MOSL: PRIME FOCUS (INITIATING COVERAGE)-Set to run the show-Forte in global media services to drive profitable growth

​Prime Focus (initiating coverage): Set to run the show; Forte in global media services to drive profitable growth

(PRIF IN, Mkt Cap USD0.4b, CMP INR89, TP INR130, 46% Upside, Buy)

• Prime Focus Ltd (PFL) is a full-service media player offering creative solutions, including visual effects (VFX), animation, 3D conversion 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 INR13.9b and 50% equity dilution over the last five years are now behind. Furthermore, improving EBITDA and lower capex requirement are expected to help generate healthy FCF, improve RoIC to 19% and reduce net debt by ~68% to INR4.5b by FY20.
  
• We thus initiate coverage on PFL with a Buy rating and a target price of INR130 (46% upside), based on SOTP-based valuation, ascribing 10x (industry average) on FY19E EBITDA.
  

Full-service media player set to run the show

• PFL, a full-service media player, has grown its revenue by 10x and EBITDA by 5x over the past ten years. Post five years of strategic M&As (integration completed in FY15-16), the company turned profitable in FY17. 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 INR32.8b. Besides this, the scale benefits and cost synergies, particularly in the Creative segment, should drive 18% EBITDA CAGR to reach INR 7.8b over the same period.