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Tuesday, January 08, 2013

Crest Animation Studios Ltd: Buy
CMP: Rs.16.85
Introduction: Crest Animation is a full-service studio specializing in the development and production of digital animated properties for theatrical, television, home entertainment and interactive distribution for the global entertainment industry. Crest is the undisputed leader in the Indian animation industry, and one of the leading CGI animation studios in the world.
Crest Animation leverages its India advantages of highly-skilled talent and cost efficiencies, and the creativity of its Los Angeles arm to provide high quality CGI (computer generated imaging) animation product to the global animation industry. Through the Crest Advantage of Time-Cost-Quality, Crest has become a revenue differentiating player in the global animation industry.
Crest's state-of-the-art technology and world-class facilities, together with its depth and breadth of experience, has earned it an unparalleled reputation in global animation circles. Crest has delivered more than 200 half hours of television and home video titles in CGI animation, working for such clients as Mike Young Productions, Mark Brown, Classic Media, Nelvana, American Greetings, Marathon and Nickelodeon. Crest has produced animation for several international TV shows such as 'Jakers!' and 'Pet Alien' that have won many awards including Daytime EMMY, BAFTA, FICCI Frames 2005, Humanitas Prize for Children’s Animation, and a nomination for Annie Award.
Crest recently tied up with Lions Gate Family Entertainment to co-produce three movies. Crest has delivered its first feature film co-produced by Lionsgate USA. Alpha & Omega has been accepted for consideration in the Animated Feature Film category for the 83rd Academy Awards. It is the first animated film from India to appear on Oscar's list." 
Financials: For FY12, the net loss of the company came down to Rs.20.56 Cr to Rs.171.15 Cr in the same period previous year. For Q2FY13, the company came out with a net profit of Rs.26 lakhs as against a loss of Rs.3.17 Cr in the same period previous year. In terms of sequential values too, the company did well. The net loss of the company for Q1FY13, came out to be Rs.32 lakhs as against a net profit of Rs.26 lakhs in Q2FY13. Also, both on Q-o-Q and sequential basis, its OPM and NPMs increased substantially. This points towards a turnaround of the company.
Triggers:
(i) As on September 30, 2012, the company has invested Rs.74,464,890 in Norm LLC, a special purpose vehicle which is formed for the purpose of feature film Norm of the North. For Norm Financing LLC the company also has outstanding receivables of Rs.74,620,398, unbilled revenue of Rs.169,639,437 & Work in process of Rs. 60,247,558. In addition, Company has an Investment of Rs.1380.23 lacs in a subsidiary Company which has receivable as at March 31, 2012 of Rs. 1114.22 lacs due from norm Financing LLC. Work on this project was deferred during first quarter of Annual year 2011-12 due to the uncertainty prevailing on the financing arrangements of the same. However, based on discussions with alternate financier, the Company is confident of resumption of the project and has recommenced work on the same. A work-in-process of Rs.14,377,025 has been booked for the quarter ended September 30, 2012. There are some rumours that this work has actually started. In view of the intended recourse of the legal proceedings against the defaulted financier and developments for the alternate financier, the management is of the view that there is no diminution in the value of these investments, receivables & work in progress. These are considered to be recoverable and therefore no provision considered is necessary.
(ii) The company's operations are primarily funded from debtors realization, borrowings from private parties and promoters. Management has renewed / rescheduled its credit facilities with the banks and other private parties which are now falling due between the period from October, 2012 to July 2014. Management is confident of renewing the loans from banks and private parties on their due date. Further, management is in discussions with prospective Investors to raise funds from the liquidation of shares held by the CAS Benefit Trust (Treasury stock”) to meet its working capital requirements.
(iii) The Company continues to execute work on major hire projects. Considering the above and based on a detailed plan for meeting its cash flow requirements for the next 12 months prepared by management and approved by the Board of Directors, the company, despite the possible material uncertainty in this regard is confident of meeting its obligations as and when they fall due.
(iv) The Company has long-term Investments of Rs.7,140,500 in a joint SPV which is having film properties under development for more than 3 years. Pending the final outcome of the decision to be taken by the joint SPV partner on the development of the film properties held by the investee. Management is of the view that there is no permanent diminution in the value of this long term-Investment.
(v)  The Company continued work on the second feature film “Norm of the North” despite lack of financial closure, inviting qualification from the auditors. Alternate financing arrangements which the Company hoped to finalize this year were not successful in the period. The Company is working on financial closure in the coming 2-3 months.
(vi) The Company has taken Television contracts for execution like
Brown Bag, Gloe, Swan Princess-5 after the successful completion
and fine delivery of Swan Princess-4. Alpha & Omega, co-produced by the Company along with Lions Gate performed reasonably well with gross box office collection over US$ 50 million and sale of direct to video’s and television rights raising more than US$ 22 million in FY12. over US$ 50 million and sale of direct to video’s and television rights raising more than US$ 22 million.
(vii) The management believes that the worst seems to be well behind. The first quarter of 2012-13 has shown results on the work put in by the Company on different DVD/Television contracts, as the collections have been robust enough to take care of ongoing operational requirements as well retiring small portion of short term borrowings.
(viii) Continued negotiations and discussions are on for new contracts as well as for new Joint Venture initiatives for ensuring a robust and predictable future pipeline and guaranteed work for hire services.
(ix) The Direct to Video sales of “The Little Engine that Could”, coproduced by the Company with Universal Studios, are in line with their expectations and during the year, FY12, the US subsidiary received a total of US$ 300,000 from Universal Studios towards the subsidiary’s share. In line with the accounting practice followed by the US subsidiary, this amount has gone towards reducing the carrying value of the inventory.
(x) The Company’s information technology division known as “STG” i.e System and Technical Group which has been innovating and deploying technology successfully since past few years through
various means like high-performance storage, workflow and asset management tools, grid computing based render farm etc. These deployments have enhanced project delivery capabilities removed bottle necks related to transfer of files and approval delays. Currently the Company is working on next-generation computing based on “Hardware Accelerators” for visualization and computation to increase the productivity of the studio at highest level. Crest is the only studio in the Asia-Pacific region working on such technologies to enhance the performance of studio.
(xi) The Company has adequate positive net worth remaining after
adjusting losses and has not witnessed the loss of any of its critical clients nor the stoppage of work from them.
(xii) By Virtue of Amalgamation which came in to effect 26 July, 2011, the following downstream subsidiaries have become direct
 subsidiaries now.
1. Crest Animation Inc. (CAI)
2. Crest Animation Productions  Inc.(CAP)
3. Roop BDR Productions Inc. (RBP)
During the year FY12, the company entered into television contract with Moonscoop LLC for producing 13 episodes of 11 minutes each titled "Gloe". The company took television contract for Ireland based studio Brown Bag Films Ltd, for producing 52 episodes of television series titled "Octonauts".
(xiii) The company has successfully completed and delivered DVD project Swan princess 4 for Sony pictures. Due to success of fourth series of Swan Princess, the company has bagged the contract for the fifth series of Swan Princess.
(xiv) During the year, FY2,  the company entered into agreement with Snapdragon Inc for producing televised version of the movie "How to train you Dragon". The company started work on the project simultaneously along with the other projects which the company executed. However, due to technical complexities, the company  had to terminate the contract in order to concentrate on the delivery of other projects. But the things are expected to be streamlined in the Q3FY13.(xv) The company continued to work on the second feature film "Norm of the North" which is a part of Lionsgate deal. However, one of the financiers to this project defaulted their obligation to fund due to financial crisis in their region. The company is reviewing intended legal recourse to be initiated against the financier. Alternate  financing arrangements are also under negotiation.
(xvi) The company continued to work on "Ribbit", another CGI feature for limited release which the company is co-producing with KRU Capital Sdn. Bhd, Malaysia.
 Concerns:
(i) There have been delays and salaries to employees are outstanding. However, this has not impacted execution of work and in the past three months the Company has in fact, recruited additional artists to serve new contracts. The Company is not in default with respect to statutory dues and obligations except Tax deducted at source which have all since been paid with delays.
(ii) The Company has accumulated losses of Rs. 30.72 Cr as at September 30, 2012. However, the company is confident to cover up this loss within a short time, as the business is  picking up. Despite the overall negative sentiments prevailing in the business environment the Company was able to place a small portion of the treasury shares and is confident of completing additional placements in future.
Conclusion: Considering the points mentioned above, the investors can buy the scrip of Crest Animation Studios Ltd, a turnaround story, at Rs.16.85, for a target of Rs.27--29--32-37-41, in the coming days.