Crest Animation... A BUY in the SELL OFF

I Believe that in the current sell off one of the stocks that investors should consider buying with a long term perspective is Crest Animation Studios at the current market price of around Rs. 69. The key rationale I believe are:

• One of the only animation company in India who instead of only being an outsourced animation content provider, also is a partner in the movies it provides animation for

• JV with Lions Gate Entertainment of US, one of the biggest production houses for providing animation to their movies and having a profit share in the same

• 1^st movie Alpha and Omega released in September 2010 and have already done a business of over $40 million and is poised for a world wide release in 2D and 3D space, moreover the movie is in Oscar eligibility list, the 1^st animation movie from India in this category

• On an average an animation movie produced by major production houses of US makes around $ 100 mn in profit

• I believe Crest’s Alpha and Omega to do 50% below average, which gives a profit of around $50 million

• Here Crest’s Share being 25% of profit, gives it a value of around $12.5 million

• Which is around INR 56 cr of profit, given total number of shares, comes to EPS of around Rs. 25/share, which it would book over FY11 and FY12 (normal practice in movie industry)

• Thus given the current market price of around Rs. 68 gives it a forward P/E of around 5.7 in a high growth animation industry where peers like Prime Focus, Tata Elexsi and DQ Entertainment trade at a P/E of over 20 times their forward earnings

• Even taking the worst case scenario of a forward P/E of around 10 (50% below the industry average) the fair price comes to around Rs 150, which is double from the current levels

• This EPS expansion or growth will continue because it is slated to release one more movie in tie-up with Lions Gate in 2012 titled “Norms of North” then in 2013 titled “Ribit” and from then on a movie each year

• De Shaw holds over 15% of the company and Deutsche Bank holds around 7%

The only risk with the company I see at the current point in time is that its still loss making and the first set of earnings will start coming from the quarter ending March 2011.

Happy Investing...!!!