BUSINESS OVERVIEW

Phantom Digital Effects Limited (or Phantom) was formed in 2016. It is a Certified Trusted Partner
Network (TPN) company, full-fledged creative studio, based in India with offices operating in US and
Canada. TPN is acknowledged by Motion Pictures Association of America. This certification gives
Phantom the validation to be a part of Marvel, Disney or Pixar movies. It provides high-end visual effects
(VFX) solutions for commercials, feature films and television media globally.

VFX or visual effects is the computer-based creation, manipulation or enhancement of a moving media
shoot, that doesn’t actually take place during the live-action shooting. Either these worlds do not exist,
or they are too risky to shoot, and hence comes VFX into play.

Phantom has delivered thousands of shots for Hollywood, independent feature films and commercials
over the last few years. The Company also gets sub-contracts from larger VFX studio operators. Some
of the movies of which Phantom has been a part include Brahmastra, Bahubali 1 & 2, RRR, Vikram, Beast,
Avengers, Transformers, Superman, etc.

During 1HFY23 Phantom registered 60% of its revenues from India (INR 16 Crore), down from 70% in
previous two financial years (Figure 1). In India, it caters to Bollywood as well as Telugu, Tamil, Malayalam
and Kannada big budget movies. Its current international share of revenues is 40%. Management aims
to bring the international share to at least 50% of total revenues given it generally has higher operating
margin.

Phantom’s has offices across Mumbai and Chennai in India with international offices located in Los
Angeles, Vancouver and Montreal. It is planning to open two studios in Mumbai and Cochin during
2HFY23 and expand operations in international offices in Canada and Los Angeles. It has already
acquired an establishment in Mumbai (BKC) wherein the Company will take the total employees in
Mumbai from 50 to 300. In Chennai, it is planning to add 600 employees, 100 in Hyderabad and another
100 in Cochin. These are part of Company’s plan to take the total strength from 300 currently to 1,000
by FY23 and 2,000 by FY24. Billing is based on man-hours invested in a particular project and total
project value could vary from INR 10L (for a commercial with a 1-2 week turnaround) to INR 10-20 Crore
(for a theater or OTT film). In terms of billing per man-day, it depends upon the project and the client.
For instance, for a recent Marvel project it was INR 14,000 per man-day, while a similar project in India
could fetch 9,000-10,000 per man-day. Management expects the Cochin and Mumbai studios to be fully
operational in the next quarter that will provide end-to-end VFX solutions. Also, the management plans
to foray into animation and gaming space gradually.

Figure 1: Geographical split of revenues

Client concentration in terms of revenues from the top 3 clients over the last three financial years has
been: 1QFY23 (46%, 13%, 11%), FY22 (24%, 19%, 9%), FY21 (33%, 30%, 20%), FY20 (18%, 12%, 8%) (Figure
2). Top 10 clients contribute at least two-thirds of the total revenue. The client retention ratio is high at
80%.

Figure 2: Top 10 clients based on revenues over the last five years

According to the management, Phantom is the first go-to-vendor for Netflix in India. Whenever Netflix
has a big project with visual effects, it approach Phantom for the execution. Only if Phantom is unable
to accommodate the project requirements, Netflix searches for another vendor. Phantom also has good
working relations with Netflix International, Apple and Disney Hotstar. It recently signed a project with
Disney Hotsar.

On 21st Dec, Phantom announced that it has been endorsed as an Amazon-approved VFX studio. It also
qualified for the Walt Disney Vendor Evaluation Program and is hence authorized to receive content
from Walt Disney Studios and Television groups. This would open the doors for more OTT projects in
future. DNEG, one of the world's leading visual effects and animation studios for feature film and
television, has also approved Phantom as an Outsourcing Vendor to handle various assignments
pertaining to their feature film, television, and multiplatform content.

INDUSTRY OVERVIEW

Global VFX Industry: The global VFX market stood at US$ 26.64bn in 2020. It is expected to grow at a
CAGR of 11% to reach US$ 49.83 by 2026. The key market segments in terms of application include
movies, television, advertising and gaming. North America, and in particular Hollywood movies have
been driving the global VFX market. Key market players include Adobe, Autodesk, Blackmagic Design,
Chaos Software, Corel, PIXAR, etc.
A major driving force of the global VFX industry is the increasing demand for high-quality content.
Increased usage of digital video streaming outlets such as Amazon Prime, Netflix, Hulu, etc. have led to
the increased usage of VFX to create such high-quality content.

Indian VFX Industry: The total VFX and animation market in India shrunk by 44% from INR 94.9bn in
2019 to INR 53bn in 2020 due to severe restrictions imposed during covid pandemic. However, it sprung
back to INR 83.1bn in 2021, with a 57% growth. The VFX sub-segment grew by 103% from INR 18.8bn
in 2020 to INR 38.2bn in 2021 and is further expected to grow to INR 93.1bn in 2024E at a 3Y CAGR of
35%. Animation grew by 24%(30% growth) led to an increased demand for animated content. The total
VFX and animation market is expected to grow to INR 180.4bn by 2024E at a 3Y CAGR of 29% (Figure
3).

The major driving force for this growth include increasing demand for high-quality domestic film and
episodic content, content crossing language barriers both nationally and internationally, as well as
increased adoption of virtual production and rising VFX budgets. Earlier 5-8% of the production budget
was allocated to VFX. This has now gone up to 15-20% both for films and episodic content. Further,
increased offshoring of projects to India with the expansion of global content economy with new OTT
platforms is also pushing forward the Indian VFX industry. Growth of NFTs and metaverse in the coming
decade will increase opportunities for the industry. Metaverse will require huge volumes of virtual
content to be created, while NFTs will require high amounts of design capability, animation, game-
development and skinning, rendering in virtual worlds, etc.

Figure 3: Post covid recovery in VFX

Source: EY FICCI M&E Report (Mar 2022), Sovrenn

Source: EY FICCI M&E Report (Mar 2022), Sovrenn Source: EY FICCI M&E Report (Mar 2022), Sovrenn

If we look at the larger Media & Entertainment (M&E) sector, in 2021 it stood at INR 1.6tn. Television
was the largest sub-sector with a 45% hare (INR 720bn), followed by Digital Media at 19% (INR 303bn),
Print at 14% (INR 227bn), Online Gaming at 6% (INR 101bn) and Filmed Entertainment at 6% (INR 93bn).
Animation and VFX was at INR 83bn with a 5% share. Live events (INR 32bn), Out of Home Media (INR
20bn), Music (INR 19bn) and Radio (INR 16bn) were the other comparatively smaller segments (Figure
4).

M&E sector is expected to stand at INR 2.3tn in 2024E. The expected share of Television sees a drop
from 45% in 2021 to 36% in 2024E while Digital Media’s share is expected to move up from 19% to 23%.
Share of Print is expected to go down from 14% to 11% while Online Gaming would maintain its share
of 6%. Share of Filmed Entertainment would move up from 6% to 9%. Animation and VFX is also
expected to increase its share from 5% to 8% (Figure 4, Figure 5).
Figure 6: 3Y CAGR (2021-2024E) at 12.9% for M&E, 29.4% for Animation & VFX

Source: EY FICCI M&E Report (Mar 2022), Sovrenn

In terms of future growth expectations, the whole M&E sector is expected to grow at 12.9% CAGR over
2021-2024E period. During the same period, Live events is expected to grow the fastest at 32.2%, albeit
from a smaller base (INR 32bn to INR 74bn). Filmed Entertainment is expected to grow at a CAGR of
31.6% from INR 93bn to INR 212bn while Animation and VFX is expected to be the third largest in terms
of growth, growing at a CAGR of 29.4% from INR 83bn to INR 180bn (Figure 6).

Figure 7: M&E Sector expected to grow from INR 1.6tn in 2021 to INR 2.3tn in 2024E

Source: EY FICCI M&E Report (Mar 2022), Sovrenn

There was a pandemic related drop of 24% in M&E sector from INR 1.8tn in 2019 to INR 1.4tn in 2020.
This recovered slightly by 16% in 2021 to INR 1.6tn. The expected growth in 2022E over 2021 is 17% to
surpass pre-pandemic level. For the Animation and VFX segment, it dropped by 44% in 2020 (INR 53bn)
vs. 2019 (INR 95bn), but then grew by a strong 57% (the highest growing sub-sector) in 2021 to reach
INR 83bn. It is further expected to grow by a whopping 45% in 2022E to reach INR 120bn and then by
a 2Y CAGR of 22% to reach INR 180bn in 2024E (Figure 7).

According to industry players, India is the winnable dream factory of the world. There are four reasons
for it: cost, communication, creativity and computing. Indian VFX and animation expertise is available at
20% of the cost of their western peers. A film project can save between 30-50% of its budget if the work
gets outsourced to India. According to Boston Consulting Group (BCG) and the Confederation of Indian
Industries (CII) research, the Indian animation and visual effects industry has the potential to grab 20 -
25% of the worldwide AVCG market. VFX is 50% creating thinking and building concepts and 50%
technology. According to Phantom’s Executive Producer, although studios in India have been providing
a lot of outsourced VFX to international studios, these are largely more technical than creative tasks.
However, studios like Phantom are pushing the envelope by working with international partners and
projects to do work that requires a higher level of skills.

Further, both central and state governments have been pushing forward the AVGC (animation, visual
effects, gaming and comics) industry, which was recognized as a Champion Sector in 2018. Given the
revenue generation as well as job creation potential of the sector, the central government has
constituted an AVGC promotion task force in order to expand exports and attract FDI. There are ongoing
talks of extending incentives under the flagship Service Exports from India Scheme (SEIS) to the industry.
States like Maharashtra, Karnataka, Telangana and Assam have created special policies to promote the
sector.

SHAREHOLDING

Phantom got listed on the NSE-SME board on 21st October via IPO. The IPO price band was 91-95 INR
/ share. Bejoy Sam (Promoter) held 68.4% shares pre-IPO which changed to 52.9% post-IPO. His wife,
Syntia Darry sold a part of her shares under offer for sale and her holding dropped from 14% pre-IPO
to 7.2% post-IPO. Bejoy’s brother, Binu Sam Manohar’s % holding diluted from 5% to 3.9% post IPO.
Total promoter and promoter group holding currently stands at 63.4%. As per the DRHP, 26.3% of the
Company was on offer in the IPO via issuance of new shares (2.64mn shares) and offer for sale route
(0.42mn shares) (Figure 8). The proceeds of INR 25 Crore from fresh issuance of shares would be used
towards (i) setting up of new studios (INR 17.4 Crore) in Mumbai, Chennai, Cochin and Hyderabad and
(ii) general corporate purposes (INR 7.7 Crore). Interestingly, Phantom had received acquisition offers
from three major Hollywood companies before it went the IPO route.
Figure 8: Shareholding of Phantom pre and post IPO

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Source: DRHP, Sovrenn
BULK DEALS

The following bulk deals also took place on Phantom on the day of its IPO (Figure 9).
Figure 9: Bulk Deals

Source: NSE, Sovrenn

The current price is 35% below the initial price level at the time of IPO. The median volumes traded is
64k (Figure 10). The average delivery percent is fairly high at ~80% (Figure 11).
Figure 10: Price and volume trend

Source: NSE, Sovrenn

FINANCIALS

Phantom posted excellent results for its half year ending Sep 2022. Revenue (INR 26 Crore) for the
period was 1.2 times of that of full year FY22 (INR 22 Crore) with net profit 1.6 times (INR 8 Crore for
1HFY23 vs INR 5 Crore for FY22)(Figure 12). In 1HFY23, 80% of its revenues were from OTT platforms
and 20% from commercials and films. Also, its EBITDA margin improved from 33% in FY22 to 42% in
1HFY23 and its net margin improved from 22% to 30% over the same period (Figure 15). As per
management, FY23 could end up with revenue of around INR 60 Crore. Beyond that, it could be 25%-
30% CAGR over the next few years.
Figure 12: Income Statement
Source: DRHP, H1FY23 Company Results, Sovrenn

Phantom executed 70 projects in 1HFY23 and currently has an order book value of INR 65-70 Crore with
57+ projects in pipeline. This includes a recently won order of INR 9.5 Crore from Hotstar for an OTT
film. For this, it is planning to increase its human capabilities from 300 to 1,000 by FY23. As per the
management guidance, it expects revenues to conservatively double in FY23 over FY22 driven by both
domestic and international order wins. Further, it expects EBITDA margin for FY23 to be in the range of
38%-40% due to increasing scale of operations and higher share of international projects.

Figure 13: Balance Sheet

Source: DRHP, H1FY23 Company Results, Sovrenn

Source: DRHP, H1FY23 Company Results, Sovrenn

Source: DRHP, H1FY23 Company Results, Sovrenn