Stock Fundamentals

Nazara Technologies IPO: A high-risk, high-return game

Hari Viswanath BL Research Bureau | Updated on March 16, 2021

The gaming company needs to justify its valuation by consistent revenue growth and scaling up EBITDA margins

Investors with a penchant for high risk-high reward opportunities can subscribe to the IPO of Nazara Technologies. The IPO is an offer for sale (OFS) for ₹583 crore priced at ₹1,100-1,101 per share.

Approximately 87 per cent of the OFS is from a few existing non-promoter investors and the balance is from the promoters. The total stake of the promoters will reduce by around 2 per cent to around 21 per cent post the issue. Ace investor Rakesh Jhunjhunwala, who holds around 11 per cent in the company, is not offering any shares in the IPO.

Nazara would have a market-cap of around ₹3,350 crore at the issue price. The company is valued at around 7.75 times EV/sales (FY21 annualised based on H1FY21 revenue). Based on the FY20 revenue, the valuation comes to EV/Sales of 12.5 times. While the valuation is not cheap and the long-term success of the IPO depends on successful execution going forward, the issues offers investors with a thematic opportunity of capitalising on increasing adoption of mobile/online gaming and development of its ecosystem in India.

This segment will be a direct beneficiary of upward mobility of consumers in India and other emerging markets where the company has exposure to, and accelerating digitisation trends. If the theme plays out successfully, there is scope for good value creation from the IPO price.

Low promoter shareholding prior to the IPO gives confidence on external oversight mechanism (non-promoter investors hold 77 per cent stake). However, the risk for the business is that it is dependent on building successful gaming franchises, which is not a certainty. Threat of competition from international and domestic players (such as Reliance Jio) with deeper pockets to outspend competition is also a risk.

Besides, the company’s current valuation is justified only if it is able to successfully scale up its EBITDA margins, which is currently low. Hence, investors can look to invest in small quantities.

Business and prospects

Nazara is a leading India-based diversified gaming and sports media platform with presence in the country and across emerging and developed global markets such as Africa and North America. Its offerings are across interactive gaming, e-sports and gamified early learning ecosystems. Some of the company’s most popular games, brands and products are World Cricket Championship, Carrom Clash, Sportskeeda and Kiddopia.

For the six-month period ended September 2020, the company’s revenues were well-diversified, with India representing 41 per cent of the revenue, North America 41 per cent, and the rest from West Asia, Africa and APAC. The company’s exposure to North America increased significantly in this period vs 12 per cent of revenue in FY20, following an acquisition. The firm has a track record of acquisition-led growth model.

Currently, Nazara makes its revenue from five business segments. One, gamified early learning (39 per cent of revenue) — subscription apps that combine games and learning for young kids. Two, e-sports (32 per cent) — sports competition involving video games that are monetised via brand sponsorships and media rights licensing. Three, telco subscription (21 per cent) — share from value-added services offered in partnership with telecom companies. Four, freemium (5 per cent) — free gaming apps where basic features are given free, while the company makes money by charging for incremental features/content/in-app purchases and advertisement. Five, real-money gaming (3 per cent) — platform fee collected by company for online wager games played on its platform.

While the contribution of the last two segments are currently low, the freemium segment offers huge potential given its popularity in India. The real-money gaming segment may face challenges from laws targeting online wagering.

According to a report by Frost and Sullivan in the offer document, the global gaming industry has been well above movie revenues (box office) in recent years, and was 3.3 times as big as the movie industry in CY19 (four times in the Covid-impacted CY 20). In India, the gaming industry revenue is expected to consistently exceed Bollywood revenues only by 2023. This gives an idea on the scope for gaming business in India.

The segment is direct beneficiary of upward mobility — better smartphones, parents able to afford more entertainment gadgets for children, willingness to pay for education and gaming apps, and accelerating digitisation trends (better internet connectivity, spending more time online). Demographics is also favourable given India’s relatively young population. The company has also seen tailwinds from the Covid lockdown and banning of Chinese apps.



The company’s revenue from operations grew at a CAGR of 20 per cent to ₹248 crore in FY18-20.

The company clocked revenues of ₹200 crore in HsFY21. The CAGR from FY18-FY21 (H1 21 annualised) comes to 32 per cent, which reflects very strong growth in H1FY21 (H1 revenue was 79 per cent of FY20 revenue).

Not much can be extrapolated from these trends, as far as future growth is concerned, as the company has adopted an acquisition-led model. Its EBITDA margins in H1F 21 was at 6.1 per cent vs 3.48 per cent in FY20. The company’s key costs are advertising/promotional expenses and employee costs. Its net profit has been around break-even to modest losses between FY18 to now. It has a net cash of over ₹200 crore in its balance sheet.

Nazara needs to justify its valuation by consistent growth in revenues and scaling up of EBITDA margins. Global peer Activision Blizzard trades at EV/Sales (CY20) of 8.3x with EBITDA margins at 40 per cent. Electronic Arts trades at 5.6x with EBITDA margins at 26 per cent.

Published on March 16, 2021

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