Robust demand for 3D to continue in FY15: Prime Focus


Riken Mehta
moneycontrol.com


Follow me on Twitter @mehtariken

Prime Focus Limited, a leading player in visual graphics and animation reported consolidated net sales of Rs 235.51 crore in the fourth quarter of FY14 over Rs 196.90 crore, a year ago. The company reported net loss of Rs 8.38 crore in this quarter. The profitability was impacted due to an unrealized quarterly loss on foreign exchange and a non-cash Deferred Tax charge of Rs 7.27 crore. The operating margins of the company improved from 7.51 percent last year to 11.21 percent in this quarter.

Prime Focus recorded consolidated annual net sales of Rs 833.72 crore, a jump of 9.32 percent compared to Rs 762.16 crore, a year ago. The company’s bottomline turned profitable in FY14 with profits of Rs 32.96 crore compared to loss of Rs 20.31 crore.

In an exclusive interview with moneycontrol.com, Vikas Rathee, Group COO, Prime Focus Limited said the resurgence in demand for 3D to continue into FY15. He is hopeful of achieving robust revenue growth rates in FY15. He expects interest cost to come down in the coming quarters on the back of closure of the backend and cheaper dollar financing.

Here is an edited transcript of the interview.

Q. Could you brief us about Q4 FY13 performance? How do you see your performance for the coming quarter?

Prime Focus posted healthy growth in top-line in Q4 (20%), which was bolstered with 2 big Hollywood films Noah and The Amazing Spiderman 2. Due to a one time increase in costs, there was a dip in margins for Q4. Profitability has also been impacted due to an unrealized quarterly loss on foreign exchange and a non-cash Deferred Tax charge of Rs 7.27 crore. We expect the margins to return to earlier levels in the coming quarters on the back of cost appropriation over various projects and realization of benefits of working on VFX projects out of India.

Q. The company has posted a revenue growth of 20.17%.  Can you tell us how much revenue contribution came from new businesses? How do you see revenue growth going forward along with PAT and margins guidance?

Share of Revenues from new businesses has increased from 69% to 79% in FY14. We expect the resurgence in demand for 3D to continue into FY15. Our key focus is also to continue to increase the share of VFX in our total revenues for FY15. We believe our capex phase is behind us. Overall, we expect stable growth in demand for our creative services business and we expect to increase our market share.
PFT (Prime Focus Technologies) continues to grow at a rapid pace in 12M FY14, where it grew 100% year on year. We continue to add new customers as well as get more demand for our products and services from existing customers. PFT has also expanded inorganically with DAX in the US and the initial progress since closing has been very promising – we see significant opportunity for PFT in the largest media market globally. Although it is difficult for us to project similar growth rates from such a high base, we feel we should again expect very robust growth in revenues from this segment in FY15 as well.

Q. Employee cost and other expenses were significantly higher in this quarter. Was there a wage hike in this quarter? Tax component was also high. Brief us on the same.  

We used Q4 as a quarter to bolster our capacity in VFX, which led to a one time increase in headcount in Q4, which should stabilize again post release of Sin City 2. Both PFT and Prime Focus Limited on a stand-alone basis had strong PBT and as such taxes are a reality. However, the Tax component contained a non-cash deferred tax charge of Rs.72.7mn for the quarter, which is the tax benefit we are getting due to the loss we incurred last year due to the redemption of the FCCBs. We will continue to monetize this benefit in FY15 as well.

Q. What was the total debt at the end of FY14? Will the interest cost come down in the coming quarters?

We have managed to stabilize the debt levels in the Company. Our total debt as of 31st March, 2014 is Rs 800 crore, which includes the Rs 45 crore of the OCD raise which was completed on 31st March itself, i.e. was reflected in our Cash balances as well. What is important to note is that we continue to shift the debt towards Buyers Credit and Financial Leases structures, which are a lot less onerous and cheaper sources of financing capex for the company.

Of the total debt, Rs 92 crore is towards Property loans, which are on the back of the key delivery centers owned by the Company in LA and Mumbai in relation to our Creative Services business, together currently valued at over Rs 200 crore. This also includes the NCD issued to Standard Chartered Private Equity in the parent Prime Focus Limited, including its accrued Redemption Premium value, totaling at Rs.228.3 crore as on 31st March 2014.

We continue to focus on leveraging our foreign company balance sheets to source cheaper financing for the overseas operations. You would notice a good reduction in our average interest rates and we feel we should continue to see a decline in our interest costs as we move forward, on the back of closure of the backend and cheaper dollar financing.

Q. Give us a brief idea on how much money will be used to retire debt and working capital from Rs 45 crore fund raising plans?

Of the total OCD raise,  25%-30% would be used to retire debt, while the balance would be used to fuel the growth of PFT’s international business.

Q. Which are the upcoming movies in this quarter and next?  

Our list kicked off on May 30 with the release of Walt Disney Pictures Maleficent, from director Robert Stromberg, and continues next week with the amazing Edge of Tomorrow from Doug Liman / Warner Bros. Pictures, which releases in the US on June 6

Unfortunately we can’t mention all the films we’re working on yet, but here’s a few that we’re really excited about: Maleficent, Edge of Tomorrow, Transformers: Age of Extinction, Earth To Echo, Hercules, Into The Storm, The Expendables 3, Sin City: A Dame To Kill For, The Interview, Kingman: The Secret Service

Q. Your subsidiary Prime Focus Technologies (PFT) recently acquired a US firm, by when do you think it will reflect in your performance?

PFT’s DAX acquisition was effective 1st April, 2014, hence DAX’s contribution will start reflecting from Quarter April to June 2014 onwards. We are very optimistic about PFT’s US operations contributing in a significant manner to the numbers over the next couple of years.

Q. Your technology subsidiary – PFT has seen a steady growth over the years, can you elaborate on how the business has been in the last quarter?

PFT has grown its revenue, really doubled its revenue over last year FY14 once again. We think it is because of two key factors – increased adoption of our cloud-based Media ERP technology platform, CLEAR and of course introduction of new products and services. Some significant wins we have had this quarter – one of the largest South African broadcast networks have adopted CLEAR and CLEAR-based media services.  We also added additional services for BCCI (Board of Control for Cricket in India) as a big sports client. We have had interesting wins from a very large multichannel network which is using us now for a significant part of their content publishing.

The second big activity for us is digital. One, we have developed our own business to business to consumer (B2B2C) platform, the OTT platform, for example where we are delivering IPL (Indian Premier League) and all the multiple sports on Starsports.com, which has quickly become the leading web-based multi-sport OTT platform in India and globally. We have also started digital play-outs and again given all the excitement in digital, we have sort of started a brand new activity of actually doing digital play-outs. We already are laying out over 20 channels now. We are now a YouTube certified partner.

We also announced the acquisition of a company called DAX and that is again an important milestone in the lifecycle of PFT. This is a company that has a cloud based platform that is being used by all the leading studios that are producing content in Hollywood and we saw a team that had uniquely similar blend of media and IT skills. Through DAX we also got access to key customers in the US such as Warner Bros. Television, CBS Television, Fox Television, Lionsgate, Legendary, Starz Entertainment and Showtime. We feel it has been a very satisfactory quarter and even better year for PFT, and we continue to make rapid strides in the global market.

Q. Are there any new markets that you will look at for your VFX, 3D conversion business?  

On the VFX and also in 3D we have made rapid strides and there is good momentum on the back of the success of blockbuster Hollywood movies such as Gravity, Noah, The Amazing Spiderman 2, etc. with a number of upcoming high profile releases such as Maleficent, Edge Of Tomorrow, Transformers and Sin City 2 as I mentioned earlier. We see good momentum across both these fronts in FY15 and we will surely leverage this momentum to capitalize on growth opportunities. We have recently started addressing the China market via a JV. We recently did work on our first contract in China for 3D conversion for a film called Iceman 3D and continue to make rapid strides to increase our market share in China.

Q. Could you brief us about expansion and capex plans for the coming years?

We feel we are done with all the expansion and bulky capex that we have incurred in bringing up our business to the level it is today. The benefits of the investments should accrue for us over the next several years. We do not foresee any major capex for the coming years as we hope to now consolidate our global offering across the various businesses.

Q. How do you see the overall industry outlook for the next one year?

We expect the Industry to remain buoyant. VFX in Hollywood is an evergreen segment, which continues to grow each year with audiences at large preferring to see more of sci-fi and animated films over dramas or live-action. 3D had flattened for a couple of years before Gravity happened, which has again led to a resurgence in the demand for 3D, especially in Asia.
The market for Media ERP type of solutions is still in its infancy stage. Broadcasters face many challenges today like flat revenues, rising operating costs and a new set of customers – highly demanding digital consumers. Virtualizing content supply chain operations, driving efficiencies and media process outsourcing are increasingly becoming their top priority. PFT’s CLEAR Media ERP technology and cloud-enabled services are helping content enterprises do more with less. We are happy to be riding the early growth wave in this segment with huge potential.

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