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Pentamedia: Losing focus - Views on News from Equitymaster

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Pentamedia: Losing focus

Nov 8, 2001

Animation major, Pentamedia Graphics declared a marginal growth in turnover and a drop in net profit for 1HFY02 on standalone basis. The drop in performance was even more evident from 2QFY02 results. While sales dropped by around 26%, net profits registered a steep fall of around 50%. Operating margins also registered a sharp fall of around 520 basis points.

(Rs m) 2QFY01 2QFY02 % change 1HFY01 1HFY02 % Change
Sales 1,350 998 -26.1% 2,495 2,579 3.4%
Other Income 100 112 12.6% 141 144 1.8%
Expenditure 912 727 -20.3% 1,550 1,680 8.4%
Operating Profit (EBDIT) 438 271 -38.1% 945 899 -4.9%
Operating Profit Margin (%) 32.4% 27.2% 37.9% 34.9%  
Interest (34) 28 -180.8% (17) 62 -462.4%
Depreciation 112 72 -35.7% 235 277 18.0%
Profit before Tax 460 283 -38.4% 868 704 -19.0%
Extraordinary Items (202) (150) (202) (150)  
Tax - 3   6
Profit after Tax/(Loss) 258 130 -49.5% 666 548 -17.8%
Net profit margin (%) 19.1% 13.0% 26.7% 21.3%  
No. of Shares (eoy) (m) 39.9 60.5   39.9 60.5  
Diluted Earnings per share* 25.8 8.6   33.4 18.1  
P/E (at current price) 4.4     2.1  
(*- annualised)            

The drop in operating margins seems to be on the back of a shift in the company’s focus from work-for-hire projects where the company gets assured margins, to own products basis. Pentamedia currently has several projects in its pipeline to be released at appropriate intervals by early March’03. The company expects a sharp jump in animation production minutes to over 450 minutes from around 380 minutes currently.

Coming to its subsidiaries, Media Dreams, engaged in production of southern films, successfully released a film during the year, which did an average performance on the box office. Two other movies are under production. Media Dreams also entered into film distribution business during the year. It has acquired distribution rights of “Asoka” (Hindi movie) for distribution in TamilNadu and Kerala. However, as the film has not performed well on the box office, this division is expected to record considerable loss on this account. “Mayajaal”, the multiplex and theme center of the company based at Chennai is close to completion and the company has entered into several annual sponsorship agreements for the same.

The NumTv project of the company, which is into internet entertainment content distribution is gaining momentum and the company currently has a subscriber base of more than 30,000 of niche clientele spread across several continents. The NumTv project of the company with its vast bouquet of channels could see a bright future ahead. However, the success of the project is completely dependent on the availability of broadband.

At the current market price of Rs 38, the stock is trading at 4x its 2QFY02 annualised earnings. The company’s shift in operations from hire work basis own products basis in the animation business could see a drop in margins in the coming quarters, if it not able to secure adequate markets for its products. Further, the investments made by the company in all its subsidiaries especially NumTv are riskier and would take time to generate returns. The company also seems to be losing focus exhibited by its entry into film distribution business, which is not its core area of operation.

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