Net margins in Indian Animation Industry attractive but declining

ValueNotes has recently come out with a report on the design and animation industry in India. The report highlights the fact that though EBITDA (earnings before interest, tax, depreciation and amortization) margins of the industry are quite satisfactory, net margins are still a concern. Also the Compound Annual Growth Rate or CAGR of the industry is about 27% from 2007 to 2011.

Animation industry in India. Image source

ValueNotes is one of the prominent research firms in business intelligence. The research products and support services of the company has enabled organizations to take strategic decisions and hence achieve competitive advantage. Apart from research based activities, the firm also offers knowledge processing services, competitive intelligence consulting services, and training programmes for corporate teams and individual practitioners.

The chances of animation industry to flourish in a country like India are really high, since it possesses some of the top entertainment industries across the globe. Also the operational cost in India is comparatively lower than that of western countries. Other factors attributing to the growth of design and animation industry in India is the robustness of telecom infrastructure, and ready availability of resources with adequate technical skills and language proficiency.

For the last five years the industry had shown a steady growth. As mentioned earlier, CAGR value of the industry is about 27% from 2007 to 2011, while aggregated revenue increased by 18% in 2011. The report from ValueNotes ‘Design & Animation: Financial Performance Review’ finalizes the fact that poor financial management has hindered the steady growth of design and animation industry in India. Even though cost factor is high till 2009, results showed a steep rise in the revenue of the industry.

Arjun Bhuwalka, the Project Manager, ValueNotes has come out with the opinion that EBITDA margins are quite good but at the same time it is showing a declining trend. EBITDA margins declined for 2009 and 2010, but it showed a minor improvement of 31% in 2011.  Net margin is still a concern for the industry, which is about 10% in 2011.

According to Service Provider Evaluation Ranking done by ValueNotes in 2011, DQ Entertainment tops the list, with the highest reported revenue. The company also holds high margins and good shareholder returns. Other prominent companies in the queue are Prasad Corp, Crest Animation Prime Focus, and Digient.

Therefore we can conclude that the following factors has attributed to the poor financial performance of design and animation industry.

  • Declining interest coverage ratio
  • Low returns
  • Poor working capital management
  • Weak net margin

These key financial indicators had advanced for the last few years, but are not enough to improve the overall turnaround of the companies working in the industry. Even though the revenue factor got decreased to a certain extent, companies still have the opportunity to grow and flourish in the sector. But this can be possible only by reducing the cost factor at a quick pace.

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