Prime Focus - Expecting a substantially better FY14 - IIFL

Following a muted FY13 performance, Prime Focus (PFL) aims at a much better FY14, driven by growth in the visual effects (VFX) business and the PFT division. Margins should also improve due to better utilisation of existing capacities. Valuations seem cheap at c.7-8x potential FY14 EPS.

- FY13 earnings are likely to decrease substantially from FY12 levels because of: 1) certain project misses and a few delivery delays due to client deferrals, and 2) increased investment in capacity in preparation for higher business growth. Furthermore, a one-time loss of Rs823mn on FCCB redemption depressed 3Q FY13 results.

- However, in FY14, PFL expects the VFX division's revenues to grow by 50%+ driven by new project wins. Management also expects strong growth in the content management division (PFT), which it sees scaling up to $100mn by FY16 from $16-18mn currently. Driven by healthy revenue growth, Ebitda margin should rebound to 30%+ in FY14 from under 25% in FY13.

- If PFL can execute its business strategies successfully, growth in the VFX and PFT divisions can drive substantial earnings upside over the next few years. Management also aims to generate positive free cash flow beginning FY14, as capacities to drive growth over the next few years are largely in place.

PFL's shares trade at a low P/E (c.8x FY12 EPS), potentially because of the company's significant leverage and a portfolio of young and unproven businesses. There are hardly any relevant publicly traded comparables for PFL. In the past, the company had considered diluting stake in its US operations, which are its most profitable part. The company believes that the valuation of the US operations alone, at 10-11x EV/Ebitda, may exceed PFL's overall valuation. We think demonstration of strong earnings growth, accompanied by the commencement of free cash flow generation, could be the potential triggers for an upward move in PFL's stock price.

Source : Equity Bulls

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