UK biz a concern; see margins at 26%: Prime Focus

Reema: Can you explain why your margins have come down so much from nearly 20 percent to 11 percent? Why is there a loss of Rs 36 crore and what was the reason for your depreciation as well as expenditure to go up so much?

A: It is a picture which has two sides to it. On the operational perspective all our core businesses have delivered a pretty strong performance. The creative business as well as our technology business have grown both top line as well as Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) and also 20 plus percent. So, if you also look at our EBITDA from last quarter to this quarter, we have grown from about Rs 11 odd crore last quarter till about close to Rs 40 crore. On the operating side the business as improved. The delta is primarily on the back of- we have spoken about post-production businesses especially in the UK which has continued to suffer. Also if one goes down, there is a marked increase in depreciation, amortization on the back of our acquisition that we did of double negative and other business coming on. So, a lot of the charges you see are non-cash, also on the tax side is a non cash charge related to the same leading to the path differential but even at the PBT perspective, we have actually saved almost Rs 40 crore from where we were last quarter. So, we are happy with the operational up trend we have seen on our core businesses. There is a decline as expected on the non-core part of the business and by the March quarter end you should see that basically going away.

Anuj: What explains this near doubling of depreciation expenses?

A: What has happened, even if you look at our revenues year on year (YoY) perspective, the revenues have almost doubled. That is primarily on the back of the double negative merger that our creative business did in out of London. I June-July time frame. So, along with that there is a depreciation charges coming through. Also with the companies act, there is a depreciation increase in relation to the assets that we c an have on the books in relation to the technology and other equipment which are now required to be depreciated over a much shorter period.

Reema: Are you winding down the post-production business in the UK and any more provisions or any more write-offs that you will have to take on the back of that?

A: No, we did actually take all the write-offs in relation to that business as part of our fiscal year end of June that we reported. So, the provisions and stuff we have already taken. Also what you notice is our integration expenses, redundancies that we effected pretty significant amount of that in last quarter, some amount of that has come through this quarter as well as exceptional charges. Those are really behind us and as kind of leading to a growth in the EBITDA margins. March quarter is typically the strongest that we have in our Industry and we expect a continued significant uptrend on the operating EBITDA as we go forward in March and thereafter.

Reema: So, on a consolidated basis, now going ahead what can be the expected revenue run rate as well as the revenue run rate at the EBITDA level.

A: Rather than going into specific figures, I can tell you, even if you look at our history, the March quarter is always the strongest quarter we have. So, we expect a significant uptake in the revenue in the creative services side as well as the technology business for the March quarter and a lathe chunk of that is going to flow to the EBITDA side. If you just look at our EBITDA margins, we were for the first quarter in low single digits. We have already gone into the double digits and my expectation is for the March quarter, we should be in the high double digits in relation to the EBITDA margins.