Phantom Digital Effects Limited

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https://nsearchives.nseindia.com/corporate/PHANTOMFX_17012024133631_PDELPressReleaseJan2024Signed.pdf

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Mark these words from Mr. Bejoy Founder and CEO of Phantom digital

Success of Ayalaan movie will be a transformative stepping stone for the rise of Indian VFX industry and Indian cinema

I am sure Ayalaan, HanuMan movies success would have become talk of the town in Industry circles

Sharing my thoughts on the same

What it means for Indian VFX Industry and Indian Cinema

  • Hollywood genres like Sci-Fi / Superhero movies which were largely un attempted or half attempted before can be made in India …HanuMan director has plans to make some 10 other Superhero movies, one is already in pipeline… Ayalaan director Ravikumar is only interested in Sci-Fi movies and his next also will be same including Ayalaan 2… and I am sure more movie makers will be already thinking in similar lines

  • Budget is not a constraint, we can do it below 100-150 Crs …unlike the previous VFX heavy movie hits like Baahubali, RRR

  • Technical capabilities and Quality is not a constraint…We don’t need to hire Hollywood Studios for making these kind of films…Indian VFX studios like Phantom digital has proven that they can handle large & complex projects alone

What it means for PhantomFX

  • Brand Image - Ayalaan has put PhantomFX in one of the top Indian VFX studios to work with …It has become a popular name for Tamil audience …they would be interested to have their favourite Hero project handled by PhantomFX vs any unknown company

Note, Brand image also plays a key role in attracting talent and retaining them

  • More projects - Given the quality and technical capabilities a directors top choices will have PhantomFX in the list…Also

  • High chances are that Dir. Ravikumar will be working again with PhantomFX for his next projects

  • Ayalaan 2 - Director, Producer and Hero at different times mentioned that they have plans for Ayalaan 2 (movie too ends with scope for part 2), but I guess this will depend on success of its Telugu, Hindi versions that would give them confidence and clarity on what scale it has to be taken up…with IP rights, for sure Phantom will be working for this series too

  • Co-producer model - Unlike a service provider who is not worried about the success of the movie, producer will be more than happy to work with companies like Phantom willing to share risk and also providing a dedicated team putting their heart out there working right from the ideation stage ensuring that their baby is delivered with utmost quality…

This model looks a win-win for both … Phantom would bag more projects and bigger pie of VFX work along with IP rights for VFX models…but, given the risks in production Phantom has to make sure that their Investments are secured and 100% recoverable with learnings if any from Ayalaan

Needless to say about the advantage it gets over its competitors while increasing chances for grabbing more Hollywood projects

Disc: Invested and positive on VFX Segment

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50 Cr order from Ayalaan producer, KJR Studios

In the current business world people want every transaction to be profitable come what may… But, we are forgetting that there is something called LTV (Life Time Value) of a customer …It is much much bigger than the short term pain / deviation you take making adjustments to your customer needs

Needless to say, the message you send across by your positive acts to other potential customers …btw, yesterday actor Surya appreciated PhantomFX for their excellent VFX work…I believe there will be more to come by and in different forms

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Following the resounding success of the original Ayalaan, Phantom visual effects (VFX) studio, joined forces to push the boundaries of VFX and CGI with the highly anticipated sequel, Ayalaan 2.

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I was studying companies similar to phantom, and I found out about Prime Focus Company, which is also engaged in similar activities. I have observed that their balance sheet shows a consistent increase in debt year on year. Does this indicates that the sector is capital-intensive, and similar to Prime Focus, they might be incurring increasing debt due to plans for acquisitions and investments in technology?

Phantom went the QIP way for such technology introduction.

That will further dilute the equity

Hello. I found on page 115 of the annual report about a private company which is owned by the directors of the company. The name of the company is PhantomFX Studios Private Limited. Has the management explained about the existence of this company? Why do they have it at all?

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Is it a sister concern or subsidiary? What is the nature/purpose of the transactions between these companies? How much is value of the transactions?

This is not a subsidiary or a sister concern. There are no transactions between the listed entity and the private company.

I am just raising this because I want to understand from the community if someone has asked the same question to the Investor Relations team or the management.

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The concall is scheduled for day after, so if anyone is attending it they can ask the same to the management.

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I am reproducing my blog post on the company here

Business Model

The company provides visual effects services to the entertainment industry. Specifically their clients are movies, OTT, gaming studios, advertisers. They charge as per man day. So if they have allocated 1 person to work on the visual effects of a movie, then they may charge 15,000 per man day to the movie production house. In addition to this the company has recently ventured into movie production and distribution too.

Founder and Management

The founder is Bejoy. He has about 2 decades of experience in the visual effects industry. Before starting this company he was working in Prime Focus which is another big visual effects company out of India. He understands the whole cycle of visual effects pretty well. As a VFX supervisor he has ample experience of working with movie directors and trying to create artificial worlds which are crucial to the storyline of the movie. His top management comprises of people who have worked with him for a long time. They all come from the same domain and have similar number of years of experience as Bejoy. Bejoy and his family hold about 50% of the company as of now.

Product

This is a services company. They do not have a product. They have a huge labour cost arbitrage especially when serving international clients. The company is trying to become more efficient in doing visual effects by using the latest software and hardware in the VFX industry. The company has also started using AI to reduce the time that their staff spent on purely manual tasks. One more way to productise their offering is by retaining the IP of the digital assets that they create. For example if they create a VFX tiger for a movie, they can license the same tiger to another movie tomorrow. But this product line does not generate any meaningful revenue for the company right now.
Distribution

The founder’s experience and relationships are the biggest driver of distribution. The founder has worked with some pretty big names in South Indian movie industry. As a VFX studio once you deliver good work for a director and production house, they want to involve you in all future projects too. So by spending more time in this industry you build a reputation for delivering quality and that reputation then keeps bringing more work towards you. Now the company is trying to increase distribution internationally by hiring salespeople in those geographies. They are planning to use the salespeople to get them work and to front-end with the client and then 95% of the work would happen from India after that.

The company has also gotten approved as a certified vendor with content producers like Netflix, Disney, etc. This company has some network effects. Clients come to you because they have seen the work you have already delivered. And then you get to deliver more work which against acts as your marketing tool.

Brand

The company is trying to position itself as a creative visual effects studio. They are going out and telling the industry that they have the intellectual capacity to work on any kind of project which requires the VFX team to co-create the content along with the director of the movie. This is a small industry with a limited number of customers globally. The best way to build a brand is to deliver outstanding work and then show it as proof of your capability. This is what the branding strategy of the company seems to be too.

Financials

Revenue growth is strong. The company needs to give credit to its customers. And therefore the more growth we see in revenues the higher would be the growth in receivables. And therefore the company may have to constantly dilute equity in order to grow very fast. The business has limited operating leverage. At least till the time AI makes the whole workflow super efficient. Till then you would have to hire more employees as you keep getting more work. Margins are strong at 35% today. I am not sure if the same margins can be kept intact as the company continues to grow at a quick pace. They would have to build more bench strength and therefore you may have quarters where the margins take a huge hit due to lower utilisation of the workforce. For example if there is a strike by Hollywood actors and screenwriters then the company will not get a lot of new work from international clients during that time. But they still have to keep paying salaries.

Bull case

With AI the time it takes to create good quality VFX will go down drastically. Therefore the company will be able to do a lot more work with the same employee and at the same time charge a lower fee to the end customer. As the price of incorporating VFX comes down, content creators would start using a lot more VFX. Think about Instagram influencers. Right now they do not use a lot of VGX and have to depend on their facial expressions, background music and writing to keep the audience engaged. But if they can get Phantom to do VFX work for them for a low cost and quick turnaround then the quantity of VFX usage would explode. The company is at the cutting edge today of what is happening in the industry. May be they will leverage AI to scale up rapidly and therefore start serving lot of new niche industries like edtech and Instagram influencers. Also, the company may productise its own offerings for these niches where the customer base is mass. For example Phantom may create an app which would use APIs from AI model providers and Phantom would train that model such that any Instagram influencer can use the Phantom app to manipulate the VFX by himself using language prompts.

Bear case

AI becomes really good in delivering VFX and the company is unable to figure out how to combine the advances in AI with the capabilities of its own workforce. In such a scenario AI would start competing with the company and over a period of time AI would start winning and the company would start to see degrowth in revenue. Or the founder of the company becomes an inefficient allocator of capital and starts spending a disproportionate size of the balance sheet towards passion projects like producing films.

P.S. My internal blogs/drafts for this post are below.

Disclaimer: The views expressed in this blog are personal. I may or may not hold investments in the stocks mentioned.

Sunday, 11 February 2024 at 9:50:16 AM

So I have spent time on this company for the past few days. They create visual effects. What are visual effects? Ever tried to photoshop a photo? Well that is visual effects at its very basic. This company is obviously much better at it and therefore they can accomplish very complicated visual effects. Think about how when you are making a movie like Brahmastra and you want to show Ranbir throwing fireballs. Obviously Ranbir ain’t playing with fire. Instead someone is sitting in front of a computer and then adding fireballs to the whole scene. So that is what this company does. But before I get to that let me first touch on a more basic thing.

Why do we need visual effects? The human mind gets very interested in something which is not ordinary. So when you did not have TV or Cameras etc. we used to go and watch a dance show or theatre etc. Now assume that magically we are living in 1700 and there are human beings who dance throughout the day on a street. Now assume you live on that street. How fascinated will you be with all that dancing on the 1000th day? Probably you won’t be much excited. You will just come back home from work and then just ignore all the dancing on the street and just head into your home. So our mind is always looking out for something unusual. You can say that we are always on the lookout for drama. What is drama? Drama is basically when some story comes to you and you are able to identify (sometimes feel too) the emotions involved in that story. For example think of a short story. Ek thaa raja Ek thee rani - dono mar gaye khatam kahani. This story has a pretty drastic thing happening. Two human beings are dying at the end. But there is no emotion to this story. So you don’t really connect with the story at all. It’s not something you would want to tell other people. Neither did you identify any emotion in this story nor would you be interested to tell it to someone else. But if I were to tell the same story with all the underlying drama about how the two first met, how they connected emotionally, etc. then you would remember more of this story. You will feel connected to the story a bit more because some part of your brain will shout out that hey I have also felt something similar some time in the past. So storytelling is all about helping the consumer connect with the drama of the story.

Now how do you do that? Let us fast forward to the time in which we are living today. There was a movie called ‘Ready Player One’ a few years back. It imagined a future where humanity is spending most of its time in a virtual world. People put on these AR glasses and then they get lost in a virtual world and all their emotions are tied to that virtual world. There is very little interaction with the physical world around them. Obviously it is a movie so there will be some sort of exaggeration. But I think we are seeing the same thing play out at a smaller intensity level today too. Your screen has become your glasses. You wear your screen (phone, TV, Laptop) throughout the day and you interact with the rest of the physical world with that screen. Now again that screen is making everything digitised. So now people who are making products for that screen are trying to find out how can they manipulate the digital nature of that screen to give you something useful. And this includes storytellers. For example 50 years back when you saw a Hindi movie you saw actors who just had their facial expressions and voices and some background music to make you feel something. Today in addition to all that you can put an alien (digitally created) next to the actor. Human beings have always been interested in beautiful illusions. Now with digitisation the kind of illusions that can be created are only limited by the human imagination. Think about a scene where Lord Krishna is lifting a whole mountain on his little finger. Now think how would a storyteller shoot a movie scene like this 50 years back. How believable would that be? Now think about the same scene today. Can the storyteller now make the same scene more believable using visual effects? I think the answer is yes.

We all want to escape reality and now I think storytellers have the tools to make movies or serials or advertisements or games to really help us do that. It is not all bad. As a species I am hopeful we will adapt to this and then we will be able to balance it with our innate humanness. Also, we might use this to become more productive. Think about a geyser mechanic. Can he get some basic training on how to remove a bad wire in the geyser by using Apple Vision Pro and an application which teaches him just that? Think how many people can get trained in the same skill simultaneously. Think how much of this could have been achieved with a human teacher. Now think about how AI will in real time customise the teaching to the needs of each learner in this virtual environment. So screens and the digital world are tools which can be used for both good and bad. And storytellers would continue to use digitisation heavily to tell their stories.

So the demand for visual effects is going to be strong for many many years to come. Now let’s come to our company. They are called Phantom Digital Effects. The founder has been doing this for close to 20 years. Obviously this is something he is deeply interested in. And he comes from a village in Tamil Nadu. People who always have had businessmen fathers or mothers find it really easy to live with risk. Since childhood they have seen their parents handling risk and uncertainty. Therefore it is very easy for urban business families to ensure that their child starts his own business. For everyone else the default setting is something else. If your parents have always been in a job then you have to work extra hard to prepare yourself to live with risk. And therefore mentally you need to be super strong. Or you should be completely in love with something to give up the certainty of a job for the life of an entrepreneur. And this is what our founder did. He worked for others for a long time. And then took the plunge purely out of passion. In his heart he is just a creative artist who is trying to do something which he really enjoys. His other skills are not that great. For example I do not think he understands the financial aspects of the business very well. But he is making up for that by hiring smart people.

So the company today does visual effects for movies, TV series, advertisements and gaming. Most of the revenue comes from movies today. The company is now trying to diversify its sources of revenue and is therefore working to increase business from other customers. Now anyone should be able to do visual effects? After all isn’t it just being able to sit in front of a computer and then understanding how to use a software to achieve a desired result. But this is where the founder is deliberately trying to escape that trap. He is ensuring that the company takes up creative work. Let us take an example. Suppose there is a scene in which the hero is running in a crowded marketplace. Now in this scene if you are just editing out distractions like a rickshaw puller then this is pretty easy work isn’t it. You just ask the director of the movie what all is to be removed from the scene and then you just go ahead and remove it. But what if you were told that the hero will run with a green screen behind him and now you need to create a whole crowded marketplace around him. And the marketplace should have a particular shade of light and it should not have any repeated faces. At this point of time you need to start using your brain. And that is the kind of work that Phantom is focusing on. Visual effects work which requires human imagination and creativity. Not just cheap labour sitting in front of a computer and doing what anyone can be doing.

So one problem I have with this is that this then becomes a people business. As a promoter you don’t really have a product you are selling in the market. Instead you are going to the market and telling the market that you have a bunch of talented people who know how use the requisite software and who have the creative skills to make sure that the director’s vision comes to life on the screen. So now you need to be really good at managing people. And mind you these are people who are artistes. They inherently have a yearning to break the rules. And these are the same people on whom you need to depend to finish projects on time. And then you also need to make sure that you don’t pay such people exorbitant salaries so that you continue to remain a viable option for your customers. This is a services business but unlike the typical IT workforce you have people who are much more free spirited. And people who are not that great with maths. You need to maintain that balance where you are delivering projects on time and still you are not being accused of being a heartless capitalist by your employees.

The obvious strength of this business model is that we have a huge labour cost arbitrage as a country. Our people speak good English and our people have a service mindset. What do I mean by a service mindset? It means that if a client gives you a call on a weekend you don’t mind picking up the phone. Atithi Devo Bhava. The western world definitely has lost this mindset. Rest of Asia does not have our English speaking skills. So all the people in the world who need visual effects services have a great option in India. This is what the company is trying to leverage. They have sales offices in London, Dubai, Los Angeles, Vancouver. But then the actual VFX work happens in India. And this company is not the only one which has figured this out. There are many VFX companies doing something like this in India. There are Indian owned companies and then there are foreign owned companies. So just like IT I think India will continue to gain market share when it comes to being the back office of this industry.

One possible problem is the quality of work that comes the company’s way. Within India I think getting work and context is not much of a problem. India is the only country in the world other than the US where local film and TV hold out on their own. We have superstars and method actors alongside each other. The box office collections of Indian films is far more in India as compared to foreign films. We love our culture and therefore despite being a poor country for the past 70 years, we have always had a thriving movie and TV industry. We get the art of film making. We just never had the budgets. We still have small budgets. But finally we are getting there. So in India itself content making will continue to explode and VFX will continue to get a larger budget of the overall content making process. Think about the Amazon Series Family Man. Even that has explosions etc. And that requires VFX. So VFX sab ko chahiye ab. Kisi ko thoda zyada aur kisi ko thoda kam.

Now in addition to the Indian market or demand for content growing, we also have demand from other countries of the world. Especially the western world. Not only film and TV they also need a lot of VFX for gaming. Globally the revenue made from gaming has exceeded Tv and film. And this is I believe can be a big driver of revenue growth for our company. I am not sure how will the company crack this market. Whether their current skill set is enough to appeal to game studios. But this is a call option that the company has. So western markets will continue to outsource more and more work to India. The only hitch here is how to get real high quality work from the west. Some time back I read one interview of Tony Hsieh of Zappos. He mentioned why his company insisted on hiring call centre agents in the US itself and not outsourcing this to India or the Philippines. His firm sold shoes online. He said that when a customer calls us and says that she was looking to get something like Julia Roberts in Pretty Woman, the agent should immediately get the context. If you live and grow in a place, there is so much context that you absorb. It becomes a part of you. Similarly when it comes to VFX, you will only get a big pie of the VFX work when you are involved with the director and the scriptwriter right from the stage of pre-production. The director needs to tell you that what is his vision for each scene. You need to then give him computer generated visuals to get on the same page. And once you have done that then during actual filming the director would shoot the sequences as discussed with you. Or the director would want you to be on set with him. And then in post-production again you need to be together with the director and make sure that his vision is getting fulfilled. So this is a deep deep collaborative process. Only then will you get really high quality VFX work. That has fat margins. Whether the company has the people to achieve this part, I am not sure. In my opinion they would have to hire expensive American employees to get this kind of work who can sort of shadow the director throughout the making of the film. So this is something that I would be watching out for.

OK. Now let’s talk about the risks a bit. First let’s take on AI. Now AI definitely improves productivity by a lot for knowledge workers. In some case it might make someone 10x more productive even today when this industry is just starting. So I do believe that human intensity would reduce. AI will take care of a lot of skills based work. Now two things may happen. One is that the industry would find demand for this 10x productivity. As a result you will see the cost per vfx unit come down and this would mean you would see more Vfx all around you. Think about Instagram influencers using Vfx to make more engaging reels. The other thing which can happen is that demand does not go up in the same proportion and as a result VFX studios would have to let go of people in order to maintain profitability. I think humanity would always choose option 1. I bought an electric car in July 2022. Earlier when my son did not sleep on time, I used to take him out on a joyride and he used to fall asleep may be after I have driven around 4-5 kms. Now when I came back home it registered with me that I am spending roughly 70-80 rupees worth of fuel on this every night. After purchasing an electric car this concern went out of the window. The running costs of driving an electric car would be 1 rupee a km. And therefore I started taking him out more often for joyrides. In fact sometimes I would go to India Gate just for this and we would drive 50 kms. So that is what humans do. We always want more and the moment costs come down instead of controlling our budget we start consuming more. Think about how many phone calls you now do vs 2005 on your mobile phone. Or how many google searches would you do in a day if you had to pay 2 paisa for every search. So I am operating with the base scenario that demand for VFX is going to explode.

Now who would be the first adopters of AI. I think it would be service companies like Phantom. The employee and his time is the only raw material for a service company. The founder of a service company is always thinking of ways that he can complement his employees with technology so that his employees spend lesser and lesser time accomplishing more and more. So I believe instead of being scared of AI, service companies will make the most of it. They will reach out to those markets which they were avoiding till now because these markets were very small niches. At a broader level, I think AI is going to take away skills based tasks from human beings. Think about how to operate a particular software. That is a skill. If you understand basic English, you can do a course for a few months and start to operate that software now. But AI will not take away the taste that human beings bring to the table. What is taste? Taste is when you deeply understand a space and then decide how to connect the dots to achieve a result in that space. Think about an experienced chef. He can observe a novice cook for a few minutes and come out and tell you whether that novice cook would be good at a restaurant or not. He has a taste for this space. So AI will give this experienced chef millions of novice chefs at his fingertips who can be taught very quickly how to acquire the skill to make something. But whether that something should be made or not in a restaurant setup is something that the chef will determine. Or think about a software architect who is experienced. AI will give him a robot who can write code to take the backup of data in a new database every few seconds. But whether this data should be backed up every second or not is something which the software architect would decide. So it becomes a matter of taste. To acquire test you need to experiment and read up about a space. It takes time and experience to build taste. And that is why in the long term in any industry only those founders would thrive who are deeply passionate about their space. Skill will become a commodity. Taste will remain a luxury. And taste can’t always be bought with money. As a human being you need to obsess about a space over many many years before you start developing a taste. AI can definitely help accelerate that process. So a novice would acquire taste quickly. But at the same time the person who already had taste is not sitting idly. He will take his taste to the next level. So this is a race and only the passionate would survive.

Next risk is that the company will always have high revenue concentration. At least till the time they restrict themselves to depending on the movie industry. Movie making will never be a mass employer. So the people who have the taste for movie making will always be limited. And therefore this is an industry which works on relationships. You need to ingratiate yourself with the best directors in the world and then you also need to keep the few studios happy who corner the bulk of the profits of the industry globally. This is an industry with high entry barriers. And therefore the company will always be sort of holding high trade receivables. And they cant criticise the debtor publicly too. After all they have to go back to the same party for the next project. Whether the company starts developing revenue from OTT, gaming, advertising and whether that reduces their concentration on movies remains to be seen. We are already seeing some of this risks play out. The company is raising invoices but those are taking time to convert into cash. As a result the company has to get some of these invoices discounted and therefore the company is letting go of some margin this way.

Also, there is some diversification for which I have not found a great answer. The company recently paid 17 crores to buy some distribution rights of the movie ‘Ayalaan’. Why would they do that? I am still reading up on the company so may be I will discover it as we go along. But this is a business whose risk profile is completely different from what they are currently doing. And 17 crores is not a small amount for the company. It is like 20% of their balance sheet. So why would you enter such a risky business? I am trying to find out. I have a suspicion that the founder is not well versed with good financial management. One reason is my bias against creative people. I have usually found that they are not good with money. And vice versa. People who work in the financial world are so bland when it comes to art and culture. And our founder here is the creative type. Then in one of his interviews I found out that whenever a financial question came up he asked his CFO to step in and answer it. Is this decision for buying distribution right similarly a bad capital allocation decision?

Then next is that obviously you will want that the company figures out a way to productise some of its offerings. For example lets say using computer graphics they build a tiger for a movie. Now the next time another movie wants a tiger can’t they use the work which has already been done by our VFX company. May be it will save them 80% of their time. And may be therefore Phantom can earn a royalty from such digital assets. This kind of licensing is very common in the software world where software companies write code once and then license it out to whoever wants to use the product built with that code. But I haven’t heard too much from the company on this. Also, none of the people o ValuePickr thread mentioned this being a critical part of the role model for even foreign owned companies. So let’s see if there is any meat to this narrative or not. Because if they continue being a services company which grows at 30% a year then I am not sure if they have a TAM which is growing at that rate. For example if let’s say the content keeps improving in quality and quantity, will human beings suddenly start spending 50% more time every day in consuming content? I dont know? Or will e-books adapt and also start using VFX? I don’t know. With someone like Infosys or TCS you know that the skills of their employees are applicable to what is needed by the whole economy. So their TAM also kept increasing real fast and therefore they did not hit a ceiling even after 30 years of growing at 20%. But what about the demand for VFX? Therefore I would love to see the company start generating some revenue from productising their offerings.

So this is my understanding of the company till now. Let me read up more and update this thread.

Monday, 12 February 2024 at 7:47:05 PM

I have done some more study on the company. I have become even more unsure about the bull case for the company. I can’t really put my finger on the impact of AI on the industry. I am not talking whether the current state of AI is good enough to start replacing human VFX artistes. I am talking about how fast are things moving in the AI space. And my research reveals that no one knows. I saw a couple of videos where on the basis of text prompts we are able to generate 4 second video clips. How good will that software be in a year’s time? I don’t know. Will the creative side of VFX move completely in-house for all production studios? If all you need to do is think, then wouldn’t you want to have that capability in-house? So let me try and sort of expand on this. Currently when a movie or a TV series comes about, it first springs in the mind of the writer. The writer then puts the story down on paper. He takes that story to the producer. If the producer likes the story he will convince a director to helm the whole projects. Sometimes the writer himself is asked to become the director. At other times the director meets the writer and then tries to imagine the story along with the writer. At this stage the director starts involving other people in the movie whose job is to think. For example the director would start involving the music director. The director and the storywriter and the producer and the music director will together think through the story and the music director will then go back and come up with a few possible options for the background music or for the songs in the movie. So a good director would always want to involve an expert like the music director early on in the project. The director wants the whole creative team to feel the story in their bones. May be the male and female leads will also be chosen and will start spending more time with the writer to understand the world of the protagonist. Similarly the action director would also start getting involved. This is how the business of cinema has worked for many decades. But now there is one more director who has started getting involved into projects and this is the VFX director. All movies have big or small VFX requirement. As we go ahead this requirement would start going up. The VFX director is someone who understands the technical aspects of VFX and who can then help the movie director realise his vision using the hardware and software tools for VFX. Now usually the producer would want a VFX person who only works with his production house. And therefore for the producer the VFX director becomes a crucial part of his overall talent requirement. Now the VFX director today can’t do everything on his own. He needs a whole team behind him who would actually sit in front of a computer and build the required VFX. Right now this team is full of human beings. But in the future would it just be the VFX director himself sitting in front of the computer and writing down prompts for generative AI to carry out all the VFX needed in a shot? This is a question to which I am unable to find out an answer. And so this becomes a huge unknown for me.

Now let’s come to other issues that I see with the company. One is that the company mentions that they will get more involved in the movie production business going ahead. What will be the parameters involved for the same? This they have not disclosed. They have not even disclosed how we should think about Ayalaan which is the first movie that they have co-produced. In the concall they mention that going ahead movie production houses would want to work more with those VFX studios who also get involved in the production of the movie. But then they mention that they only got in the production of the movie because the project stalled due to non-availability of funding. So what is their job? Is it just to make VFX? Or is it to bail out movies where one of the producers has walked out? And the company has not clearly outlined how do they expect to be paid back for this project? Do they get a profit share from the project? Will they get their expected profit margin from the receivables which will be cleared for the VFX done by them? Have they sold the distribution rights that they have to another party and if yes then how much of a profit did they make on that? As a capital allocator if you are putting up so of your company’s net worth into a new project, then as a shareholder I need to know the definitive payback expectations. I am not sure if something is going wrong. But just the lack of knowing is bad for me as a shareholder.

Ok, next big one for me is the dilution that the company is doing with the QIP. The company just had an IPO. What is the requirement of capital that they are now seeing which they were not seeing then? And as a result they are doing a QIP of 80 crores and diluting about 20-30% of the company? As a shareholder I am not clear what is the big pressing need to dilute this much right now and immediately raise this money. The company mentioned that some of this money will go towards buying hardware since existing hardware is becoming obsolete very quickly due to tech advancements. But then there are no further details on exactly what hardware is being invested in with the QIP money. Then there is also some mention about going big on the animation and gaming vertical and how the company will use some portion of the QIP money towards that. But again no further details are available on that. So you have managed to raise 80 crores but I am not sure how exactly you want to use it. And I can’t look back at your history and figure out for myself that what requirement of capital was now needed which was not needed earlier. The only logical use is to fund working capital. As the company is growing so are its receivables and therefore some QIP money would help in taking care of the working capital requirement. But even then why not use alternatives like invoice discounting. Why dilute equity in the business? Another thing related to the QIP is that esteemed names like Morgan Stanley and Bank of America are subscribers to the QIP. My understanding is that post the QIP, the subscribers are locked in for about 18 months. So I am assuming that those big name investors probably can see something which I can’t. May be the revenue growth is going to be great and it will also translate into cash flows real soon. But I need to see some evidence of it.

Then in terms of the make up of the board. The founder is on the board. His wife is on the board. His brother is on the board. There are 4 independent directors. But they don’t inspire a lot of confidence in me. One is a law expert. Other has some experience working with non-VFX companies. The others I did not bother checking up. The latest annual report does not have the qualifications in detail. I could have checked the RHP in more detail but I don’t feel the need to. I am not very sure if the board is a very capable one. May be in due time I will put in more time to dig deeper.

So the family together takes about 3 crores or so as annual compensation. Nothing legally wrong with that. I am just trying to understand if there is enough profitability for such kind of a pay packet. The company has also taken on car loans for about 1.7 crores from ICICI Bank. I dont know who is using those cars. May be the promoter feels that he deserves all this after his hard work. I have a difference of opinion. Let’s leave it at that.

For a company which is so dependent on the quality of people that it can retain, I am really surprised that they do not have a formal ESOP policy till now. How is the promoter still able to retain talent is beyond me? May be that is how things work in the VFX industry. I am still learning. But coming from a startup background, it’s almost impossible to retain your best talent without giving them ESOPs.

Another problem is the revenue booking and the translation of those invoices to cash flow. The company has said that before they start working on any project they collect some upfront advance. How much is that I do not know. Then in addition to that the company keeps raising invoices as chunks of the overall project keep getting finished. But exactly how does that work? Do we raise an invoice when 25% of the work is done or 50% is done I don’t know. And then before the final bit of work is handed over to the movie producer, the whole payment is collected. But then why would receivables occasionally build up I dont know.

I think there is so much about this company that I dont understand that it is better for me to stay away with it. The founder seems to be extremely passionate about the VFX industry. But I hope that they improve their shareholder communication and clearly lay out their strategy. If they are still experimenting with stuff then say so. Its fine. But I am extremely uncomfortable with such ambiguity and I do not want to let my imagination fill in the blanks. I will continue to observe this company and then let’s see if later when it price corrects and communication improves then we may get a good opportunity to buy.

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Phantom Digital posted great set of numbers.

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All was good until the news that CFO resigned.

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He joined Phantom on 28th July, 2023.

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He resigned on 29 Dec 23 and now relieved from his duty post 45 days. So its not as abrupt or unplanned as it seems. It is only disclosed now…

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Can someone also clarify why screener is showing FII and MF holdings as per Dec 2023 data. Shareholding in NSE site says only promoter and public are holding all shares.

For many sme companies screener does not show correct P/E ratio

It looks like there are some interesting growth triggers moving forward as the company announced that they are currently in the process of acquiring a multiple Oscar, Emmy and BAFTA award-winning studio to the extent of US$3 Mn. This can help the company to get a foothold in US markets (hopefully).

This was mentioned in the Nov23 con call. Good to see that the management is following up with their public commitments (possibly sign of a matured mgmt).

Will be interesting to see how company decides to allocate the Rs 80 cr via QIP that they raised recently.

Disc: Invested (position size here). No buy/sell in last 30 days.

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