Prime Focus is hovering over a firm in the US

MUMBAI: Coined as one of the most attractive niche media models to bet on by the analysts’ fraternity, Mumbai-based digital post-production and VFX specialist Prime Focus seems to be gearing up for another acquisition.

This time though the buzz is that the company promoters are targeting a facility in the United States of America.

Namit Malhotra, managing director of the company, however, denied saying, “There is no such plan.”

Reliable market sources indicate that a possible buyout in the US has been chalked out already and that the company is pursuing the matter very seriously. “Having acquired VTR Plc and Clear in the UK earlier in the year and turning them profitable within the first year, the promoters are now eyeing the US market. The objective most likely is to gain a considerable share of the digital post-production and VFX from Hollywood through acquisition in the US,” the source said.

While most of the funds being raised through the IPO have been utilised in expanding the company’s domestic and international expansion, the management is looking at raising more money to fund its next level of expansion, including the one in the US. In fact, the management seems to have already taken an enabling approval for undertaking this exercise.

“Exploring various funding options include ADR/GDR, the company may look at raising to the tune of $40-50m in order to equip itself for the potential buy out in the US,” said the source.

Prime Focus had earlier made two acquisitions in the UK market in the form of a 55% stake in VTR Plc (a post-production and visual effects company) at valuations of £11 million and a 100% stake in Clear (an animation company) for £1.5 million.

On the domestic front, the company has already commissioned its Chennai facility in January 2007 and is understood to be in the final stages of acquiring one in Hyderabad.

According to industry sources, the facility to be acquired in Hyderabad is Suresh Productions Pvt Ltd’s post production arm Spirit DI in Hyderabad. While exact value of this acquisition is not known, sources said that settlement of this acquisition will be through a combination of cash and stock.

“We are currently in the due diligence stage and I will be able to share more details including its value, once the deal is completed in another 3-4 weeks,” said Malhotra.

Elucidating the rationale behind expanding in South India, he added: “Telugu film industry has a significant number of movies now involving and budgeting for Visual Effects (VFX) and Digital Intermediate (DI). The new facilities will be aimed at providing quality post production services there.”

Building on its capacity in Mumbai, the company launched its fourth state-of-the-art facility at Royal Palms housing 200-odd animation and visual effects artists.

And with domestic and international business growing at a fast pace, the management intends to more than quadruple its employee base here adding another 700 VFX artists and animators in the coming years. As for the company’s financial performance is concerned, it has reported revenue growth of 56% at Rs 1.87 crore in the domestic operations and consolidated revenues (including VTR and Clear) at Rs 57.6 crore.

According to SSKI India Research analysts Nikhi Vora, Bhushan Gajaria and Rahul Narayan, though the company’s overheads on newly commissioned studios in India have led to margin
dip of 830 bp in domestic operations at 61%, it has managed to turn around the VTR operations. Standalone Ebitda was at Rs 11.4 crore and consolidated Ebitda stood at Rs 18.1 crore.

Prime Focus reported PAT growth of 55% on the standalone basis at  Rs 7.5 crore and consolidated PAT after minority interest of Rs 9.5 crore.

The analysts in their client report said: “Prime Focus is one of the most attractive niche media models to bet on, operating in a rapidly emerging digital technology, post-production and visual effects space. We believe that Indian VFX space is set for a major boom as Indian film industry is aggressively following the Hollywood footsteps which is clearly evident from that fact at all time top 10 grossers were VFX heavy movies.”

Some of the recent blockbusters with heavy VFX usage in India include names like Shivaji - The boss, Dhoom 2, Krissh, Ta Ra Rum Pum, etc.

Calling it an outperformer, the SSKI India Research report said that the Prime Focus stock is trading at 15.2x FY09E earnings and is one of the preferred picks in the media space today.