The visual effects of these films were done by an Indian company that has made these movies a thorough visual delight and provided millions worldwide with pulsating entertainment and ever-lasting memories.

Yes, We are talking about our next research IDEA

Phantom Digital Effect Limited (Phantom FX)

A Company that works passionately and diligently behind the Scene for hundreds of movies and documentaries to Bring Your Imagination Alive on screen

WHAT IS VFX?

Visual effects (VFX) refer to special effects that deeply reflect the story’s visual representation

VFX has evolved to deliver sights that cannot be filmed. This procedure involves the incorporation of live-action footage as well as the imagery created to create realistic scenes. It is expensive and requires considerable investment, which involves creating a large creative workforce, big state-of-the art studios and electronic instruments. Additionally, it needs an uninterrupted power supply and good cooling capabilities

Fun Fact

10% EVERY MOVIE IN ANY GENRE ACCOUNTS FOR 10% OF VFX USAGE

90% of all movies have some form of VFX involved

Before we move further , lets see what they do through a reel

https://vimeo.com/742656903

About the Company and Business —

Incorporated in 2016, Phantom Digital Effect limited is a creative VFX studio that excels in creating jaw-dropping visual effects for leading movie/ documentary makers worldwide and in India. Company contribute to the production, pre and post production of feature films, web series and commercials. Besides working directly on a particular project, they take up subcontracts for large VFX studios.

PhantomFX specializes in various VFX services

• Completing a Shot with Final Compositing
• Creating 3D Elements, Photoreal creatures, and Environments
• Rig/Wire Removal, Paint cleanup, Rotoscopy
• 3D MatchMove
• 3D Animation (Story Board, Animation)
• Pre-visualisation
• Game Cinematics
• Fire/Water Fx and other natural phenomena
• 3D Ride films animation

Some stats

Geographical presence –Company has three state-of-the-art studios in Chennai, Mumbai and Hyderabad, India

And has marketing teams at Los Angeles, Vancouver and Montreal

Clients –500+

Employees/ Artists -500+

Office space 39000 Sq ft

Repeat clientele ~46%

Clients associated for more than 5 yrs –25%

International business vs Domestic business 40:60

Strength

Promoters have significant industry experience and have been instrumental in the Company’s consistent growth

Esteemed clientele with strong relationships

Good work done in past to showcase and bring new clients

Triggers

Phantom FX has recently acquired a new studio cum office space in Mumbai, Hyderabad and Chennai with the capacity to accommodate ~150, ~60 & ~50 employees, respectively.
Phantom FX plans to open office cum studio space in London and Dubai shortly

Latest update in 21Sep23

Planning to hire 2,000 more employees in the next two years.

Targeting significant contribution from the OTT sector and expects at least 50% of revenue from international operations.

The global VFX market is expected to grow from US$28.81 BILLION (2022) to US$65.45 BILLION (2030) AT 10.8% (CAGR)

According to an Indian I&B Ministry estimate, between 2023 AND 2024 the domestic VFX space is expected to GROW AT 30% (CAGR)

Increasing use of digital video streaming platforms and high-quality content has positioned VFX as an integral part of the OTT evolution

Expansion of OTT services: The proliferation of smart devices like smartphones, HDTVs, laptops, tablets and subscription-based video streaming services in both advanced and emerging economies are driving the growth in the VFX industry

Owing to the rapidly growing demand for OTT content driven by low data charges in mobile broadband, the Asia-Pacific region is expected to witness the fastest market growth till 2030. India and China are likely to surpass the continent over the medium term

Demand for highly realistic and super-quality content: Worldwide demand for high quality realistic content is driving the demand for the market. VFX alters, creates, replaces and enhances live-action media to include effects that are otherwise impossible to capture

To promote the animation, visual effects, gaming and comic sector in India, the I&B Ministry of India formed a task force likely to create nearly 2 million jobs in India. AVGC XR (Animation, Visual Effects, Gaming, Comics, and Extended Reality) Promotion Task Force recently submitted their plan with several recommendations to the Government.

Plans to foray into animation services space and tap allied field of gaming which requires extensive VFX by leveraging its capabilities and experience.

VFX Tailwinds emerging

VFX grew 30% to reach INR50 billion in 2022

• From delivering back-end services only, India has now emerged as the provider of turnkey services – from pre-visualization to final rendering. This also means an increase in both value and volume of work coming India’s way
• Indian creators investing in Advanced VFX and virtual production companies
• Domestic players expanding their base

• Tentpole movies like Avatar etc have always been heavy on VFX, and continue to be a major draw for audience across theaters as well as on OTT platforms globally
• The major draw in OTT today is episodic content across platforms. This content draws heavily on VFX and is the second-largest addressable market today
• There has been a 100% increase in high-budget films (INR100 crore or more) in India in 2022 over 2021, which increased the demand for domestic VFX services
• Large budget films tend to spend 25% to 30% of the entire budget on VFX. The corresponding number for a low to mid-size film is 10% to 15%

• Top global VFX players are turning to India to leverage the cost arbitrage that India continues to offer as sequels are generating a lower return in many cases. This will further increase the revenue from service exports
• Studios are embracing technologies like virtual production, machine learning and artificial intelligence. This is helping streamline the workflow with quicker iterations, thus improving efficiencies further
• Availability of capital for infrastructure and technology, and skilled talent are the two major challenges for growth in the segment

Top global VFX players expanded into India to leverage the cost arbitrage that India continues to offer

► For a global VFX player having operations in India, Indian VFX artists cost only one-eighth of the cost incurred on hiring artists in the UK or North America16
► In the last two years alone, the Indian visual effects industry has created 60,000 jobs, with studios like MPC in Bengaluru going for an extensive hiring spree
► In 2022, five global VFX players, including ILM, have either started operations or announced their entry into the Indian market

New subsidiaries, Offices, Capex plans, Orders, QIP

The company has recently been awarded a prestigious contracts worth Rs. 62.5 Mn which includes a significant deal valued at Rs. 40 Mn, in the field of international movie production.

Company has received work order from Netflix (Netflix Worldwide Entertainment, Netflix US and Netflix India Originals). VFX for Project includes Netflix-branded audio-visual content, whether produced directly by Netflix or licensed from a Licensor for exhibition on Netflix OTT. Time period of the order is 4 years with extension option for another 2 years. Estimated order is INR 120 Cr over 4 years.

Total order book from May23 onwards is 200cr approximately (100cr is estimated execution order for FY24)

Added 50cr more in Jan24 in order book from KJR studios after recent success of movie Ayalaan

Jun ‘23: BoD has approved the incorporation of a wholly owned subsidiary of the Company in London, UK. This will leverage the growth opportunities in the international market and avail the maximum benefit of the resources available. The business of subsidiary is in line with the main object of business of the Company.
Dec ‘22: Company has been endorsed as an Amazon-approved VFX studio. The same is notified to all Amazon productions. Due to this development, it will be able to provide various VFX services for Amazon’s production.

It has also been qualified for the Walt Disney Vendor Evaluation Program. It is authorized to receive content from Walt Disney Studios and/ or Television groups. There will be an increase in the total number of OTT Projects with the active participation by Amazon and Walt Disney for the same.

DNEG, one of the world’s leading visual effects and animation studios for feature film and television, has approved the Company as an Outsourcing Vendor to handle various assignments pertaining to their feature film, television, and multiplatform content. This association with DNEG will further boost Company’s order book and further enhance the quantum of projects.
Dec ‘22: Company announced its opening of a third office with the ability to accommodate 50 employees in Chennai.
Nov’22: Company is on the verge of completion of establishment of a new studio cum office in Bandra, Mumbai. Once operational, it will be able to accommodate 250 employees and will be equipped with infrastructural facilities for VFX studio to expand the services of the Company.

Openings recently in the company

QIP of 80cr done with renowned fund houses at 412Rs/share. What caught my eye is expansion in Gaming and Animation space

Success of Movie Ayalaan

15Feb 24 update on process of acquiring a company

Certifications and Awards

Phantom FX is TPN Certified, among the few in India with this coveted watermark.
This certification means that we are a ‘data-secure ecosystem’ that meets the rigorous standards of the MPAA.

• Excellence In Animation and Visual Effects In Times Business Awards 2022
• Company of the Year In Outlook Business ICON Awards 2023.
• VAM Awards 2022 for Best VFX Shot Award for the Movie, Dangerous
• VAM Awards 2023 – Best Simulation Effects for the Movie, Beast
• VAM Awards 2023 – “Best use of Previsualization” for the movie Beas

Financials

Management Guidance
Revenue is expected to grow by ~75-80% in FY24 led by inflow of demand for our services and effective execution of order book.
EBITDA margins is expected to stay within a corridor of 33-35%

Jun23 results shows management walking the talk

Skin in game along with FII and DII increasing stake

Valuations

Management guides 100cr revenue approximately leading to bottom line of approx. 22-27Cr

Estimated EPS 20-23, PE range 20-50 leading to price range of 400-1050

That means we are very close to low valuations

Technicals

on 27th Oct23

Interesting Pattern on 5dec23

Support demand zone seems to be respected in recent downturn

RISKS

Increasing assets and employees, if not ably supported by orders, can turn out to be a problem

Increase in trade receivables as business grows is an issue which needs to be monitored very closely

Just 1-2 bad reviews, bad work can lead to downfall of company faster than we can imagine. In simple words, clients will come because of work quality

Valuations –Company though looks undervalued considering the growth potential, but if growth stalls or new orders don’t come at an anticipated pace, then these valuations may turn out to be a trap

Heavy Dependence on Exports–Company and industry in general is dependent on International assignments. Recent strike by artists in Hollywood crippled the revenue in second quarter of H1FY24

Risk of talent poaching— The attrition rate in the VFX segment in 2022 was 25% to 30%. High poaching of mid-level talent was also observed in the segment. Almost all industry leaders were concerned about the inability to find technically skilled employees to meet the opportunities provided by the high global and domestic demand for content –Companies are working in it by implementing training programs to acquire, retain and up-skill talent

Competition: The high-margin business and its growing opportunities is attracting a number of players into this field which is increasing the competitive intensity.

Technology: VFX studios require cutting-edge technology and software to produce high quality visual effects, which can be expensive to acquire and maintain. Additionally, keeping up with the latest technological advancements can be a challenging task.

AI tools are posing a threat where with use of AI tools, movie can be created without much effort and labor. We see this as an accomplice for the company where such tools help to add value along with human creativity, Read few such article on AI impact and usage in VFX

https://rossdawson.com/futurist/implications-of-ai/comprehensive-guide-ai-artificial-intelligence-visual-effects-vfx/

AI in Visual Effects and the Rise of NeRFs

Timeline issues: The VFX industry faces is the increasing demand for visual effects combined with tight project timelines. As clients demand high-quality visual effects in less time, VFX studios often have to work overtime to deliver the final product on time. This can lead to employee burnout and a decline in the quality of work produced, ultimately impacting the reputation of the studio

Disclaimer – Analysis is NOT a BUY/SELL/HOLD Recommendation. It can be used for educational purposes. There can be lot of things which have been missed in analysis either due to lack of information or oversight etc.. Do your own diligence & contact your expert financial adviser before making any investment decision.

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