Prime Focus Ltd (PFL) has turned into a strong media service player globally, offering visual effects, 3D animation and media-focused ERP solutions in India and abroad. The company turned profitable in FY17 post completion of the M&A integration in FY15-16. In our view, the four M&A transactions in the last five years have allowed PFL to become a strong media service player globally, which should drive 15/18% revenue/Ebitda CAGR over FY17-20E.
One of the top-4 Hollywood VFX service providers, PFL is well placed to benefit from the steady rise in VFX budgets of the top Hollywood movie grossers. We note that the demons of 2.8x jump in net debt to Rs 13.9 bn and 50% equity dilution over the last five years are now behind the company. Furthermore, improving Ebitda and lower capex requirement are expected to help generate healthy FCF, improve return on invested capital (RoIC) to 19% and reduce net debt by 68% to Rs 4.5 bn by FY20.
We believe M&A has allowed PFL to become a strong player in the media service industry globally, which should drive steady 15% revenue CAGR over FY17-20E to reach Rs 32.8 bn.We thus initiate coverage on PFL with a Buy rating and a target price of Rs 130 (46% upside), based on SOTP-based valuation, ascribing 10x (industry average) on FY19e Ebitda.