Having posted an operating profit margin of just 3 percent for the quarter ended September, Prime Focus is not looking to lower down its margin guidance of 20 percent by FY16 end.
Speaking to CNBC-TV18, Group CFO Vikas Rathee says the company has already taken significant efforts on the reduction of duplication on the personnel expenses side.
“For integration and consolidation base transactions you always see one-time impacts of restructuring cost that will come through. We are still very confident on 20 percent plus margin for FY16,” he adds.
Below is verbatim transcript of the interview:
Q: In the last quarter you gave us revenues of around Rs 350 crore, will that be the revenue picture on a quarter-on-quarter basis?
A: Nearly Rs 350 crore should be building upon. One of thing you haven’t seen in this is the transaction that we are still on the works on the Reliance Media Works side also just this quarter given you have July and August which is the holiday season, the September quarter is kind of slow from our industry perspective anyway. Therefore, you should see that if subsequent quarters build upon on the revenues just from a coal business perspective, also you will have additions from the Reliance Media Works business come in hopefully by the end of December if not in the first calendar quarter.
Q: When we had spoken to you last time, you had given us some margin target of reaching 20 percent by the end of FY16. In this quarter your margins have come down to 3 percent. Would you look to scale down your assessment of margin growth in the next may be this year or FY16?
A: Not really, this was a horizontal kind of a transaction merger where in Double Negative (DNeg) which is one of the largest players in the VFX market going to merger with us on the creative services side so obviously there is significant duplication on personnel cost which is kind of what you see from the margin perspective.
We have taken significant efforts already on the reduction of duplication on the personnel expenses side, also facilities closure.
This is as planned, for integration and consolidation base transactions you always see one time impacts of restructuring cost that will come through. We are still very confident on 20 percent plus margin for FY16.
Q: If you need to get to that mark then you will have to see some reduction on employee cost that you were mentioning. For this quarter the employee cost for various reasons was at around Rs 230 crore. Going ahead, on a quarter-on-quarter basis, how much can we see that number and even at other expenditure that one as well bloomed up to around Rs 100 crore. With regards to both these two entries what are the figures that we can look at going ahead?
A: We are technology-led business and also people intensive. Our personnel cost are going to be in the 40 percent range, higher this time around like I said there is duplication across our business on the creative services side.
Some of that impact means other cost fundamentally is some of the restructuring stuff that is coming through. There is also duplication on facilities and that also we have kind of cut down during the course of this quarter.
Where we are going to see that has people and duplication cuts down some of that we have seen, a large part in this quarter, there will be some residual effects that you are going to see in the next quarter.
However, these one-time cost reductions are absolutely necessary to create the marginal synergies that we are looking to anticipate.
The cost pace we have in India is north of 20-25 percent kind of earnings before interest, taxes, depreciation, and amortization (EBITDA) margin business.
The mergers or the entities we are absorbing in the west typically have a low single digits or just about very low double digits kind of EBITDA margins. It is primarily because of the cost of personnel being in the west versus being back here, not dissimilar to what you see in IT services companies.
The trajectory is to be able to do a lot more work back around from India keeping your sales marketing in a higher and artist back in the west and get the benefit of scale and cost here. That’s where we come from in terms of how we see the trajectory of going back to above 20 percent margins by FY16.
Q: You spoke about your deal with Reliance Media Works where you all will be merging the films business that to accrue hopefully by December quarter if not March quarter of next calendar year. What will be the financial impact in the December quarter and also in the March quarter?
A: We are very excited about that transaction especially in terms of what is going to add to our already impressive line up in India.
The Indian media entertainment market continues to grow very rapidly both on the films side even more so on the television side of the business.
The operating cost will not be too much because we have a very similar business already in here but the valuation proposition and the opportunities we will provide to the Indian customers is going to be significantly enhanced.
Q: Any numbers?
A: Our domestic business on the EBITDA side had north of 40 percent EBITDA margins in this current quarter on standalone perspective. We believe that the domestic business with the combination of Reliance Media Works should delivery EBITDA margins north of 50 percent.
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