The pure-play design and animation firms in India grew at a CAGR of 27% from 2007 to 2011. The operating margins of these companies are attractive so far, however, they are now declining, according to Pune-based market intelligence and research firm ValueNotes Database.
The company, in its report titled “Design & Animation: Financial Performance Review” has analysed the key financial ratios of pure-play service providers with operations in India, which specifically cater to the animation and special effects segment. The report notes that a lack of prudent financial management has dented the benefits of steady growth. “Till 2009, revenue growth in the industry was high, but costs were increasing at a faster pace. As a result, the bottom line was poor and showed no sign of improving,” it states.
It further adds that Indian design and animation companies have been growing steadily over the last five years. The revenue of these companies grew at a CAGR of 27%, while aggregated revenue increased by 18% year-on-year in 2011.
Arjun Bhuwalka, project manager at ValueNotes says, “EBITDA margins are attractive but declining, while net margin continues to be a concern. EBITDA margins declined in 2009 and have been flat with a minor improvement to 31% in 2011. On the other hand, net profit margins do not paint a happy picture, as they have hovered around 10%.”
Unattractive returns and low interest coverage have been raising questions on investments. The aggregated return on capital employed (ROCE) for the companies, has been in single digits during the last four years and was a meagre 6% in 2011. Moreover, in this period, interest coverage fell to 2.49 in 2011, it further adds.
From a financial perspective, low returns, weak net margins, poor working capital management, and declining interest coverage ratio make the design and animation industry unattractive, the report notes. It adds that performance on these key financial indicators has improved marginally in the last couple of years but the companies have not done enough to indicate any potential for a turnaround. "Although revenue growth has decelerated, it is still high - this provides an opportunity for companies to improve their performance. However, this will require quick and significant measures in reducing cost," the report suggests.