-based digital intermediate studio.

It had recently commissioned its Chennai facility, apart from having three studios in Mumbai. With facilities in Chennai and Hyderabad, the company is eyeing a share of the Telugu and Tamil film industries.

English channel
Prime Focus acquired a 55 per cent stake in VTR plc of UK in May 2006 for £4.7 million (approximately Rs 39.8 crore) and turned it into a full-range post-production company from an advertising focused studio by investing another £3.2 million (approximately Rs 27.1 crore) in equipment.

Further, in order to dent the European media on the creative front, in July 2006 it took over Clear, a visual effects company for £1.5 million (around Rs 12.9 crore).

The company claims to have about 4 per cent share of the British market and is now looking to bag large post-production deals. Another opportunity exists on gaining an edge over competition in the British market by leveraging its low-cost Indian base by outsourcing some work back home. Besides, the company will also benefit from the quality know-how of its UK arm.

"VTR was a business with technical expertise but operated at a high cost base, which provided us an opportunity for arbitrage," claims Malhotra. The results are visible in the near future, as Prime Focus expects a Hollywood release in the coming quarter.

However, on a closer look, VTR's revenues and operating margins appear to have dipped in the past couple of years.

Nishant Fadia, chief finance officer of Prime Focus agrees: "VTR was a top-heavy company with a chief executive for each of its different divisions, which added a significant amount to the wage bill. The company's expenditure on salaries was about 60 per cent to its sales, as against an average of about 47-48 per cent in the London market. We have been able to rationalise it to a level of 50-52 per cent, and still continue to do so." 
 

THE BIG LEAP
Rs crore	FY06	FY07E	FY08E*
Revenues	42.40	51.90	235.00
Operating profit	28.30	39.50	105.80
Net profit	14.00	21.40	51.70
EPS (Rs)	13.10	16.90	40.70
P/E (x)	"�	24.60	10.20
Note: FY08E numbers post-consolidation with PF UK, while FY07 numbers are PF India stand-alone basis

Valuation
With specialised skills in digital post-production services, Prime Focus is a high-margin business with a significant potential to scale up, considering the size of the Indian film industry and its global forays.

The operating margins have grown from 45 per cent to over 55 per cent over the past three years, which is expected to continue over the next few years. After the integration of VTR plc over FY08, a jump in revenues and profits is likely to be seen. Our revenues have grown at a compound rate of 30 per cent, while the net profit has grown at a compound rate of 55 per cent over the past three-four years," says Fadia.

Going further, the company expects to maintain this steady health. The company has also garnered attention of investors such as Reliance Capital, which held an 11.8 per cent stake and Adlabs Films, which owns a 3.8 per cent at the end of December 2006.

The stock is valued at 24.6 times its expected FY07 earnings, which is high. But if it manages to effect a smart consolidation of its acquisitions, which it should be able to, the outlook will change for better.