Phantom Digital Effects Limited

[manhar]

Phantom Digital Effects Limited

Incorporation dated February 2, 2016, a Certified Trusted Partner Network (TPN) company, full-fledged creative VFX studio, based in India with offices operating in US and Canada only for procuring orders. They provide high-end visual effects solutions for commercials, feature films, and Web series and all sorts of creative VFX works.

The company’s specializations include

1. Completing a Shot with final compositing
2. Creating 3D elements, photo real creatures, and environments
3. Rig/Wire removal, paint clean-up, rotoscopy
4. 3D matchmove
5. 3D animation (storyboard, animation)
6. Pre-visualization Game cinematics
7. Fire / water Fx and other natural phenomena 3D ride animation
   
   

Some of their Recognized work

VFX REEL IND 2020 on Vimeo (Check this video you would find most of the above shorts and enjoy the video)

Business Model

1. Pre-production: Pre-production is the initial phase where the planning and preparation for a VFX project take place. It involves conceptualizing, designing, and organizing the necessary resources and elements for the visual effects

2. Production: The production stage involves capturing the live-action footage or gathering the necessary elements to be used in the visual effects shots. This phase typically takes place on set or during the principal photography of the project

3. Post-production: Post-production is the final stage where the captured footage is combined with the visual effects to create the finished product. This stage involves Color Grading, Sound Design and Music, rotoscoping (masking out elements), 3D animation, CGI (Computer-Generated Imagery), particle effects, and compositing

Business segment

1. The company charges close to 9k to 12k for per man day to domestic clients and close to 14k to 20k to international clients . They plan to increase the international segment to 50% of revenue which would increase the margins and will have better realization.

2. The company has close to 360 artist taking 50% as the geographic split, 10k and 17k as per man day realization (domestic & international) and average of 220 man day the revenue generating potential with current employee base is 100cr

Revenue Recognition

1. The company received 15% to 20% advance payment before they start the project .

2. Based on work completion they keep invoicing the client now this is where the receivables build because the allow 30 t0 40 days to client to clear the payment.

3. Once the entire project is completed before the delivery the client has to settle all the milestone payment and the final payment if the payment is not made the project will not be delivered.

4. The company has close to 15.7cr of receivable as on 31st march 2023 but out of this they have collected close to 13cr and the balance is only 3cr which they expect to collect in coming time

So in a project between the advance payment and final payment they recognize a lot of revenue which they actually don’t receive but one the project is done the entire payment is settled.

Promoter and directors

Mr. Bejoy Arputharaj Sam Manohar, aged 39 years, is the Promoter and Chairman & Managing Director of the Company. He holds degree in Bachelor of Science in Computer Science from Kalinga University. He has been designated as Chairman and Managing Director of August 8, 2022 for a term of 3 years. He has an experience of around 22 years in the Industry. He is the key driver of the growth of the Company at present level. He is responsible for the managing and supervising operations, expansion of business, sourcing new projects and overall management of the business of our Company. His abilities have been instrumental in leading the business of the Company.

https://www.linkedin.com/in/bejoyraj/details/experience/ (entire experience of promoter is here)

Growth

The biggest player is DNEG which is a British motion picture visual effects and computer animation and stereo conversion company that was founded in 1998 in London. They have over 6000 employee across the globe with more than 4000 in india.

They are expecting to grow revenue at 25% CAGR from FY22 to FY26

https://investors.dneg.com/wp-content/uploads/2022/01/Project-Infinity-Investor-Presentation-1.25.22.pdf (Their latest investor presentation)

India VFX industry

Between 2019 and 2024, Animation and VFX segment is expected to grow at 47%

Media and Entertainment Industry in India, Indian Media Industry (For better understanding of growth and source)

India contributes to about 5% of the total industry and 95% is still done by the international players which shows the size of opportunity ( Source concall)

Management Guidance and recent development

1. Revenue is expected to grow by ~75-80% in FY24 led by inflow of demand for our services and effective execution of order book.

2. EBITDA margins is expected to stay within a corridor of 33-35%

3. The current order book comprises of 15 under execution orders with total contract value of ~Rs.700 Mn. expected to be completed in a period of nine months. Further order inflow worth 240 Mn. are expected from a large OTT platform.

4. Boasts of impressive delivery capabilities backed by ~600 employees in creative space and Endeavoring to add another ~400 employees by FY24 and they plan to take it to 2000 in a few years

The company is trading at 25 times price to earnings and if executed as per the management guidance the company is trading between 15 to 17 times FY24 price to earnings.

Competition

This is an extremely competitive industry and the biggest resource here is the employee of the company. The company keeps training 50 to 60 employee on a 3 to 6 monthly basis which helps them to increase their size and cater the demand.

They differentiate themselves from being a creative studio rather than a skill based studio
2022 Alpha Ideas SME Stars - Phantom Digital Effects Ltd - YouTube (Check this out form 20th minute for difference and then see the entire video)

Top VFX Companies In South-India - vfxexpress (Some of the top competitors)

As discussed DNEG is the biggest competitor with 4000+ employee in india and PDEL aims to reach 2000 employee in a few years.

Risk

1. Success is dependent on their employee. Their ability to attract and maintain people qualified technical personnel, will affect the results of operations and financial condition

2. They have reported negative cash flows from its operating activity, though we know how receivables are created and collected there is still some risk of they becoming bad

3. Company operates in the constantly evolving VFX market, which is subject to rapidly changing clients behavior and tastes. It requires it to quickly react to changing technologies, market dynamics and clients behaviour and preference

4. They have substantial working capital requirements and may require additional financing to meet working capital requirements in the future

5. Highly competitive and the relationship of the company with film producers determine the possibility of future contracts.

6. 70% of revenue from top 10 clients

7. AI in VFX (did not understand this properly will put more time here)

100% Growth in Niche Micro Cap Stock?? - YouTube (must watch video by value educator)

PHANTOMFX_14022023191443_PHANTOM_DIGITAL_EFFECTS_LIMITED_IP.pdf

Special thanks to Sahil Sir for bringing this company to my notice and giving few important points

Disc invested

[Aksh_Bera]

@manhar Can you mention how do they get orders? As you mentioned it is a very competitive Industry.

[manhar]

Hi Aksh,
There are few factors mentioned below

1. So this majorly depends on the ability of promoter and their marketing team to get new clients and their relationship with producers, studios so that they can get the work again

2. They retain 8 out of 10 clients which come to them so they get repetitive orders from their previous clients. Their top 10 client as on june 2022
   

   

3. There is also a function of size here, So as you get bigger and bigger you start getting qualified to work for big international players and ott players like they are now an amazon approved vendor, they received recognition form walt disney, approved as a vendor for DNEG. They are also a go to vendor for Netflix india ( as per the concall)

4. They are expanding and opening more offices internationally. Now they are planning to open one in Vancouver which will not only be for front ending but will also do VFX work. They recently incorporated their subsidiary in London and they are planning to take their headcount to 2000 in next few years.
   

   

5. They also said that they are a creative studio and not a skill base studio (the difference is explained above) So as per the management majority of Indian companies are skill based so this differentiates them for rest of the companies. They are a TPN certified company which also differentiates them form rest of the small companies.

6. The overall industry is growing at such a rapid pace that there is enough for all of them. Like DNEG is expecting 25% growth between 2022 and 2025 so the pie is increasing and as said india only accounts for 5% of the global market share hence huge opportunity.

7. They already have a strong order book of 70cr which they would execute in next 9 months.

So these are basically all the factors on how they will get new orders and how they would keep growing despite lot of competition.

[ChaitanyaC]

Years ago I used to observe then names of visual effects artists who have worked for Hollywood films, and there used to be many Indian names, don’t remember the company names. And there used to be one company Pentamedia which provided graphics work, probably the first one I know, which was years ago.

Coming to PDEL’s recognized international projects given in the first image, most of the names are old, does this mean they are dependent on Indian movies and not getting international work or despite getting some work from US, it is negligible and as such not quoted?

VFX in itself is acclaimed many times, and the contribution from India here is not recent, I think Indian animators have been working for more than 15 years or so. There are institutes which provide educational services and train them. So if PDEL is not getting foreign work, and if this is a medium size company, then similar size companies also must have been dependent on Indian work. And I think there isn’t any major difference between the end product delivered, the work might be a commodity.

Have you read about ILM, or the companies which provided VFX for Pixar, this could provide a comprehensive look at such a business.

No investment, don’t follow anything, saying from what I remember, so there could be errors.

[Debojit_Kangsa_Banik]

Impact of AI on VFX Industry by

• Keitan Yadav, the COO of Red Chillies Entertainment, believes that while AI enhances efficiency and delivers more realistic outputs, it is unlikely to replace humans completely in the VFX sector.
• Yadav states that certain jobs may speed up or not be required to be sent to India anymore due to automation, but human intervention will always be critical in the industry.
• Global studios have established a presence in India due to the existing film industry and readily available workforce. Yadav predicts a promising future for the VFX industry in India.
• While generative AI tools can assist with certain tasks, Yadav emphasizes the need for a professional setup and level to consistently deliver high-quality animation and VFX.
• Yadav acknowledges that AI has the potential to automate many processes currently done manually, but it may not provide perfect results initially.
• Yadav believes that as research and development progresses, more tasks will be taken over by AI-powered software in the VFX industry.
• The VFX industry in India uses standardized software and hardware that is also used globally, so advancements in AI technology will impact studios worldwide.
  https://analyticsindiamag.com/red-chillies-coo-says-ai-is-unlikely-to-replace-humans-in-vfx/

[manhar]

@ChaitanyaC

they are dependent on Indian movies and not getting international work or despite getting some work from US, it is negligible and as such not quoted?

1. Hi Sir in FY22 and FY23 their revenue from international is 40% (This is significant) and as mentioned we can see them opening new offices outside india. They plant to take it to 50%

2. Yes VFX is there from a long time in india but in the last 3 to 4 years it has accelerated. The share of VFX in indian movies is 10% to the total budget when compared to 20% to 25% in Hollywood. (as per concall) if you see the last 4 to 5 big south movies (RRR,KGF,BAHUBALI, PUSHPA) big money has been spent on VFX (Like the tiger scene in RRR was so real) this was not the case 10 years back.

Movies like brahmastra got the recognition because of VFX and movies like adipurush are being made fun of because of VFX. VFX has now become a very important part in the last 3 to 4 years.

Hence we can see industry leader DNEG guiding for 25% growth and the industry is growing at double digit globally.

@ChaitanyaC

Have you read about ILM, or the companies which provided VFX for Pixar, this could provide a comprehensive look at such a business.

No, will look into it

[ChaitanyaC]

Hollywood has a very wide reach, global reach, and there is literally nothing that they won’t do or can’t do if it is profitable, effects based themes one among them, for more than 7 decades. While we were fighting for our independence, they were making animation. So cartoons, animation, VFX are part of their culture. There are VFX awards given exclusively by people who work in the field. We won’t reach that level, we have our limitations. Whatever recent triumphs we may have got, personally I would call them one off, occasional flashes in the pan, recency.

Vision is unique, creativity is unique, tech is a commodity. So just like service oriented IT companies have been thriving in India for more than 25 years, if VFX is also outsourced to India from US and increasing, then we can say the pie is getting bigger, and every effects company in the business will flourish. If not, then I am not too sure of the revenue that companies generate depending on Indian projects. Pixar does not stop just because Lightyear bombed, they can, we cannot. So my take is that US revenue must grow, as it is stable and dependable.

There is a lot of material out there, if one believes in this story, up to the level of exhaustion. One can have a very detailed understanding of the business, right from the vision of the makers, to the number of shots, the technology they have used, to the recognition and awards given.

No investment. Have a broad, general idea about the business, with some knowledge about the whole concept, so making an argument.

[y21]

You have covered most of the business so let me chip in my thoughts.
I think all of FY24 is probably discounted into the price as of now.
Management has guided for around 100cr topline this year. Converting 35% EBITDA margins and taking around 28-30cr as bottomline, stock is trading at around 15x FY24 Earnings. A little bit expensive but going forward in FY25 and FY26, I feel sustained revenues above 100cr and a Topline of 150 cr in FY26 will probably take bottom-line to around 42cr at which I feel, a 800-1000cr Market cap should be justified.
Another negative point is the cash flow but I think over the next year we should see the conversion.
I did quite some due diligence and valuations looked reasonable during March 23 but I feel the margin of safety is very less at these levels.
Personally holding till the story plays out, bought at lower levels.

[sahil_vi]

There are some very interesting developments in Phantom & VFX industry in general that one has to watch out for. Keep in mind that the co is 60 cr only & is a microcap. one cannot expect HUL type moats here. For a microcap, what should the framework be? Here are my thoughts:

1. Base rate of success: Look at base rates here: Services exports out of bharat is growing at double digit even today, VFX industry itself is growing at 12% at a global level, VFX exports out of india (i dont think this is a tracked macro but my suspiction is this must be 15-20%). One of largest executor DNEG is growing revenue at 17% CAGR & Profits at 25%
   
   
   
   Base rate of success increases. Because pie itself is growing at 12% or more, competitive intensity becomes lower (there is enough & more for everyone out there). IT & NBFC are some of best scalable biz for small companies. VFX lies somewhere close to IT (Digital animation, creative services) & has similar base rate of success.
2. Execution Capability: The promoter is ex-Prime focus. Led their LG team. Their clients include Bahubali, Bahubali 2, RRR, Avengers, DC, Paramount, Netflix, Amazon. My suspicion is that they will execute good projects in future as well. 9% attrition in last 12 months. Which is pretty good compared to any IT co. So just ask yourself why attrition is so low. Receivables have come down from mar-31 15cr to 3 cr now.
3. Promoter integrity: From whatever feedback i have received from fellow investors, promoters seem to not be crooks (I am always happy to seek disconfirming evidence & be proven wrong). Receivables have reduced as explained in this video: 100% Growth in Niche Micro Cap Stock?? - YouTube
4. Industry structure: 90% of VFX companies in india simply do processes & not creative work. Phantom is in higher end of VFX services. Involved in creative, pre production, & it will not be easy for a random VFX studio to come in because they lack the knowhow & processes to do creative work. Phantom creates digital assets like tigers etc, These digital assets are cumulative. They reduce the incremental cost of implementation & have a operating leverage effect since the asset is charged off in 1st use but can be reused at 0 or low costs in future iteration. This is a very interesting aspect of industry. Some of their VFX has been charged 30,000 rs per man day. This shows the value addition of work they do. 60% of employees are in creative, 20% in management, 20% in process (low value work). This shows the value addition of the work that phantom does. Interestingly dneg & phantom are NOT just competitors. They collaborate as well since sometimes dneg might not have required manpower or skills and same for phantom. Both are vendors for each other. Phantom says they are in top 3 of India (probably on creative VFX side) after red chilli VFX, prime focus / dneg. This might be a bit of exaggeration so needs independent validation.

Should be very interesting to see how this one plays out.

Disclaimer: Invested, biased

[RocketMan]

1.5 Hour Conversation With The Promoters - 100% Growth in Niche Micro Cap Stock?? - YouTube

Check out for more deeper information on the company.

[RocketMan]

@manhar

dneg

DNEG is owned by Indian Company Prime Focus which too is listed.

[SambitMishra]

Hi All!

This is going to be my first post on this platform. Not a finance guy and my understanding of the same is limited. I am only commenting because I work in the industry that Phantom services i.e. I presently write screenplays for the shows and movies (in India) that vfx firms work on and thus might have some insight into the working of Phantom. Plus, I used to be an advertising writer from 2000 to 2017, another industry that Phantom services.
My understanding is that from 2000 to 2015s, if the vfx/animation job was uncomplicated and the makers could provide ample reference to copy from, the makers would go for Indian firms. Else for any job that required actual creative thinking and execution, we used to prefer VFX firms in Poland, UK and even US if the budgets permitted.
Things have changed considerably since then. A lot of Directors and Production Houses trust Indian VFX firms for creative jobs. Almost all of non-Netflix-non-Amazon shows get their VFX done by Indian firms. I believe Phantom has signed a preferred vendor status with Netflix India that would give them a decent work flow from Netflix as well.
Another point to note is that the relationship that the VFX guy has with the Director/Show Runner/Producer is almost similar to that the Director has with the Cameraman or the Editor. It is based on extreme trust and comfort (almost like a husband-wife). Once the Director is comfortable with a certain VFX firm, he/she will fight tooth and nail to ensure that the VFX firm gets the job for his film/show. I believe Phantom has a similar relationship with the makers of Bahubali, Vikram and a lot of south based production houses that gives the company a solid footing in that market.
In Mumbai, things might be different where Pixion Prime Focus and a host of other smaller outfits hold sway. But if Phantom manages to build relationships in Mumbai basis their work folio, things might look up for them. It is not going to be easy. (Although Prime Focus is not really seen as a creative shop in the industry and is not trusted with high end jobs.)
I do not have a lot of information about how International Production Houses operate. But one thing is certain, budgets are under pressure everywhere. And SOHO, MILL and Poland based VFX houses might be priced out by Indian firms in the long run only if they can convince the makers in LA that they are not mere copy-paste guys but can actually visualise and execute the jobs.

Not Invested. Considering.

[Vivek_Shetty]

Thanks a lot for the great insights into the industry. Would be grateful if you could share your thoughts on a couple of other points as well.

1. As an insider, what is your opinion on the disruptive potential of generative AI for Indian VFX companies? Will their cost advantage disappear since productivity might improve significantly with AI tools?
2. Also, any idea what the attitude of Indian VFX companies in general, and Phantom in particular, is to the new tools? Are they adopting them at a fast pace?

Would love to hear others’ thoughts on these as well. Thanks.

Disclosure - not invested, worried about obsolescence risk.

[SambitMishra]

Hi Vivek,

For the information that you ask for, I would need to talk to a few of my buddies in the VFX firms in Mumbai. This might take a day or two. Shall get back to you as and when I get the dope.

[Debojit_Kangsa_Banik]

Since its listed in SME market, only allowed to buy 1 lot of size 600 minimum,
Is there any other way to buy less number of share?
Quite interested in it but dont want to give so much portfolio exposure.

[ChaitanyaC]

No unless they migrate to main board, it is not possible to buy less and can only be bought in lots. And obviously the conviction need to be high when buying such small companies, if we don’t have big capital.

[sandybansal]

@sahil_vi What kind of skillsets are required and are there enough institutes to train people for this profession? If not, then 9% might not be comparable with IT sector?

I didn’t find much from my LinkedIn search.

[P2018]

I just have one question looking at their RHP. How did the company manage to generate 22 crores of revenues with just 1 crore of net fixed asset or 2.8 crores of gross block?

[manhar]

@sandybansal

If not, then 9% might not be comparable with IT sector?

Hi, So even i could not find much on this but their biggest strength is their core team which consist of 80 people who are there from last 5 to 7 years (like permeant employees) this is like 13% of work force. You can also see this video from 45th minute https://www.youtube.com/watch?v=yG-h001GHD4 . We cannot take this worlds literally but 8.9% is very impressive.
Manufacturing, services log 8.27 per cent attrition in Q3: Report - The Economic Times
This article can give you a good understanding about how good their attrition is. I think for a service company it is brilliant.

@P2018

How did the company manage to generate 22 crores of revenues with just 1 crore of net fixed asset or 2.8 crores of gross block

Hi, All their offices are on lease so HARDWARE is the biggest cost for them (something like Ksolves). Have a look at this from their DRHP.

I think their current gross block is like 10cr and revenue generating capacity of 100cr. (So 10X)

EMPLOYEE CORELATION WITH REVENUE.

@manhar

The company has close to 360 artist taking 50% as the geographic split, 10k and 17k as per man day realization (domestic & international) and average of 220 man day the revenue generating potential with current employee base is 100cr

Actually if we see what they have to deliver they already start building a year back. Like roughly they have a 100cr capacity and this is what they plan to deliver in FY24. So they already hire and train the skill set for the future.

Now we can kind of project their revenue expectation. They are targeting 1000 employee in FY24.

And then their medium term goal is like 2000 employee (This is almost half of what DNEG has in india)

@SambitMishra thankyou for valuable information

[geneva]

Top company in This sector.Prime Ltd. It Looks scary. can someone explain reason behind this. does phantom fall into same category?