Phantom Digital Effects Ltd Management Discussions

ECONOMIC OVERVIEW

GLOBAL ECONOMY: The UNCTAD reported strong growth in the goods and services sector despite the lingering impact of the pandemic and prevailing geopolitical tensions. Trade in goods grew 10% from last year to an estimated $25 trillion, partly owing to higher energy prices. Services were up 15% to a record $7 trillion.

Though trade value witnessed a temporary slowdown, the overall trade volumes actually saw a robust growth rate throughout 2022, indicating a resilient global demand.

While the World Economic Outlook anticipates a deceleration in growth from 5.4 percent in 2022 to 2.8 percent in 2025, Asia is still poised to be a key growth driver accounting for an estimated 70% of the global demand, despite all downward trend predictions.

DOMESTIC ECONOMY: India, the bright star amidst the gloom, is that model of resilience that continues to perform notwithstanding worldwide uncertainties. A GDP of approximately 7.2% for FY25 was recorded, primarily driven by private consumption and capital formation

RBIs monetary policy tightening cycle gradually brought down the initial out-of-range inflation from 7.8% in April 2022 to 5.7% in March 2023.

Indias per capita net national income (at current prices) for 2022-25 stood at INR 172,000, according to estimates from the National Statistical Office (NSO)

- a more than 100% increase over the per capita income in 2014-15.

An estimated GDP of 6.5% is predicted for the Indian economy in FY24 aided by vigorous credit disbursal and investment cycle.

The VFX Industry

GLOBAL: With the rising culture of hustle and relentless toil, digital video streaming platforms with their high-quality content have now become the most sought-after refuge. Binge- watching online content is the easiest exit from reality, and this is enhanced with the increased use of Visual Effects (VFX).

Visual Effects (VFX) is a captivating factor todays entertainment industry. They are special effects in TV shows, movies, videos, games, and commercials that cannot be shot in real life. VFX assumes huge investments in terms of infrastructure, creativity,, electronic instruments, and a relentless power supply.

As we move into a technologically enabled world, the VFX industrys scope will only expand thanks to the plethora of opportunities that come along with Artificial Intelligence (Al), Augmented Reality (AR), Machine Learning (ML), and the OTT revolution. A spur in the growth rate of this industry is accurately anticipated.

The VFX market, driven by the rising demand for high-quality content on digital platforms, has already clocked in a value of USD 9.95 billion in 2022. This market is expected to witness further growth in the forecast period of 2025-2028, growing at a CAGR of 10.4%.

Growth Drivers

• High demand for a pleasing visual experience: The world these days is a glutton for the extraordinary. VFX satiates this appetite by providing high-quality visual content otherwise impossible to capture in real time

• Surge in OTT usage: The most sought-after source of entertainment, OTT platforms, have exposed the VFX industry to new opportunities. Intriguing visuals in web series and movies have gained traction, and draw a larger audience each day.

• Emergence of new technologies: The possibilities for the technological industry are boundless. With the advent of Artificial Intelligence (Al), Augmented Reality (AR) and Machine Learning (ML), umpteen opportunities of producing the highest quality content have risen.

• Exponential growth of online video viewers: The widespread availability of low-cost internet and the proliferation of mobile devices have made watching videos online very accessible. Consumers expect to see high-quality content with great visual effects at ease, which is fuelling this industrys growth towards more fresh shores

• Telecom Advancements: The introduction of 5G will be revolutionary making online watching more impressive. A larger audience is expected to prefer watching high-quality content with reduced latency and higher speed.

Industry Trends

• The exciting tech upgradation in the field of Augmented Reality (AR) and Virtual Reality (VR) is set to revolutionize the gaming industry. VFX being a crucial component in games will simultaneously witness an upward growth trend.

• With content reaching worldwide rapidly, creators are looking for options that will give them an edge. Employing VFX will enable them to acquire that competitive edge.

• Viewers demand to experience an immersive watching experience is an eternal pursuit which fosters growth in the VFX industry.

DOMESTIC: The Visual Effects (VFX) industry has now successfully transitioned from being an outsourcing partner to being a global competitor in its own right. Keeping up with the demand for high-quality visuals, this industry is witnessing remarkable growth occasioned by technological advancements and government initiatives, allowing it to innovate. With CAGR forecasts of 20% and 25%, and anticipated ingenious visual effects and animation work, the Indian VFX industry is estimated to reach market value of INR 190 billion by 2025

OPPORTUNITIES

Getting positioned as a global player: Indias VFX industry has put the nation on the global map of entertainment. Forging new partnerships as well as harnessing the VFX industrys potential to create cutting- edge content will open up a wide array of opportunities for industry professionals.

Boost in the Gaming Industry:

The Indian mobile gaming market is poised to reach US$ 7 billion, in value, by 2025. This will accelerate the demand for Visual Effects that are vital for gaming aesthetics.

Cost-effective solution: VFX is a more cost-effective replacement for producing special effects than expensive physical sets.

This cost-effectiveness provides filmmakers and creative artists more latitude for their creativity.

Flexibility to create: VFXs capacities to generate content with enhanced realism makes it a flexible tool for mythology and fantasy-driven content that is so popular with the Indian audience

Threats

Competition: The high-margin business and its growing opportunities is attracting a number of players into this field which is increasing the competitive intensity.

Technology: VFX studios require cutting-edge technology and software to produce high- quality visual effects, which can be expensive to acquire and maintain. Additionally, keeping up with the latest technological advancements can be a challenging task.

Timeline issues: The VFX industry faces is the increasing demand for visual effects combined with tight project timelines. As clients demand high-quality visual effects in less time, VFX studios often have to work overtime to deliver the final product on time. This can lead to employee burnout and a decline in the quality of work produced, ultimately impacting the reputation of the studio.

Government Initiatives

• The inception of the National Centre of Excellence in Animation, VFX, Gaming, and Comics (AVGC) is an important stepping stone towards harnessing the industrys vast potential.

India is slowly progressing to position itself as a global AVGC hub with new opportunities.

• The government plans to invest 200 crore rupees in importing state-of-the-art equipment for use by AVGC start-ups and others.

• The Union Minister of Broadcasting and Information has announced plans for a Seed Capital Fund for AVGC start-ups and other industry members to take advantage of incentives for post- production work. FHe further assured introduction of a simple policy framework in order to reward incentives.

Future Possibilities

The future of the Indian VFX industry is one with immense potential as various technological advancements- Artificial Intelligence (Al), Augmented Reality (AR), and Virtual Reality (VR) - are set to revolutionize this space.

Rapid growth in this industry will also be due to the major Hollywood studios increasingly outsourcing their work to the Indian VFX industries owing to availability of skill talent and the cost effectiveness.

The pandemic caused radical shifts in content consumption which propelled the performance of the M&E sector. Since then, the performance graph has been upwards and has augmented growth in the VFX industry.

Sizing of the Indian Cinema:

A model theatre policy is being worked upon by the Information and Broadcast industry in order to roll out a pan India, single window clearance system.

This is a step towards reviving the theatre sector which was previously ravaged by the pandemic. The State-run CSC e-Governance Services will open 10,000 cinema halls in rural areas by the end of 2024. This is indeed a good paragraph.

Increasing subscription of OTT services: The variety of entertainment options and the convenience of usage offered by OTT platforms is gaining traction. The rapid popularity of OTT channels, increased emphasis on animated intellectual property (IP) content, and larger investments in VFX by studios has provided animation and VFX studios with opportunities in both domestic and international markets.

5G and its potential push to the media industry: With improved bandwidth and lower latency brought about by 5G services, streaming of high definition videos and other data-intensive media content could lead to an increased audience engagement for the media industry.

Gaming

The gaming industry has turned a corner after the onset of the pandemic. Being compelled indoors, many have resorted to mobile gaming to escape boredom, thus enhancing audience engagement for the gaming industry

The pandemic made the gaming experience so immersive that soon, in search for better gaming facilities, people became willing to pay for online games. According to analysts, over 24 million Indians were added to the payment-linked gaming market. In-app purchases are anticipated to drive future growth at a 34% CAGR between FY22 and FY27.

Growth potential: The Indian gaming market is expected to grow from $2.8 billion in 2022 to $5 billion in 2025, growing at a CAGR of 28-30%. The quantity of gamers in the nation is supposed to expand from 420 million in 2022 to 450 million by 2023, and it will hit 500 million by 2025. Thus, this industry is poised to generate 10,000 to 12,000 direct and indirect jobs in 2023.

Animation

Growth potential: The Indian animation industry is estimated to grow at a CAGR of around 15% during the period of 2021- 2026, the prime movers of growth being the increasing demand for animation content from various sectors such as media and entertainment, gaming, advertising, visual effects, education, and e-learning

About the Company

Phantom Digital Effects Limited, (the Company) a TPN certified company, is a VFX service provider, providing high end visual effects solutions for commercials, feature films and web series globally, through its offices cum full-fledged creative VFX studios in India, and marketing teams based in US and Canada.

The Company offers a variety of creative VFX works, ranging from Final Compositing and Roto to creating 3D Elements, Photo real creatures and Environments, 3D, match move, and Animations. The Company support production houses by providing end to end services.

The Company has a team of creative- driven professionals who are capable of managing complex and scalable VFX production tasks to deliver high-quality, industry standard content for the client. Currently we are one of Indias trusted Visual Effects providers backed by esteemed clientele and vast industry experience and aim to build strong relationships with the existing clients to build competitive advantage.

Business operations

The Companys operating studios currently are at Chennai, Hyderabad and Mumbai, India, while its marketing teams based in Vancouver, Montreal and Los Angeles cover the North American markets. We would be opening offices in London & Dubai to cater to the UK, Europe and Middle East markets respectively.

Financial performance

The Company registered an impressive performance despite a dismal global economic environment. Revenue from Operations more than doubled from 72233.27 lakhs in FY22 to 75789.43 laks in FY23 owing to the increase in the number of projects delivered. EBITDA scaled three-fold to 72347.9 lakhs in FY23 from 7749.85 lakhs in FY22

1 Particulars	2022-23	2021-22
Revenue from Operations	5,789.43	2,233.27
Other Income	84.43	3.33
Total Revenue	5,873.86	2,236.60
Profit Before Tax	2,177.58	655.11
Current Tax	525.40	168.15
Deferred Tax	32.62	(3.37)
Net Profit/ Loss for the period	1,619.56	490.33

underpinned by increase in the proportion of overseas business yielding higher margins and improved operational efficiency Likewise, Profit after tax jumped from 7490.3 lakhs to 71619.6 lakhs over the same period.

Business profitability improved appreciably as EBITDA margin and Net margin improved from 33.5% in FY22 to 39.9% in FY23 and from 21.9% in FY22 to 27.6% in FY23 respectively.

Net Cash flow from Operations was in the negative impacted by a significantly increase in working capital, especially trade receivables.

Net worth increased from 7525.65 lakhs as on March 31, 2022 to 74420.91 lakhs in March 31, 2023. This massive jump was due to the 72910.42 lakhs IPO during the year which increased the equity capital by 71163 lakhs and reserves by 72732.3 lakhs.

While overall debt increased from 7268 lakhs as on March 31, 2022 to 7729 lakhs as on March 31, 2023, the net debt to equity ratio dropped to 0.16 as on March 31, 2023 from 0.51 as on March 31, 2022 due to the equity infusion.

The Company made considerable investments in scaling its operational capacity and capabilities. These investments should support the Company improve its financial performance a few notches higher in the coming years.

Significant changes, i.e., a change of 25% or more in the key financial ratios

In accordance with the amendments notified by SEBI in Regulation 17 of the SEBI (Listing Obligation and Disclosure Requirement) Regulation, 2015 on 9th May 2018, the details of significant changes, i.e., change of 25% or more in the key financial ratios as compared to the immediately previous financial year along with detailed explanations are reported hereunder:

1 Particulars	2022-23	2021-22	Change (%)	Reasons for change
Debtors Turnover Ratio	5.9	11.19	-47.3%	Increase in Sales & Accounts Receivable in FY 23 over FY 22
Current Ratio	2.9	1.56	92%	Increase in Current Assets
Debt-Equity Ratio	0.16	0.51	-68%	Equity Infusion in FY 23
Interest Coverage Ratio	39.13	10.84	261%	Increase in Sales in FY 23
Operating Profit Margin (%)	37.1	32.15	15%	Increase in overseas business yielding higher margin
Net Profit Margin (%)	27.6	21.9	26%	Improved operational efficiency
Return on Net Worth (%)	36.6	93.3	-61%	Drop due to equity infusion in FY23

Internal Control & their adequacy

At Phantom Digital, the internal control mechanism is designed to protect its assets and authorise, record, and correctly report all transactions on time. It conforms to the local statutory requirements and meets the highest global standards and practices to remain competitive in evolving business dynamics.

The internal control framework monitors and assesses all risks associated with current activities and corporate profile, including scientific and development risks, partner interest risks, commercial and financial risks.

While ensuring flawless execution of accounting and financial processes, the internal control mechanism reviews the manual and automated processes for transaction approval. The Audit Committee reviews the internal audit plan, verifies the adequacy of the control system, marks its audit observations, and monitors the sustainability of the remedial measures.

Human

Resource

At PhantomFX, we prioritize the development of our employees. We have implemented various initiatives to support their growth, including performance appraisal, learning management, talent cultivation, and training programs. Our HR policies promote employee contentment, motivation, and retention through an open-door ethos, flexibility, and transparent communication. We actively identify potential leaders and maintain a reservoir of talent, enabling us to navigate the ever-evolving landscape of technology and environmental shifts. Our symbiotic relationship between our human capital and strategic framework positions PhantomFX for continued success. Our workforce had grown to over 500 employees by the end of March 2025, and continues to expand.

Risk

Management

Phantom Digital understand that its business is subject to risks and uncertainties that could have short-term and long-term implications. Business risks are constantly evolving in a rapidly changing business environment with dynamic customer requirements. As a result, there is significant variation in the risks landscape across businesses.

The Company constantly monitors the external environment to identify potential emerging risks and their impact on our business. The Company evaluates risks impacting its strategic, operational, compliance and reporting objectives.

Its robust and resilient risk management framework is guided by the Risk Management Committee of the Board, involving Independent Directors and Senior Management. The Risk Management Committee monitors risk management efforts and provides insights for effective risk management across our operations. In line with the Listing Regulations, cyber security risk is included in the risk management plan.

In the opinion of the Board there has been no identification of elements of risk that may threaten the existence of the Company.