MOSt Mid-caps

Prime Focus
Buy 06 February 2007

CMP: Rs367 Target: Rs555 Initiating Coverage

Prime-time action Sector Entertainment

Outsourcing of entertainment technology (ET) services is a huge Bloomberg PRIF IN

opportunity for low-cost countries like India. As a global ET player, Prime Reuters PRFO.BO
Focus (PF) is poised to profitably scale up its business with low risks. We BSE Sensex 14,478
expect EPS CAGR of 40% through FY09. Our sum-of-parts target price S&P CNX 4,196
for PF is Rs555, an upside of 51%. BUY.
Equity Shares (m) 12.7
Y EAR N ET S A LE S PAT EPS EP S R OE ROC E P/ E P/ BV EV / EV /
Face Value (Rs) 10
EN D (RS M ) ( RS M ) ( RS) Y o Y ( %) ( %) ( %) (X ) (X ) SA LES E B IT D A
52-Week Range 428 / 274
3/06 424 140 13.6 45.8 27.8 27.7 27.0 5.4 9.0 15.7
1, 6m Rel. Perf. (%) -13, -23
3/07E 593 211 16.6 22.1 16.3 22.5 22.1 2.5 6.8 11.0
M.Cap. (Rs b) 4.7
3/08E 831 280 22.0 32.4 14.0 21.5 16.7 2.2 4.9 7.8
Avg. daily volume ('000) 65
3/09E 1,163 412 32.4 47.2 18.1 27.7 11.3 1.9 3.4 5.4
Note: Numbers are for PF India; 55% subsidiary PF UK is valued separately E: MOSt estimates
SHAREHOLDING PATTERN
„ Indian ET - the sequel to Indian IT
Outsourcing of ET services is a huge opportunity for low-cost
countries. India is strong on all the key success factors - technology,
talent and tongue (ie, comfort level with English). Indian ET has
the potential to mirror Indian IT, both in terms of revenue growth
and moving up the value chain.

„ Prime Focus is a global ET player

Prime Focus offers the full range of ET services in India, and has
built strong relationships with both customers and vendors. In May
2006, it acquired VTR Plc, UK. We believe this will help PF get
business given the advantage of (1) UK-based front-end for quality PRIME FOCUS vs SENSEX
control and (2) India-based back-end for cost control. Planned (REBASED) SINCE LISTING
foray into Dubai Studio City and Los Angeles also holds potential.

„ High-margin, high-cash business model SENSEX - REBASED

We are convinced that PF's business model is robust. It is fairly

predictable, scalable, highly profitable and sufficiently derisked.
Aggressive depreciation keeps profit muted; but margins are high
enough to keep operating cash flow strongly positive and rising.
PRIME FOCUS

„ 40% EPS CAGR through FY09E, 1-year target price Rs555; BUY
We expect CAGR of 40% in revenue, PAT and EPS through FY09. At
our target PE of 20x FY08E, the value of PF India works out to
Rs440. With conservative assumptions, the DCF value for 55% stake
Shrinath Mithanthaya
in PF UK is Rs115 per share which we believe is not captured in the
Shrinathm@MotilalOswal.com
current price. Our sum-of-parts one-year target price for PF is
+ 91 22 39825421
Rs555, a 51% upside from current levels. We recommend BUY.

© Motilal Oswal Securities Ltd., Hoechst House, 3rd Floor, Nariman Point, Mumbai 400 021 Tel: +91 22 39825500
PRIME FOCUS MOSt Mid-caps

Investment Argument
We initiate coverage on Prime Focus with a Buy. Our one-year target
price of Rs555 offers 51% upside from the current levels.

Indian ET - the sequel to Indian IT

Outsourcing of entertainment technology (ET) services is a huge
opportunity for low-cost countries. India is strong on all the key success
factors - technology, talent and tongue (ie, comfort level with English).
Indian ET has the potential to mirror Indian IT, both in terms of revenue
growth and moving up the value chain.

ET is a global revolution
Technology is a key driver of the entertainment1 industry today. The Of the total movies produced

traditional analog processes of entertainment have been completely and released, share of high
ET movies is rising
transformed by digitisation, which we call Entertainment Technology or ET.

The ET revolution touches -

• Production - high definition cameras, motion control rigs, etc; and
• Post-production2 (we call this ET services) - digital intermediate,
editing (both offline and online), special / visual effects (SFx / VFx),
animation, etc.

The ET revolution is evident, especially in movies -

• Of the total movies produced and released, share of high ET movies
is rising; and
• Even within high-ET movies, of the total production budgets, the
share of ET spend is rising.
RECENT HIT MOVIES

International India
Star Wars series Dhoom and Dhoom 2
Lord Of The Rings Krrish
Harry Potter series Don
The Chronicles Of Narnia Koi Mil Gaya
King Kong Hanuman
Shrek and Shrek 2 Hum Tum
Ice Age 1 and 2 Dus
Superman series Paheli

Besides movies, ET is also making significant inroads into -

• Television e.g. for 24-hour animation channels
• Entertainment promotions e.g. trailer clips, TV series ads, etc
• Advertising e.g. Innova ad with Aamir Khan in his various roles, or
the Pepsi ad with Shahrukh Khan as the snake-charmer.

1. In this report, we use the term ‘entertainment’ for movies, TV and ad films.
Also, ET here covers only video and not audio.
2. For glossary of basic technical terms, see Company background, page 6.

2 06 February 2007 Motilal Oswal Securities Limited

MOSt Mid-caps PRIME FOCUS

India has competitive edge in ET services

Even as popularity of VFx-heavy entertainment is on the rise, so is the Comfort level with English is
cost, especially in the US and Europe. Hence, outsourcing of ET services a major advantage
is emerging as a major trend.

Currently, much of ET services outsourcing is from east Europe. Two

success factors in ET services are technology and talent. Both are
available in plenty in east Europe, which also has proximity to the major
markets, viz, US and west Europe.

India's competitive edge comes from the third, and perhaps the most
important success factor, tongue (or language). Unlike IT/ITeS,
outsourcing of ET services involves a lot of communication with the
customers, mainly Hollywood production houses and/or large studios.
As the major movie markets are English-speaking, India's comfort level
with the language is a major advantage.

ET SERVICES - KEY SUCCESS FACTORS

Success Factor India's position

Technology Access to ET hardware and software is uniform across
the globe. The major manufacturers include Thomson,
France and Autodesk, USA
Talent As in IT, there is a huge pool of creative talent in India
at significantly lower costs compared to US and
Europe - main markets for ET.
Tongue India's comfort level with English gives it an edge over
other lower cost competitors, mainly east Europe
and China

Further, India itself is a large and fast-growing market for ET services,

helping service providers to scale up, achieve overheads efficiency and
enjoy superior margins.

POST-PRODUCTION MARGINS - INDIA VS REST OF WORLD

Company Ascent Media VTR Plc Prime Focus Margins reflect India's
Country US UK India competitive edge in
ET services
Year ending Dec 2005 Aug 2005 Mar 2006
Currency $ m £ m Rs m
Revenue 304 22 424
EBITDA 57 3 244
EBITDA margin (%) 18.8 13.9 57.5

Ascent Media is part of Discovery Holding Co, US

VTR Plc is now a 55% subsidiary of PF, and has been renamed as Prime Focus, UK

Motilal Oswal Securities Limited 06 February 2007 3

PRIME FOCUS MOSt Mid-caps

Indian ET could mirror Indian IT

The Indian IT/ITeS sector has sustained a growth rate of over 35% for
the last 10 years. We believe Indian ET services could see a similar
growth rate for the next 10 years at least. The opportunity is huge and
India has the competitive edge. Also, as in IT/ITeS, there is enough
scope for India to move up the value chain.

INDIAN ET/ET SERVICES - POTENTIAL VALUE CHAIN

Indian IT/ITeS revenue ($ b) 39.7 Becoming

37% C AGR FY96-FY07 a Tier I
Source: Nasscom studio
30.3
Prime Focus Co-prodn with -
22.6 is here or acquisition
16.7 by - Tier I studio

12.9
10.1 DI, Fx for
8.6 Tier I studios
5.7
3.9
2.7
1.2 1.8 Content partner
for TV, DVDs

Fx for - or buyout
of - Tier II
studios abroad

Fx for Indian
movies

DI, trailers
for Indian
movies

Full ad films

Post-prodn Possible ET/ET services

for TV Revenue Curve

Equipment
hiring

DI - Digital intermediate; Fx - Special effects, animation, etc Source: Motilal Oswal Securities
Tier I studios include the likes of Disney Studios, Dreamworks, Sony Imageworks and Blue Sky

4 06 February 2007 Motilal Oswal Securities Limited

MOSt Mid-caps PRIME FOCUS

Prime Focus is a global ET player

PF offers the full range of ET services in India, and has built strong
relationships with both customers and vendors. In May 2006, it acquired
VTR Plc, UK. We believe this will help PF get business based on the USP of
(1) UK-based front-end for quality control and (2) India-based
back-end for cost control.

PF offers integrated ET services in India

Prime Focus (PF) offers the full range of ET services for movie producers,
television production houses and advertising agencies. The highlights
of PF's business profile in India are –

• End-to-end solutions: from equipment rental to the edited master

negative for movies.

• Strategic locations: three studios in Mumbai, one in Chennai and Preferred post-production
one planned in Hyderabad. PF tends to be a preferred post-production partner for Adlabs
partner for Adlabs, and one of its studios is housed in the Adlabs film
processing facility in Mumbai and Chennai. (Adlabs holds 3.8%
of PF's equity, and Reliance ADA group, which owns Adlabs, has
11.8% stake.)

• Strong relationships with customers: PF has a strong relationship High possibility of

with all major Indian movie production houses, leading to high possibility captive business
of captive business. For instance, following PF's association
with - and the resounding success of - Black, PF is likely to be the
post-production partner for most Sanjay Leela Bhansali productions
going forward. Likewise, PF has strengthened its relationship with
Yash Raj Films, having worked with their recent releases Fanaa and
Kabul Express, and the planned Tara-rum-pum.

• Strong relationships with technology vendors: PF is the largest Equipment costs are low
customer in Asia for Spirit, state-of-art telecine equipment by
Thomson of France. Similarly, it has introduced into India the first
Lustre colour grading system by Autodesk of USA. Such moves have
helped it build strong relationships with vendors, resulting in equipment
procurement at highly competitive rates.

Motilal Oswal Securities Limited 06 February 2007 5

PRIME FOCUS MOSt Mid-caps

PRIME FOCUS INDIA - BUSINESS PROFILE AT A GLANCE

Key services Locations Major customers Major competitors

Movies Mumbai Movie producers In India

• Equipment rental
• Film scanning, editing,
recording
• Visual effects
• Theatrical trailers, promos
• Title design and
end credits
Advertising
• Dedicated studio in
Mumbai for turnkey
services including editing,
sound studio and
visual effects
Television
• Equipment rental
• Editing
• On-air promos
• Raghuvanshi Mills - • Sanjay Leela Bhansali • Prasad EFX
boutique studio for ads • Yash Raj Films • Famous Studios
• Adlabs - digital film lab • Ram Gopal Varma • Pixion
• Royal Palms - dedicated • Boney Kapoor • Raj Taru
VFx facility • Vidhu Vinod Chopra
• Harry Baweja Abroad
Chennai Tier II
• Commissioned in 2QFY07 Ad agencies • Ascent Media
to cater to the south • HTA • Technicolor
market • O&M • Weta Digital
• Chaitra Leo Burnett • EFilm
Hyderabad • and many others • Framestore CFC
• The Mill
• Proposed acquisition of
Spirit DI from Suresh Others Tier I
Productions (likely • TV production houses • Disney Studio
• Dreamworks/PDI
completion by end FY07) • Satellite channels
• Sony Imageworks
• Music companies &
• Blue Sky
music-video makers

Source: Company red herring prospectus / Annual Reports

Prime Focus background

Prime Focus (PF) was formed in 1997 by the merger
of two proprietary concerns - Video Works of Naresh
Malhotra and Video Workshop of Namit Malhotra.
Over the last 10 years, Prime Focus has grown to
emerge as one of India's largest providers of end-
to-end post-production services and visual effects
for feature films, TV serials and ad films.
PF's services include the following: [(1) to (6) below
is the core post-production process]
1. Telecine - This is the process of transferring
motion picture film into electronic form by
scanning. Telecine enables a motion picture,
captured originally on film, to be viewed on
standard video equipment, such as televisions,
video cassette decks or computers.
2. DI - Digital intermediate (often abbreviated as
DI) is the process of digitising a motion picture
and enhancing colour and other image
characteristics for the right look.
or 'online' resolution. The offline edited version
goes on for adding visual effects, if any.
5. Visual effects - This involves the integration of
live-action footage with CGI (computer
generated imagery) to create scenes which look
realistic, but would be dangerous, costly, or
impossible to capture on film.
6. Reverse telecine - This is the process by which
the final edited video footage is printed back
on to 35mm film, called the master negative.
The negative is printed, copies of which are
distributed to various theatres for exhibition.
7. Equipment rentals - video equipment for indoor
and outdoor shootings, including digitial
cameras HD (high-definition) video cameras,
motion control rig, etc.
8. Other services - Title design, movie trailers,
promotion clips, etc

3. Offline editing - In offline editing, all the original
footage is digitised at a low resolution. The
editor then does the basic sequencing of the
frames to arrive at the final cut.
4. Online editing - When the offline edit is
complete, the pictures are re-assembled at full
PF has won several awards, the recent being Screen
2005 awards for best visuals effect in Vaah! Life Ho
To Aisi, and for best editing in Yahaan.
In May 2006, PF made an IPO of 24m shares @ Rs417
to finance acquisition of VTR Plc in UK, and studios in
Chennai and Hyderabad.

6 06 February 2007 Motilal Oswal Securities Limited

MOSt Mid-caps PRIME FOCUS

VTR acquisition takes PF global

In May 2006, PF raised Rs1b via an IPO of 2.4m shares @ Rs417. Major 55% stake in VTR Plc of
part of the proceeds were used to finance its £4.7m acquisition of 55% UK for £4.7m
stake in VTR Plc of UK, a £20m turnover company primarily engaged in
post-production services for ad agencies. VTR is now renamed as Prime
Focus, UK. In July 2006, PF UK acquired Clear (Post Production) Ltd, a
visual effects company.

PRIME FOCUS UK - BUSINESS DIVISIONS

Business division Activity

Clear Visual effects

VTR (incl JV in Beirut) Digital intermediate

Blue Post-production for TV programs

TMR Digital restoration, duplication, archiving

eTitle Planned initiative to speed up sub-titling

Source: www.vtrplc.com

For the year-ending August 2006, we estimate PF UK to have a turnover

of £23m and a net loss of about £1m. However, the company follows an
aggressive depreciation policy, and is actually cash positive.

PRIME FOCUS UK - FINANCIAL SNAPSHOT £ '000

Year ending August 2004 2005 2006E

Turnover 25,345 21,506 23,000

EBITDA 4,781 2,997 2,200

EBITDA margin (%) 18.9 13.9 9.6

PBT / PAT (no tax) -252 -780 -1,000

Depreciation 3,400 3,276 3,400

Cash profit 3,148 2,496 2,400

Source: VTR Plc Annual Reports; E: MOSt estimates

Acquisition benefits to start accruing soon

PF acquired VTR by taking up fresh equity shares rather than buying Advantage of UK-based
out existing shareholders. This infused money into the company, enabling front-end for quality control
a fresh round of capex. Of the £4.7m acquisition proceeds, the company and India-based back-end

claims to have deployed about £3.2m so far towards enhancing for cost control

post-production equipment.
With the VTR acquisition, we believe PF has emerged as a major force
in the global post-production industry. The potential outcomes of this
acquisition suggest a major upside to PF group's revenue and profit –
• Rise in profitability of the combined entity through offshoring
• Bidding for - and bagging of - large post-production deals based on
the USP of (1) UK-based front-end for quality control and (2) India-
based back-end for cost control
• Qualitative benefits such as effective training of PF India talent, and
exposure to global standards and best practices in ETS.
• Foray into Dubai Studio City and to Los Angeles for tapping Hollywood.

Motilal Oswal Securities Limited 06 February 2007 7

PRIME FOCUS MOSt Mid-caps

Dubai and LA hold huge business potential

In November 2000, the Dubai government launched Dubai Media City We expect PF to enjoy an
(DMC). With an investment of $800m, DMC offers world-class early mover advantage in

infrastructure and support services for all forms of media business - Dubai

film, broadcasting, printing and publishing, music, leisure and

entertainment, etc. DMC has led to rise in all forms of media production
activity in Dubai, mainly ads and films, including from India.

To support the DMC, the Dubai government has proposed to set up

Dubai Studio City (DSC) for post-production support. Currently,
Dubai-based production houses are outsourcing the work from out of
Dubai, mainly London.

PF's IPO objects included setting up of a studio in Dubai. We expect

PF to enjoy an early mover advantage in Dubai - a strong positive
going forward.

Besides, PF is exploring a foray into Los Angeles to tap the Hollywood

market. We believe the VTR acquisition strengthens PF's chances of (1)
finding a JV partner or takeover target, and/or (2) getting business
directly from Tier II/I studios there.

8 06 February 2007 Motilal Oswal Securities Limited

MOSt Mid-caps PRIME FOCUS

High-margin, high-cash business model

We are convinced that PF's business model is robust. It is fairly
predictable, scalable, highly profitable and sufficiently derisked.
Aggressive depreciation keeps profit muted; but margins are high enough
to keep operating cash flow strongly positive and rising.

PF's business is scalable, profitable, derisked

We have evaluated PF's business model against a framework used Fairly high scores on all
internally by Infosys - PSPD, ie, predictable, scalable, profitable and PSPD parameters
derisked. We believe PF scores fairly high on all four counts.

Predictable: Of the four, this would perhaps rank the lowest. There is
more empirical, macro-level evidence of business predictability, rather
than micro-level data like installed capacity and executable order book.
However, we believe the lead empirical indicators are strong -

• High VFx/animation content in all recent box office hits, both

international and in India

• Significant cost advantage in India, making a case for outsourcing

• PF India's association with recent Bollywood hits (Black, Sarkar,

Paheli, Dus, The Rising, Fanaa, Guru, etc) and forthcoming big-banner
productions like Eklavya, Saawariya, Tara-rum-pum and Love Story 2050.

• Initial outsourced business from PF, UK.

Scalable: PF's business is fairly asset-intensive (FY06 sales/gross block

of 0.6x). However, gestation period is low, and once the assets are in
place, the business is extremely scalable. For instance, PF has
500 people in India and, if need be, it can run 1-1.5 additional shift in
each of its facilities. We believe the company is in the investment
mode, including its VTR acquisition, the benefits of which will accrue
going forward.

Profitability: The asset intensity of PF India's business is offset by

huge EBITDA margins - last six-year average of 52%, with a rising
trend. Even the return ratios are attractive - despite a 10x increase in
capital employed over the five years ending FY06, PF's average RoCE
has improved from 22% to 28%.

Derisked: PF's business seems derisked in more ways than one.

• Business segment risk: PF caters to movies, ads and TV segments.

Over time, sales mix share of the recession-free movie business has
only increased. Even within movies, its Chennai and Hyderabad studios
are expected to lower dependence on Bollywood.
PF'S SALES MIX - RISING SHARE OF MOVIES

FY02 FY04 FY06E

Revenue (Rs m) 127 202 424
Movies 22% 34% 65%
Ad films 50% 37% 24%
TV & Music videos 28% 29% 11%
Source: Red herring prospectus; E: MOSt estimates based on 9mFY06

Motilal Oswal Securities Limited 06 February 2007 9

PRIME FOCUS MOSt Mid-caps

• Customer risk: PF has a large number of customers with no single

customer accounting for a significant share of revenue.

• Geography risk: With acquisition of VTR in UK and expansion plans

in Dubai and Los Angeles, we believe PF's geography risk is fairly
mitigated.

Overall, we are convinced that PF's business model is robust.

Profit underplays cash generated

Across the globe, post-production companies adopt an aggressive
depreciation policy to account for possible obsolescence of ET hardware
and software. As a result, the profit after tax figure underplays the
cash generated by the business.

This is true even for PF India and PF UK. In India, one of the concerns High margins ensure high
is delayed payments from customers, and the need for discounted operating cash flow
settlements. However, this is factored in PF's margins. Thus, the
company has managed to sustain a rising level of operating cash flow.

PRIME FOCUS - RISING CASH FLOW FROM OPERATIONS (Rs m)

Source: Company / MOSt estimates

10 06 February 2007 Motilal Oswal Securities Limited

MOSt Mid-caps PRIME FOCUS

Financials & Projections

PF's FY01-06 revenue CAGR is a robust 30%. Till FY07E, EPS CAGR is
lower than PAT CAGR due to continuous equity expansion. With no further
equity dilution likely, we expect expansions and acquisitions to drive
40% EPS CAGR through FY09E.

Movies segment propels revenue growth so far

PF's FY01-06 revenue CAGR is a robust 30%, on the back of a 75% Movies segment - FY01-06
CAGR in revenue from the movies segment during the period. EBITDA revenue CAGR of 75%
margin is up from 48.2% in FY01 to 57.5% in FY06. PAT CAGR is 55%;
but EPS CAGR is lower at 23% due to interim equity placements with
Adlabs and other investors including Reliance Capital.

YTDFY07 figures suggest that FY07 will continue the trend of EPS
growth lower than PAT growth, this time due to the IPO in May 2006.

PF YTD PERFORMANCE
Nine months ending Dec-05 Dec-06 % chg
Revenue (Rs m) 293 389 33
EBITDA margin (%) 58.2 61.5
PAT (Rs m) 110 161 45
Equity shares (m) 10.3 12.7 23
EPS (Rs) 10.7 12.6 18

Expansion and offshoring to drive future growth

We see two key drivers for PF's revenue and profit going forward -
• Expansion, both in India and abroad; and
• Offshoring from PF UK.

Expansion: PF is on a mega expansion-cum-acquisition spree, which

we expect to end by March 2007 and benefits of which should flow in
from FY08.

PF'S RECENT EXPANSIONS AND ACQUISITIONS

In India
• Boutique studio for ad industry in Mumbai (February 2006)
• Studio in Chennai (September 2006)
• Dedicated VFx facility in Mumbai (September 2006)
• Proposed acquisition of Spirit DI in Hyderabad (March 2007)

Abroad
• 55% stake in VTR Plc, UK, renamed Prime Focus, UK (April 2006)
• Acquisition of Clear (Post Production) by PF UK (July 2006)
• Planned facility in Dubai Studio City (expected by mid-FY08)

Offshoring: PF UK's revenue is around £25m. Even if 10% of this is

offshored to PF India, it works out to Rs212m which is 36% of the
latter's FY07E revenue. Such offshoring should also help improve margins
of both the companies.

Motilal Oswal Securities Limited 06 February 2007 11

PRIME FOCUS MOSt Mid-caps

EPS CAGR of 40% through FY09E; zero net-debt company

Our base case estimates and valuation for PF group are based on the PF's earnings growth and
following key assumptions: zero debt status to
resemble IT companies
• Revenue: 40% growth in FY08 and FY09 for PF India; 0% growth
for PF UK

• EBITDA margin: 63% for PF India in FY08 and FY09, versus 62.2%
in FY07E; PF UK margins to improve from an expected 12% for FY07
to 18% by FY09 due to higher offshoring

• Capex: No major capex or fund raising hereon, both in PF India and

PF UK.

Based on these assumptions, FY07-09 PAT and EPS CAGR for PF India
works out to a healthy 40%. We also expect PF to become a zero
net-debt company by end of FY08. In this sense too, PF's business
and financial profile increasingly resembles that of Tier II / Tier I
IT companies.

Sensitivity analysis: The robustness of PF's business model is confirmed EPS CAGR to be at least 22%
by a sensitivity analysis of its earnings growth to revenue growth in all foreseeable situations
and margins.

SENSITIVITY ANALYSIS OF EPS CAGR FY07-09

Margin change over -400 -200 -100 0 +100 +200
base case bps bps bps bps bps bps

FY09E
margin 60% 61% 62% 63% 64% 65%

Rev. CAGR

30% 22% 25% 26% 27% 29% 30%

35% 28% 31% 32% 33% 35% 36%
40% 34% 37% 38% 40% 41% 42%
45% 40% 43% 44% 46% 47% 48%
50% 46% 49% 50% 52% 53% 54%
Note: Base case highlighted; Source: MOSt estimates
more likely outcome area boxed

The average of more likely outcomes (boxed) is 39%, almost the same
as our base case of 40%. In fact, the analysis suggests that EPS CAGR
is unlikely to dip below 22% for any of the above combinations. Beyond
this, the case for lower EPS growth may need to include extreme
unforeseen circumstances such as a major slowdown in US and/or Indian
entertainment industry.

12 06 February 2007 Motilal Oswal Securities Limited

MOSt Mid-caps PRIME FOCUS

Valuation & Recommendation

At our target PE of 20x FY08E, the value of PF India works out to Rs440.
With conservative assumptions, the DCF value for PF UK is Rs115 per
share. Our sum-of-parts one-year target price for PF is Rs555, 51% upside
from current levels. BUY.

Value of PF UK not in the price

We have used sum-of-parts to value PF -
• PE-based valuation for PF India, which is still in the hyper
growth mode
• DCF-based valuation for PF UK, which can be deemed to be relatively
steady state.

We believe PF's current price does not factor in PF UK, which we currently
value at Rs103 per share. Adjusting for the same, the stock is trading
at an attractive PE of 12x FY08E and 8x FY09E.

PE-based valuation of PF India: As PF does not have a long listed PF India - Rs440
track record and is an emerging business, we have chosen to value it @20x FY08E EPS
only on one-year forward earnings for now.

We have assigned a target PE of 20x, considering the following positives-

• Market leadership in Indian ET/ETS sector
• High 40% earnings CAGR FY07-09
• Room for significant earnings upside from PF UK
• Cash-rich, zero net-debt company
• Core RoE (excluding investments in PF UK) at 19.5% for FY08E and
25% for FY09E
• Estimated payout of at least 20% from FY08.

At 20x FY08E EPS of Rs22, our fair value for core PF India works out to
Rs440 per share.

DCF-based valuation for PF UK: We have assumed very low positive PF UK - Rs115 based on DCF
swing in PF UK's performance. Even in the terminal year FY17, our DCF
model factors in negative EBIT for the company. However, cash flow
remains strongly positive due to aggressive depreciation policy.

Considering PF India's 55% claim on PF UK's cash flows, our one-year

forward value works out to Rs115 per share.

Initial 1-year target of Rs555 offers 51% upside; BUY

Based on the above sum-of-parts, our initial target price works out to
Rs555, offering an upside of 51% from current levels. We are fairly
confident there is enough room for both earnings upgrade and valuation
re-rating going forward. We recommend BUY.

Motilal Oswal Securities Limited 06 February 2007 13

PRIME FOCUS MOSt Mid-caps

Investment Concerns

Unduly large capex over the next two years

Our whole investment argument revolves around that the fact that
much of PF's expansion plans are completed, benefits of which should
start accruing from FY08 in the form of free cash flow. Thus, any
unduly large capex such as a mega acquisition in Los Angeles will compel
us to re-examine our views.

Mitigant: None

Unexpected, large write-offs of receivables

Yet another core theme of our investment argument is that PF's margins
in India are sufficient to take care of delays and discounts when cashing
receivables. However, large write-offs of receivables could lead to
earnings downgrades and, more importantly, valuation de-rating.

Mitigant: Considering PF's dominant position in the industry and the

need for customers to come back with repeat business, we expect this
risk to be low.

Major change in the business model, eg, co-production

We believe PF needs to achieve a critical size of revenue and cash
flows before it ventures into newer areas like co-production. Our
estimates and investment recommendation are based simply on PF
profitably scaling up its current business and exploiting India-UK synergies.
Any change in PF's business model will compel us to review our
recommendation.

Mitigant: In the recent past, PF has tried co-production in Gayab and

Vaah! Life Ho To Aisi with no significant success. We expect PF to learn
from this experience and stick to its core knitting for the next couple of
years at least.

ESOPs not factored in

We expect Prime Focus to announce and implement an ESOP scheme in
the near future. We have not factored the same in our estimates.

Mitigant: ESOP is a standard people-retention practice, especially in

intellectual capital businesses like IT and ET. As our assumptions are
fairly conservative, we do not expect ESOP to significantly impact our
EPS estimates.

14 06 February 2007 Motilal Oswal Securities Limited

MOSt Mid-caps PRIME FOCUS

Financials and Projections

INCOME STATEM ENT - STANDALONE (Rs m )

Y/E MARCH 2004 2005 2006E 2007E 2008E 2009E

Net Sales 202 313 424 593 831 1,163

change (%) 24.1 55.1 35.5 40.0 40.0 40.0 Aggressive topline growth

EBITDA 91 177 244 369 524 733

change (%) 18.9 93.9 38.0 51.3 41.9 40.0
Depreciation 27 40 54 80 115 133
EBIT 64 137 190 289 408 600
Interest 14 17 20 25 17 10
Other Income (net) 2 9 40 54 30 30

PBT 52 130 210 318 421 620

Tax (incl FBT and def. tax) 19 48 69 107 142 208
Tax/PBT (%) 36.3 36.6 33.0 33.6 33.6 33.6 Full-tax company
PAT 33 82 140 211 280 412
change (%) 42.2 149.4 70.6 50.5 32.4 47.2

EBITDA margin 45.2 56.5 57.5 62.2 63.0 63.0 Small expansion in margins
Adjusted PAT margin 16.4 26.3 33.1 35.6 33.7 35.4

E: MOSt estimates

Motilal Oswal Securities Limited 06 February 2007 15

PRIME FOCUS MOSt Mid-caps

Financials and Projections (contd...)

BALANCE SHEET - STAND ALONE (Rs m )

Y/E MARCH 2004 2005 2006E 2007E 2008E 2009E

Net Worth 196 310 701 1,892 2,114 2,440

Share Capital 83 88 103 127 127 127 IPO in May 2006 @ Rs417
Reserves 113 222 597 1,765 1,987 2,313

Total debt 86 212 437 78 0 0 Potential zero net-debt

company
Capital Em ployed 282 522 1,137 1,970 2,114 2,440

Gross Fixed Assets 308 482 706 1,221 1,421 1,621

Capex 26 174 224 515 200 200 Large capex in FY07
Less: Acc. Depreciation 96 133 172 252 368 501
Net Fixed Assets 212 349 534 969 1,053 1,120
Capital WIP 0 8 96 10 10 10

Investments 0 0 0 400 400 400 Investment in PF, UK

Net Curr. Assets 115 233 584 668 721 970

Cash 42 110 392 300 207 291

Misc. Expenses 0 0 9 3 0 0
Net Deferred Tax -45 -68 -86 -80 -70 -60

Total Assets 282 522 1,137 1,970 2,114 2,440

E: MOSt estimates

16 06 February 2007 Motilal Oswal Securities Limited

MOSt Mid-caps PRIME FOCUS

Financials and Projections (contd...)

RATIOS - STANDALONE
Y/E MARCH 2004 2005 2006E 2007E 2008E 2009E

Basic (Rs)
EPS 4.0 9.3 13.6 16.6 22.0 32.4 40% CAGR FY07-09
Cash EPS 7.2 13.8 18.8 22.9 31.1 42.8
Book Value 23.5 35.2 67.9 148.7 166.2 191.8
Dividend per share 0.0 0.0 0.0 1.5 4.0 6.0
Payout incl. Div. Tax. (%) 0.0 0.0 0.0 10.0 21.0 21.0

Profitability (%)
RoE 20.3 32.5 27.8 16.3 14.0 18.1 Return ratios somewhat
RoCE 25.6 36.4 27.7 22.5 21.5 27.7 deflated due to investments
in PF UK
Leverage Ratio
Debt/Equity (x) 0.4 0.7 0.6 0.0 0.0 0.0 Zero net-debt

Valuation - Standalone (x)

P/E 27.0 22.1 16.7 11.3
Cash P/E 19.5 16.0 11.8 8.6
Price/Book Value 5.4 2.5 2.2 1.9
EV/Sales 9.0 6.8 4.9 3.4
EV/EBITDA 15.7 11.0 7.8 5.4
Dividend Yield (%) 0.0 0.4 1.1 1.6

E: MOSt estimates

Motilal Oswal Securities Limited 06 February 2007 17

PRIME FOCUS MOSt Mid-caps

Financials and Projections (contd...)

CASH FLOW STATEMENT - STANDALONE (Rs m )

Y/E MARCH 2004 2005 2006E 2007E 2008E 2009E

PBT bef ore EO items 52 130 210 318 421 620

Add: Depn & amortisation 27 40 54 86 118 133
Interest paid 14 17 20 25 17 10
Less: Direct Taxes Paid (19) (48) (69) (107) (142) (208)
(Incr)/Decr in WC (24) (50) (70) (176) (145) (165)
CF from Operations 50 89 145 146 270 390 Rising operating cash flow
Extraordinary Items 0 0 0 0 0 0
CF including EO items 50 89 145 146 270 390

(Incr)/Decr in FA (26) (182) (312) (430) (200) (200)

(Pur)/Sale of Investments 8 0 0 (400) 0 0
CF from Investing activity (18) (182) (312) (830) (200) (200)

Issue/(Reduction) of Capital 43 62 250 1,002 0 0

Incr/(Decr) in Debt (9) 149 242 (364) (88) (10)
Interest Paid (14) (17) (20) (25) (17) (10)
Dividend Paid (incl. div. tax) 0 0 0 (21) (57) (85)
Others (14) (32) (24) (0) (0) (1)
CF from Financing activity 6 162 448 591 (162) (106)

Incr/(Decr) of Cash 39 68 281 (92) (93) 83

Add: Opening Balance 3 42 110 392 300 207
Closing Balance 42 110 392 300 207 291

E: MOSt estimates

18 06 February 2007 Motilal Oswal Securities Limited

MOSt Mid-caps PRIME FOCUS

NOTES

Motilal Oswal Securities Limited 06 February 2007 19

PRIME FOCUS MOSt Mid-caps

For more copies or other information, please contact

Institutional: Navin Agarwal. Retail: Relationship Manager (RM) or MOSt Franchisee
Phone: (91-22) 39825500 / 56575200 Fax: (91-22) 22816161. E-mail: inquire@motilaloswal.com

This report is for the personal information of the authorized recipient and does not construe to be any investment, legal
or taxation advice to you. Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based
upon it. This report is not for public distribution and has been furnished to you solely for your information and should not
be reproduced or redistributed to any other person in any form.

The report is based upon information that we consider reliable, but we do not represent that it is accurate or complete,
and it should not be relied upon such. MOSt or any of its affiliates or employees shall not be in any way responsible for
any loss or damage that may arise to any person from any inadvertent error in the information contained in this report.
MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind,
regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability,
fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations.

MOSt and/or its affiliates and/or employees may have interests/ positions, financial or otherwise in the securities mentioned
in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest Statement in this document. This
should, however, not be treated as endorsement of the views expressed in the report.

Disclosure of Interest Statement Prime Focus

1. Analyst ownership of the stock No
2. Group/Directors ownership of the stock No
3. Broking relationship with company covered No
MOSt is not engaged in providing investment-banking services to the company.

This information is subject to change without any prior notice. MOSt reserves the right to make modifications and alternations
to this statement as may be required from time to time. Nevertheless, MOSt is committed to providing independent
and transparent recommendations to its clients, and would be happy to provide information in response to specific
client queries.

20 06 February 2007 Motilal Oswal Securities Limited