CREST ANIMATION STUDIOS LIMITED
ANNUAL REPORT 2011-2012
The Directors hereby present the Twenty-second Annual Report of the Company
with the Audited Statement of Accounts and the Auditors' Report for the
year ended 31 March 2012.
FINANCIAL RESULTS: (Rs. in Million)
Operating Revenue 141.68 371.16
Other Income 50.76 5.60
Total Income 192.45 376.76
Profit before Interest, Depreciation,
Tax, Exceptional Items and prior
period adjustment (89.11) 59.35
Less: Interest & financial charges 59.60 72.68
Profit before Depreciation, Tax,
Exceptional Items and before
prior period adjustment (148.71) (13.33)
Less: Depreciation 56.88 87.58
Profit before Tax and before prior
period adjustment (205.59) (100.91)
Less: Provision for Tax - -
Add: Excess provision for
tax written back - -
Add: Prior period income - -
Profit after Tax (205.59) (100.91)
Less: Surplus/(Deficit) in
Profit & Loss account brought
forward from previous year - -
Net surplus/(Deficit) carried
forward to Balance Sheet (205.59) (100.91)
Note: Figures for the previous period have been regrouped/restated wherever
Since the operations of the Company have registered a loss for the year,
the directors express their inability to recommend any divided on the
equity shares of the Company.
OPERATIONS DURING THE YEAR AND PROSPECTS:
Financial Year 2011-12 has been a very challenging year for the Company and
it continued to battle multiple concerns.
A gloomy and dismal global economy resulted in reduction of fully financed
entertainment products. The Company's outsourcing revenues suffered
immensely on this account.
Financing for proposed Joint Venture with an American Studio was also not
Primary amongst these were the twin blows which the Company suffered last
year, i.e. the bankruptcy filing by one of the Company's client and the
backing out of the financing arrangement on the second feature film 'Norm
of the North' by one of the financiers. The full impact of this was felt in
the year where it was not possible to have the loss of business replaced
A lackluster stock market also did not allow for recapitalization and the
company had to resort to short term borrowings to keep the operations
going. The Company was able to place a small portion of the treasury stock
only in April 2012. The Company's bankers, employees and vendors have been
very supportive in these difficult times as they have had to face delays in
getting their dues cleared.
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.
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. Inadequacy of contracts both in the television and feature
film space has put pressure on the revenues, resulting in the low
performance during the year.
The management and the artists along with support staff, despite deferring
their compensation for months, continued to do multiple tasks for
One unfeasible, non-contributing and demanding TV contract was discontinued
and alternatives are on for more viable projects.
Alpha & Omega, co-produced by the Company along with Lions Gate performed
reasonably well with gross box office collections over US$ 50 million and
sale of direct to video's and television rights raising more than US$ 22
million. As mentioned last year, the waterfall accruing to the Company will
be over a longer period of time than originally anticipated.
Due to the tight liquidity situation faced by the Company during the year,
no additional work could be carried out on the Indian Feature Film;
however, continued interest from Cable and satellite networks and from
distributors is testimony to the creative and animation quality ability of
the Company. The tentative release date is summer of 2013.
However the worst seems well behind us. 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
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.
The Direct to Video sales of 'The Little Engine that Could', co-produced by
the Company with Universal Studios, are in line with their expectations and
during the year 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.
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.
The Board of Directors supports the broad principles of Corporate
Governance and the Company has been in compliance with the mandatory
provisions of Corporate Governance as stipulated in Clause 49 of the
Listing Agreement entered into with the Stock Exchanges. In addition to the
basic governance issues, the Board lays strong emphasis on transparency,
accountability and integrity.
A detailed report on Corporate Governance Compliance and Management
Discussion and Analysis as stipulated in the Listing Agreement is annexed
and forms part of this report.
In accordance with the requirements of the Companies Act, 1956 Mr. Randhir
Kochhar, Mr. Rajen Damani and Mr. S. Balasubramanian Directors of the
Company retire by rotation and, being eligible, offer themselves for re-
Mr. Shyam Benegal, Director, has resigned with effect from 14 June 2012
from the Directorship of the Company. Your Board recorded its gratitude for
the guidance and counsel provided by Mr. Shyam Benegal during his tenure as
Director and accepted his resignation.
Brief particulars and expertise of directors seeking appointment/re-
appointment and details of their other directorship and committee
membership have been given in the Annexure to the Notice convening the
Annual General Meeting.
Directors recommend the resolutions pertaining to re-appointment of
Directors for approval of the members.
M/s. Chaturvedi and Shah and M/s. S. R. Batliboi & Associates (Member firm
of Ernst & Young Global) Chartered Accountants, Mumbai will retire as the
Auditors of the Company at the conclusion of the ensuing Annual General
Meeting. M/s. Chaturvedi & Shah have given their consent for re-appointment
as required under the provisions of Section 224(1B) of the Companies Act,
1956. M/s. S.R. Batliboi & Associates have expressed their inability to
continue as Auditors. The Board of Directors of your Company recommend re-
appointment of M/s. Chaturvedi and Shah as Statutory Auditors of the
Company. A resolution seeking your approval for re-appointment of Auditors
is included as item 5 of the Notice convening Annual General Meeting.
During the year under review the Company has not accepted any deposits from
the Public under section 58A and 58AA of the Companies Act, 1956 read with
Companies (Acceptance of Deposit) Rules, 1975.
DIRECTORS' RESPONSIBILITY STATEMENT:
Pursuant to Section 217(2AA) of the Companies Act, 1956 (the Act) amended
as per the Companies (Amendment) Act, 2000, the Directors confirm that:
* In the preparation of the Annual Accounts, the applicable accounting
standards have been followed along with proper explanation relating to
* The Directors have selected such accounting policies and applied them
consistently and made judgments and estimates that are reasonable and
prudent so as to give a true and fair view of the state of affairs of the
Company at the end of the financial year and of the profit or loss of the
Company for that period;
* The Directors have taken proper and sufficient care of the maintenance of
adequate accounting records in accordance with the provisions of this Act
for safeguarding assets of the Company and for preventing and detecting
fraud and other irregularities; and
* The Directors have prepared the annual accounts on a going concern basis.
As regards the qualifications made by the auditors as stated in paragraphs
4, 5 & 6 of their report on the accounts of Crest Animations Studios
Limited and paragraphs 5, 6 & 7 of the report on the consolidated financial
statements of the Company respectively, attention is invited to Note Nos
23, 24, 25 & 26 forming part of the accounts of the Company and Note Nos
23, 24, 25 and 26 of the consolidated financial statements of the Company,
wherein the detailed explanation are provided which in the opinion of the
Board of Directors are self explanatory.
Further the Auditors have laid emphasis on the accounts of the Company in
their report, with respect to continuance of the Company as a going
concern. In response, the factual situation is as follows.
(a) The Company was not a non performing account with any of the lenders on
31 March, 2012 or at any time thereafter until the date of this report.
(b) The Company has been able to get the limits and loans with the lenders
realigned with respect to repayments and maturities.
(c) The Company has been able to service the interest on the private loans
and has even repaid/renewed some of these temporary loans since the date of
the balance sheet.
(d) Since the balance sheet date the Company has executed Rs.95,859,642 of
work on hire projects and collected Rs.133,002,805 from debtors.
(e) 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
(f) The Company is not in default with respect to statutory dues and
obligations except Tax deducted at source which have all since been paid
(g) 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 before December
h) 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.
CHANGES IN GROUP STRUCTURE:
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, 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
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
During the year 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.
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
The company continued to work on 'Ribbit', another CGI feature for limited
release which your company is co-producing with KRU Capital Sdn. Bhd,
CONSOLIDATED FINANCIAL STATEMENTS:
In compliance with the Listing Agreement entered with the Stock Exchanges,
a Consolidated Financial Statement of the Company and all its subsidiaries
is attached. The Consolidated Financial Statement has been prepared in
accordance with Accounting Standards 21, 23 and 27 issued by the Institute
of Chartered Accountants of India and show the financial resources, assets,
liabilities, income, profits and other details of the Company, its
associates companies, joint venture companies and its subsidiaries after
elimination of minority interest, as a single entity. The statement
pursuant to section 212 of the Companies Act, 1956 forms part of this
The consolidated accounts present a full and fair picture of the state of
affairs and the financial condition. A statement of summarized financials
of all the subsidiaries is attached along with the consolidated financial
statement. However, on request by any member of the Company/statutory
authority interested in obtaining them, these documents will be made
available for examination at the Company's registered office.
In terms of general exemption granted by the Ministry of Corporate Affairs
under section 212(8) of the Companies Act, 1956, the Copy of the Balance
Sheet, etc. of the subsidiaries are not required to be attached with the
Balance Sheet of the Company. The Company Secretary will make these
documents available upon receipt of request from any member of the Company
interested in obtaining the same. These documents will be available at the
Registered Office of the Company, during working hours up to the date of
the Annual General Meeting.
PARTICULARS AS PER SECTION 217 OF THE COMPANIES ACT, 1956 ENERGY AND
The particulars as required under section 217(1)(e) of the Companies Act,
1956 read with Companies (Disclosure of particulars in the report of the
Board of Directors) Rules, 1988, are attached as annexure to this report.
PARTICULARS OF EMPLOYEES:
As required by section 217(2A) of the Companies Act, 1956 read with the
Companies (Particular of Employees) Rules, 1975 forms part of this report.
However, as permitted by section 219(1)(b)(iv) of the Companies Act, 1956,
the report and accounts are being sent excluding the statement containing
the particulars to be provided under section 217(2A) of the Act. Any member
interested in obtaining such particulars may inspect the same at the
Registered Office of the Company or write to Company Secretary for a copy
Your Directors place on record its sincere appreciation towards Company's
valued overseas customers for the support and the confidence reposed by
them in the Company and look forward to the continuance of this mutually
supportive relationship in future. Your Directors gratefully acknowledge
the contributions made by employees towards the success of your Company.
Your Directors are also thankful for the co-operation and assistance
received from its vendors, bankers, STPI, regulatory and Governmental
authorities in India and abroad and its shareholders.
FOR AND ON BEHALF OF THE BOARD
Place: Mumbai Seemha Ramanna
Date : 21 August 2012 Chairperson & Managing Director
ANNEXURE TO THE DIRECTORS' REPORT:
Disclosure of particulars with respect to conservation of Energy, Research
& Development expenditure and Foreign Exchange earnings and outgo under
Companies (Disclosure of particulars in the Report of Board of Directors)
CONSERVATION OF ENERGY:
The Company has an efficient energy conservation task force, which is
actively involved in continuous monitoring of energy usage and its
conservation. In spite of the Company's state-of-the-art equipments having
in-built energy efficient features, the Company continues to give highest
priority for conservation of energy by using a mix of technology changes,
process optimization methods and other conventional methods.
RESEARCH & DEVELOPMENT (R&D):
Your Company has initiated the process of R&D to develop new sets of
skills, enhance existing ones, and improve production facilities and
various processes of productions.
In future, the emphasis will continue to be on quality to identify ways to
optimize cost and develop new skills with focus on clients needs.
The Company continues to lay emphasis on development and innovation of in-
house-technological and technical skills in areas of computer graphics and
animation to meet the specific customer requirements. Efforts are also
being made to upgrade the existing standards and to keep pace with advances
in technological innovations.
FOREIGN EXCHANGE EARNINGS AND OUTGOINGS:
1. Total foreign exchange earned Rs. 131,491,483 (Rs. 371,157,058)
2. Total foreign exchange utilized Rs.1,012,540 (Rs. 1,886,181)
For and on behalf of the Board
Place: Mumbai Seemha Ramanna
Date : 21 August 2012 Chairperson & Managing Director
MANAGEMENT DISCUSSION AND ANALYSIS
Time and again a question comes to the fore. Is the Animation Industry
Recession Proof Rs. Animation has not only survived but grown in
geometrical progression over decades because it has bred very competent and
skilled artists, producers and animation studios where they collaborate to
produce quality work at very predictable intervals. With the advent of 3D
CGI animation the dynamics have stayed intact. It is an industry with its
very own distinct sensibilities and nuances.
Over the last year, emergence of well loved movies franchises like Ice Age,
Madagascar, Kung Fu Panda, Lorax, just to name a few, many upstart
entrepreneurs and visionary artists decided to create 3D animation studios
of their own. The hype continues without reaching a bubble status. After
all, demand continues for these kinds of entertaining, colorful family
Having said that, the global financial crisis did not just hit the realty
projects and banking firms. It did have a trickling effect on the animation
industry but limited itself to geography. Europe. How hard hit was the
animation industry Rs. It is no secret that the UK animation industry is in
a tight spot right now. According to 'securing the future of UK animation'
released recently by Animation UK, as much as 40% of the animation
companies located in the territory were either just breaking even or losing
money in 2011. And 28% of UK animation companies have gone out of business
or left animation in the last three years. Arguably, this could be
attributed to the deep financial turmoil in the European markets. But
realistically it is due to growing overseas competition. It is important to
note that a majority of those animation studios who never quite make the
cut ventured into the industry because of the promise of easy money and not
because of the love of the art. Art without heart seldom prospers and that
goes for mediums such as paintings, music, literature etc. In the Euro
Zone, France and Germany are predominantly in TV animation and largely
supported by Government tax breaks and subsidy's. TV is very crowded and
noticeably the licensing fees by broadcasters are dwindling thereby making
most shows financially un-viable. It is one thing to state that the
animation industry is encountering hard times. It is, however, another
thing to label the industry is bust like the dot-com crash of the early
21st century. No, not just yet-not with all the new technologies and
procedures coming the way of 3D animators. If anything, these tough times
will only separate the cream of the crop from lame pretenders. Also, the
difficulties created by global recession has translated to higher quality
of animated movies.
Interestingly, United States continues to dominate the animated theatrical
segment. Not only in producing animated content but also in world-wide
distribution. Another very interesting fact to note is the prominence that
China & India are getting in the global animation industry. These two
countries out of Asia are being positioned as the front runners in both
outsourcing as well as original IP creation. Major studios like Walt
Disney, Dreamworks etc have been expressing this very transparently through
CGI animated theatrical releases continue to dominate the World Box Office
and is poised to do even better as more releases are planned over the next
few years. With the increase in theatres (multiplexes), TV channels and use
of digital satellites, the rapid growth of the Internet and a wide variety
of other new technologies (including advances in stereoscopic and large-
format projection), distributors and programmers in nearly every country
require more content than ever to fill consumer demand. The general pace of
international roll-outs is quicker than in the past. Films are launched
simultaneously around the world and this is becoming common place.
Distributors and exhibitors continue to innovate, find new ways to expand
the Box Office pool.
The animation industry in India is witnessing a new revenue model, which
otherwise only existed in mature markets like North America, Europe, Japan
etc. Merchandising and Character licensing is a fast rising industry in
Asia today, particularly India. An obvious recent example is 'Chotta
Bheem'. Though the product does not fall into 3D CGI category, this
animated brand is facilitating the markets to mature. India is also
witnessing new horizons, different applications of animation, especially in
gaming, live search maps, medicine, surgery and other simulations.
COMPANY OUTLOOK AND OVERVIEW:
The year 2011-12 was extremely challenging. After the initial set back, we
pulled up our sleeves and re-grouped to strategies our way forward. The
services product mix had to have all the three formats viz work- for- hire
for TV, DVD and Feature. We began our journey with doing fresh tests, for
TV series and over the first six months of the financial year demonstrated
to the world markets that we continue to lead in quality as we were the
only studio, out of many in India, to have qualified. We were successful in
converting these prospects to customers. We were the natural choice for
Dreamworks Animation, Brown Bag Films and Moonscoop. Brown Bag Films, based
out of Ireland, is a two time Academy award nominated studio and are
producing some of the finest shows for Disney, BBC etc. Moonscoop,
erstwhile Mike Young Productions was pleased to come back to us and
Dreamworks Animation needs no introduction.
It is common knowledge that we faced operational challenges due to
irregular cash-flows largely due to the following reasons: A US client
declaring Chapter 11, default in Norm funding and lack of new service
contracts. In-spite of this challenge the entire staff demonstrated true
grit and moved forward with the belief that the situation prevailing was
During the year under review, the company once again began multiple TV
series and a DVD production in full steam. 'Octonauts' a 52 episode TV
series, GLoE a TV series for Moonscoop is in full production.
Sony, one of the largest studio in US was extremely happy with our quality
on the Swan Princess 4 DVD delivery and quickly greenlit Swan Princess 5
DVD which is in production. We also began production of one of the most
complex TV series ever made for Dreamworks Animation but had to abandon due
to cost/profitability issue. By and large TV series as a product mix has
lower margins but if managed diligently it helps in operational cash-flows.
During the year under review, the company had a special request from
Redchillies, a production house owned by Mr. Shahrukh Khan, to help them
finish animation for their Bollywood film called 'Ra.One'. This task was to
be accomplished in approximately two weeks and when we delivered the client
was so happy that they insisted on giving us credit in the 'main title'.
During the year under review, the company continued its work on the feature
'Ribbit' and the final retakes are just being delivered. A few sequences of
this film was shown to prospective distributors in Cannes Film Festival and
it has bagged some major European territory sales guarantees. This film is
slated for theatrical release during this calendar/financial year. On the
project 'Indian Feature Film' front, status quo was maintained as there was
no movement during the year.
The company recruited over 150 personnel and put them through rigorous
training in multiple software and skills and they have all become
productive in a very short span of time. They are all absorbed in various
TV episodical deliveries.
The company has also been in talks with a few overseas animation studios
for a strategic/dedicated relationship and this could see some fruition in
the near future.
SEGMENT-WISE OR PRODUCT-WISE PERFORMANCE:
The Company is engaged in providing 3D/CGI Animation i.e. 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. Management believes
that the risks and returns from these services are not predominantly
different from one another and hence considers the Company to operate in a
single business segment. However management has identified geographical
segment disclosures based on location of the Company's customers in case of
revenue. Further, disclosures of carrying amount of segment assets and cost
incurred to acquire segment assets are based on geographical location of
segment assets. As per Accounting standard AS (17) on segment reporting,
segment information has been provided under the notes to consolidated
INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY:
The company through its management is responsible for establishing and
maintaining adequate internal control over financial reporting commensurate
with its size and nature of business. Our internal control systems are
effective to provide reasonable assurance regarding the reliability of our
financial reporting and the preparation of our financial statements for
external purposes in accordance with the generally accepted principles of
accounting. The internal control systems provide for well-defined policies,
guidelines, authorizations and approval procedures. Due to its inherent
limitations, internal control over financial reporting related to
projections of any evaluation of effectiveness to future periods are
subject to the risks that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or
procedures may deteriorate. Our independent registered accounting firms M/s
Ernst & Young & M/s Chaturvedi & Shah has audited financial statements and
has issued its report on the effectiveness of internal control over
financial reporting which is included herein.
DISCUSSION ON FINANCIAL PERFORMANCE WITH RESPECT TO OPERATIONAL
During the year company started production on two television series titled
'Gloe' and 'Octonauts' as well as two Direct to Video projects, 'Swan
Princess - 5' and 'Alpha & Omega'.
The company generated total income of Rs. 192.45 Million as compared
Rs.376.76 Million for the previous year. The company's EBIDTA stood at
Rs.(89.11) as compared Rs. 59.35 Million for the previous year. The loss
after tax of the company for the year 2011-12 was Rs. 205.59 Million as
against loss of Rs. 1,711.52 Million. The loss for previous year included
impairment of goodwill on amalgamation of Rs. 1,610.61 Million.
The Financial performance of the Company can be reviewed in two parts as
1. Crest Animation Studios Limited (Standalone), which excludes the
performance of subsidiaries.
2. Crest Animation Studios Limited (Consolidated), which includes
performance of subsidiary companies, mainly Crest Animation Inc. and its
During the year the loss after tax of the company for the year 2011-12 was
Rs. 205.59 Million as against loss of Rs. 1,711.52 Million during the
previous financial year. The loss during previous year was primarily due to
one time exceptional item of impairment of goodwill on amalgamation of
Rs.1,610.61. During the current year lower revenue was due to Inventory &
Debtor write - downs of Rs. 23.47 Million and Rs. 2.09 Million respectively
(due to discontinuation of one project) which contributed to the higher
Revenues during the year are down primarily due to new contracts being
commissioned only during the second and third quarter of the year.
The company's operating revenues have been generated by production service
fees out of the work for hire contract for Television series 'Gloe' &
'Octonauts' and Direct to Video projects 'Swan Princess -5'.
During the year, revenue fell by 55% from Rs. 422.03 Million to Rs. 189.06
Million. The consolidated loss stood at Rs. 199.94 Million as compared to
Rs. 1,713.09 Million. The loss during previous year was due to impairment
of goodwill on amalgamation of Rs. 1,610.61 Million, write down of
properties, provision of debtors due to filing of Chapter 11 by one of our
clients in USA.
During the current year the decrease in revenue of 55% caused due to
funding issues pertaining to second feature film 'Norm of the North'
project is mainly responsible for the higher loss.
OPPORTUNITY, THREATS, RISKS AND CONCERNS:
India for Animation - analyzing the opportunities, threats and challenges.
1. Low cost of animation services
2. Attractive destination for outsourced animation production for
3. Increase in institutions providing animation education
4. Well equipped animation studios
5. English speaking talent
6. Growing awareness of Indian Animation talent Among international studios
1. Manpower shortage
2. Protection of intellectual property
3. Attrition and poaching loss of experienced professionals
4. Very little awareness of career in animation
5. Minimal government support or incentives
6. Funding problems, Salary issues and constant retaining of professionals
1. Increasing awareness of Indian Animation talent amongst international
2. Increasing animation budgets
3. Increasing acceptance of animation content in domestic entertainment
4. Increasing capex on building world class animation studio
5. Tremendous opportunity of tapping international animation market
1. Competition from other countries like Taiwan, Philippines, Korea and
2. Ever changing technology
3. Lack of awareness in foreign countries
4. Inadequate funding for capex and investment in manpower
5. Lack of support from government
Macro Economic Risk:
The global economy is witnessing significant contraction with an
unprecedented lack of availability of business and consumer credits. This
current decrease and any future decrease in economic activity in the United
States and other regions in the world, in which we do business, could
significantly impact our results operationally and financially. The
business risks are both inherent and perceived. The business of
entertainment being a High Risk - High Return business does test our
patience, commitment and convictions time and again.
The markets are getting increasingly competitive, Technological
obsolescence and lack of skilled & trained human resources demand sustained
and enhanced levels of investments in both depreciating as well as
Our success is primarily dependent on the audience accepting our products
which is extremely difficult to predict or guarantee. The revenue derived
from a feature film does not necessarily bear any correlation to the
production or distribution cost incurred.
The company's business is dependent on the availability of work for hire
projects and/or ability to co-produce projects. Unexpected delays in the
commencement of work for hire projects or the commercial failures in co-
production project would have a material adverse affect on our financial
results. Further, as a result of the global economic infirmity, the markets
are increasingly meandering towards co-financing models of business
association, which stipulate large capital outlay, further necessitating
the need for innovative financial structuring of deals.
The business is substantially affected by the prevailing global economic
conditions. Increases in interest rates, inflation, changes in tax, trade,
scarcity of credit are some of the factors which impede the growth of the
business. The economic downturn has left no public limited company
unaffected which is reflected in the performance of our stock. However
given the resilience of the economy in the face of recession as well as its
strong fundamentals, the company does not expect to be significantly
affected by this risk in the long term.
Business Model Risk:
We currently operate principally on one business segment i.e. 3D/CGI
animation and our lack of diversified business could adversely affect us.
Many times business of the Company is also subject to risks such as overall
economic and political events etc. The Company is providing services in
three areas Filmed entertainment/DVD/TV episodes. Hence, the risks vary for
each business area.
Filmed entertainment: The success depends on viewers acceptance of the film
which is almost impossible to predict and therefore, risky. The financial
success of film also depends on other factors like public acceptance of
competitors film, other forms of leisure and entertainment available to
public etc. Economic/Financial success of theatrical performance also has a
huge impact on other revenue streams like DVD/TV/Merchandise etc. Most
importantly one cannot assure that the film will generate enough revenue to
cover costs like distribution, marketing, production etc. which means the
net revenue could get affected.
Home entertainment (DVD): This business stream is currently experiencing
significant change due to rapid technological shifts and thereby consumer
preferences and behavior is changing. Since, this also becomes
unpredictable, there is an inherent risk involved on profitability.
Internet, You Tube, Mobile devices continue to evolve rapidly due to
technology and therefore we are constantly adapting to new distribution
TV episodes: This segment is governed and driven largely by
broadcasters/networks. As compared to live action, number of networks
dedicated to children is relatively lesser and also the 'license' fee, over
the years, is continuously reducing. The number of suppliers in this
segment are much higher and exist across all geographical regions.
Competition especially from other Asian regions (in the animation
outsourcing space) like China/Malaysia/Singapore/Korea etc. is growing in
geometric progression and their pricing is relatively more aggressive than
Indian counterparts. This puts a pressure on Ebitda margins and therefore
over a period in time one might have to exit this format and therefore
putting a risk on overall lower revenue.
To mitigate the risk in our business model, we consciously ensure that we
maintain a mix of 'work-for-hire' projects along with ownership of
content/intellectual property rights on projects in addition to strongly
exploring the Gaming and Digital asset management.
We are significantly dependent on the US & European markets and any change
in the nature and structure of these markets would adversely affect our
financials. We do believe that the US & European markets are adequate
enough to provide us with continuous and sustainable business opportunities
for the foreseeable future, the Asian markets are also warming up to the
possibilities of the CGI Industry and we have already made a headway in
establishing strategic relationship with producers of repute in these
The production of animated products is capital intensive and our capacity
to generate revenues from our work for hire projects may be insufficient to
meet our anticipated cash requirements.
The company's revenue is predominantly denominated in USD and given the
volatility of the Indian Rupee; the financials of the company can swing
significantly. To mitigate the risk the company has through proactive and
effective risk management techniques entered in forward contracts to hedge
its foreign currency receivables. The company has through its strategic
initiatives and sustained reconnaissance established formidable
relationship in the financial markets that facilitate innovative financial
arrangement to provide for its capital requirements.
Regulatory and Compliance Related Risk:
The Company's transactions are though predominantly in the US, it also
transacts with other countries. As the Company pursues towards a global
reach the risk of ensuring 100% compliance with the regulations and laws
The Company has an institutionalized structure to ensure regulatory and
legal compliance to mitigate such risks.
The reputation of an entertainment Company is built on various factors
including the Credentials of the Creative Directors, The Actors, The
success of the products as measured through BOX OFFICE collections etc. We
mitigate such risks by endeavoring towards and ensuring that we work with
the most reputed of Brands, Creatively Competent Directors of Repute and
Properties that appeals to a wide range of audience and has a Long Shelf
We cannot predict the impact the rapidly changing technology or alternative
forms of entertainment may have on us. Animated products are expensive to
produce and the uncertainties inherent in their production could result in
the expenditure of significant amounts on projects that are abandoned or
delayed for reasons beyond our control.
We try to mitigate these risks by investing in developing proprietary tools
that enable increase in efficiencies and standardization of processes. We
also ensure that we stay abreast with the changes in technology and
constantly upgrade the capabilities and capacities of our human resources
as well as technological resources.
The production completion of animated projects is subject to number of
uncertainties, including delays and increased expenditures in lieu of
creative and technical difficulties, availability of talent, cost
technology and increase in wages.
As a result the projected production cost at the commencement of the
project may increase, the date of completion may be substantially delayed
or the project may even be abandoned by the producer causing the write off
of expenses incurred with respect to the project. We mitigate these risks
through an effective amalgamation of operational planning & management,
enhancing creative and technological competence as well as good Corporate
The company has implemented and would continue to implement changes in its
production processes & systems in order to produce stereoscopic projects as
and when required. These changes will increase the cost of producing a
project, which may have an impact on the realization of profits. We rely on
technology that we license from third parties, including software. There is
no assurance that these third party technological licenses will continue to
be available to us on commercially reasonable terms or at all. The loss or
delay to maintain any of these technology licenses could result in delays
in the completion of a project and could materially adverse our business,
financial conditions or results of operations. Our success also depends on
some key employees including Management personnel's, Creative & Technical
Personnel's. We do have employment agreements with these key personnel's;
however it doesn't guarantee the continued services of such personnel's.
MATERIAL DEVELOPMENTS IN HUMAN RESOURCES/INDUSTRIAL RELATIONS FRONT,
INCLUDING NUMBER OF PEOPLE EMPLOYED:
We believe our people are our biggest asset. Animation is a manpower
intensive business and it requires a seamless conjugation of creative
brilliance and technical capabilities. The company's Human Resources
policies are aimed towards encouraging ownership, building a culture of
learning & development. We have initiated processes towards building
organization capabilities that would help set benchmarks for the industry,
enable our artists to show case their creative potentials and enhance
productivity for propelling business growth and profitability.
The key HR attributes of the Company include:
a. A strong team of Competent, Committed and Passionate CGI artist who are
ever ready to meet the growing demands of the business.
b. Strategic initiatives undertaken to ensure we are able to attract &
retain the best talent.
c. Zero non - compliance with regards to any statutory compliance.
d. No employer - employee litigations in any court of law. Cautionary
Statements in this report on Management Discussion and Analysis describing
the Company's Objective, projection, estimates, predictions and
expectations may be forward looking statements within the meaning of
applicable laws and regulations. These statements are based on certain
assumptions and expectations of future events. Actual results could,
however, differ materially & substantially from those expressed or implied.
The company, The Directors & Management assumes no responsibility with
regards to the forward looking statement herein which may change on the
basis of subsequent developments, information or events.
Observations made on the industry and other players also reflect an opinion
by the management and the management accepts no liability on such opinions.