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Saturday, September 26, 2009

Blue Star Infotech Ltd and Prime Focus Ltd:Buy/hold or sell?Future growth outlook and prospects

1)Scripscan:Blue Star Infotech Ltd
Bse code:532346
Cmp:80

Story:Blue Star Infotech (BSIL) is a global provider of Product Development services, ERP solutions, Travel Technology solutions and Testing services. Part of the US$600M Blue Star Group, Blue Star Infotech provides profit-enhancing solutions to enterprises and product companies. With operations in North America, Europe, UK, Japan and India, Blue Star Infotech delivers high-performance technology-based services by adopting a partnering approach with its clients. Blue Star Infotech is a Microsoft Gold Partner and an Oracle Certified Partner. In December 2008, Blue Star Infotech completed 25 years of operations. Blue Star Infotech enjoys long-term relationships with most of its customers. It has a distinguished list of customers across different industries such as Manufacturing, Financial Services, Travel, Retail, Technology, Life Sciences and Engineering. Headquartered in Mumbai, India, BSIL has seven software development centers in Mumbai and Bangalore and serves its global clientele through offices in Santa Clara (CA) and Jersey City (NJ) in North America, London in UK, Helsinki in Finland and Tokyo in Japan. The Company also has business associates in USA and Europe.BSIL enjoys a 24-year old relationship with Hewlett-Packard, a Fortune 100 company and has been certified as a Hewlett-Packard's Developer and Solution Partner Program member. Some of the other major clients of the co. include names such as Hitachi Medical Corp., 3M, York Intl. Apart from these, BSIL has worked with organizations such as McDonald's, Expedia.com,, Warner Brothers, NEC, European Parliament, HLL, United Breweries, Cipla, Raymond, amongst others.For the year ended March 31, 2009, Consolidated Revenue stood at Rs. 155.03 cr., representing an increase of 8% over Rs. 143.56 cr. registered in FY08. Consolidated Net Profit for the year was Rs. 15.55 cr., representing a significant growth of 217% y-o-y. On a equity of 10 cr.(Promoters'stake-55.38%), the EPS stood at Rs 15.55 and the dividend declared is 50% (Rs 5 per share). The Company added 47 new customers during 2008-09 and initiated multi-year engagements with four leading companies from UK; a multi-billion dollar engineering company in US and a leading BPO service provider and one of the largest theatre chains in India. Based on current trends and industry outlook, BSIL hopes to improve its performance in the coming year. With its current focus on strengthening and increasing its sales and marketing efforts, it is well-positioned to capitalize on the expected turnaround.BSIL's financial position is strong with zero debt and Rs 23 cr. in cash/cash equivalents as on March 31, 2009. The steady flow of revenues from HP coupled with the increasing contribution of business from key clients provides significantly visibility in the company's future revenues. At current level of Rs 80, BSIL trades at 5.1 times its FY09 earnings and looks attractive for the medium-long term. The BSIL share at current levels also offers an attractive dividend yield of 6.25%. Investors can accumulate the BSIL stock at this level and add more on declines for decent returns over the medium-long term.

2)Scripscan:Prime Focus Ltd
Bse code:532748
Cmp:87

Story:Outsourcing of entertainment technology (ET) services is a huge opportunity for low-cost countries like India. As a global ET player, Prime Focus (PFL) is poised to profitably scale up its business with low risks. PFL offers the full range of ET services in India, and has built strong relationships with both customers and vendors. In May 2006, it acquired VTR Plc, UK. PFL's business model is robust. It is fairly predictable, scalable, highly profitable and sufficiently derisked. Aggressive depreciation keeps profit muted; but margins are high enough to keep operating cash flow strongly positive and rising. PFL has an estimated 60% market share in India. With six facilities across Mumbai, Hyderabad and Chennai, its domestic business continues to grow at a fast pace, as the use of visual and special effects in Indian films is on the rise. The business is highly profitable with operating margins at 50-60%, although higher employee costs have moderated margins in recent quarters. PFL has built an international presence with facilities spanning the UK, US and Canada. Its first acquisition in the UK (VTR) has paid off, with Prime Focus successfully turning around the company and the facility has begun to outsource work to India. Prime Focus acquired Frantic Films and Post Logic Studios for $43 million in late 2007, which gave it access to facilities and talent pools in key markets of Los Angeles, New York, Vancouver and Winnipeg. The targets have combined revenue of $25 million (Rs 107 crore) and have been associated with films such as Spiderman 3, Fantastic Four and Superman Returns. International acquisitions offer PFL the opportunity to work on more sophisticated projects, gain exposure to the latest technology and allow them to capitalise on the outsourcing opportunity in India. From a financial perspective, the very size of the companies proposed to be acquired may substantially boosts revenues. Prime Focus's tie up with Warner Bros' Motion Picture Imaging appears to be recognition of the merits of this international operation. The benefits of the strategy are likely to pay off from FY '10.With a strong presence in the niche area of post-production services for films, a unique cross-border business model and a good pipeline of film projects, Prime Focus(PFL) is a preferred pick within the media sector. A substantial correction in recent months has the stock trading at about 4 times its likely FY '09 consolidated earnings per share, which is low given the high visibility in earnings growth. At the CMP of Rs 87, the stock trades at and 3x FY10E earnings. The upside triggers to the stock can come from: a) outsourcing opportunity from the US and Canada and b) growth in VTR revenue. An unexpected slowdown in domestic operations is a key risk to earnings estimates. The stock's small-cap status may call for careful timing of investments. An investment can be considered in the stock with a 12-18 month perspective. Accumulate on declines.

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