Analysts predict bleak outlook for Pentamedia

Suresh Seshadri

CHENNAI: Pentamedia Graphics Ltd, India's leading animation and special

effects software firm, is expected to report that its profit rose only

marginally in the past year, reflecting shrinking margins. The average of a

Reuters poll issued on Monday forecast that Pentamedia's net profit for the

January-March quarter fell 35.51 per cent from a year-earlier to Rs 566.28

million ($12.16 million), on sales of Rs1.65 billion, up 49.86 per cent.

The poll, which covered four analysts, forecast that full year profits for

the year ended March 31, grew 3.52 per cent to Rs 1.76 billion ($37.81 million),

on sales of Rs 5.72 billion. Analysts said concerns over the firm's

acquisitions; both completed and proposed, as well as questions over the firm's

strategic leadership clouded the outlook for the future.

"They have strong products and businesses and a good infrastructure, but

concerns over whether the management has the strategic vision weigh them

down," said K Sivakumar, research head at brokerage firm Cholamandalam

Securities. Pentamedia shares were trading down 15.6 per cent at Rs 59.35 on

Wednesday afternoon. The benchmark Bombay index was down around four percent.

The firm's shares have tumbled more than 94 per cent from a 52-week high of Rs

1,029.65, a year ago.

Squeezed margins

Analysts said the firm would continue to face pressure on its operating margins
as its core animation software export business was likely to be affected by the

US slowdown and the need to improve capacity utilization. "The company will

not be able to get the high margin business like before and with pressure to

improve bench utilization their bottomline will suffer," an analyst with a

domestic brokerage said.

In January, Pentamedia said its animation and special effects businesses had

contributed 56 percent and 21 percent respectively to its turnover in the nine

months to December. Their manpower strength at that time was 1,906 associates.

Analysts said the firm's growth would continue to be at lower levels than the

rest of the Indian technology firms.

"Firstly they are not just a software services firm, except for their

animation and special effects business, so it is not right to expect them to

grow at above 30 to 35 per cent. Also the way they account their revenue from

the long-term animation projects is unclear," he added.

Uncertainty over acquisitions

The firm's recent acquisitions of a string of local portals for its

webcasting business, as well as problems with plans to acquire U.S. animation

firm Film Roman have also cast a shadow on its growth plans, analysts say. Last

week Film Roman told the Securities and Exchange Commission that its $15 million

deal to sell a majority stake to Pentamedia had run into problems.

"The acquisitions in the portals area, though only stock deals, were

pretty expensive and will affect the return ratios and the other deals in the

animation area are either in trouble or will take a long time to add

profits," a media analyst with a local securities firm said.

(C) Reuters Limited 2001.