IPO Analysis: Nazara Technologies

IPO rating- Invest for listing gains 

About the issue 

The company is entering the capital market with its initial public offering (IPO) of equity shares of the face value of Rs 4 each. The public issue comprises a fresh issue of equity shares worth Rs 582.90 crore. The price band of the issue has been fixed at Rs 1,100 to Rs 1,101 per equity share. The IPO opens on March 17 while it closes on March 19, 2021. The issue may list on March 30, 2021. The IPO market lot size is 13 shares. A retail-individual investor can apply for up to 13 lots. Around 75 per cent of the issue is reserved for qualified institutional buyers, 10 per cent for retail investors, and 25 per cent for non-institutional bidders. The objective of the offer is to achieve the benefits of listing equity shares on the stock exchanges and also, to carry out the sale of up to 52,94,392 equity shares by the selling shareholders. 

About the company 

Nazara Technologies Limited is one of the interactive gaming and new-age sports media companies. It has operations in 60 countries spread across India, Asia, Africa, and the Middle East. Nazara has diversified business models and comprises subscription, eSports, freemium skill-based gaming in India, and chance-based gaming business in Kenya, Africa. The company derives maximum revenue from subscription fees charged from customers under the gamified early learning and eSports business segments, accounted for 71.03 per cent of revenue for the six-month period ended on September 30, 2020. The company’s goal is to cater to billion-plus mobile internet players across emerging markets, who have embraced social multiplayer interactive gaming as the foremost form of entertainment. The company offers interactive gaming, eSports, and gamified early learning ecosystems, including World Cricket Championship and CarromClash in mobile games, Kiddopia in gamified early learning, Nodwin and Sportskeeda in eSports along with Halaplay and Qunami in skill-based, fantasy, and trivia games. Nazara Tech is the next-gen digital play in India, which caters to its youth. The company is well on course for revenue growth of 25 per cent in the medium term, given India’s propelling digital story and consistent shift from traditional media backed by favourable demographics. Despite high growth prospects, concerns over fragmentation and the increased threat of new entrants persist in the digital business. The company has invested in several firms across segments and intends to do so to create a large gaming ecosystem in India and stand out vs peers due to its end-to-end offerings. Nazara has focussed on growing a profitable business, with an emphasis on self-sustainability instead of relying on external investments. This is reflected in its fund-raising history, wherein it has raised Rs 12.63 crore (in 2005 & 2007) and Rs 76.53 crore in 2018. As a result, it has historically been EBITDA positive and have generated enough cash flows from its operations. 

Strengths 

One of the leading eSports companies in India. 

Experienced management team. 

Localised gamer insights in emerging markets. 

Diversified business based on geographical presence, gaming, and telecom operators. 

Rapid growth and sustained profitability. 

Business strategies 

Pursue strategic investment and acquisition opportunities. 

Continue to build on the leading market position and growth opportunity in India. 

Enhance existing offerings and increase monetisation opportunities. 

Launch new IP and titles across content and games. 

Continue global expansion, leveraging the existing distribution network. 

Continue to drive operations based on people-centric policies and practices. 

Further build the existing technology stack to enhance the existing platform. 

Financials 

The company’s revenue was Rs 207 crore, Rs 262.10 crore, Rs 186.10, and Rs 181.90 in the six-month period ended September 30, 2020, and in the fiscals 2020, 2019, and 2018, respectively. Further, the expense was Rs 213.60 crore, Rs 281.10, Rs 174.30 crore & Rs 133.40 crore in the six-month ended September 30, 2020, and in fiscals 2020, 2019 & 2018, respectively. 

Valuation & recommendation  

Nazara may trade at an even higher multiple vs expectations, as it is a pure-play digital company offering good growth potential as per our estimates, and scarcity premium with almost no traditional company showing the capability to grow at this pace in the medium term. Global gaming and eSports companies are trading at 3.3x one-year forward EV/sales despite much lower growth rates than in India. Considering the fact that Nazara is India’s gaming play with higher growth rates, it should command a premium valuation on EV/sales. The company's ability to understand local gamer behaviour in designing games and innovatively incorporating local, licensed, intellectual property to drive the growth of its network of games is one of the key strengths. Its localised gamer insights are reflected in the popularity of some of the mobile games on Google Play store, such as, ‘World Cricket Championship 2’, ‘Chhota Bheem Race’, and ‘Motu Patlu Game’. Games of Nazara Technologies have consistently been a part of the top three games on the top free charts on Google Play store. Its content is developed in India for the Indian as well as the global audience, allowing it to achieve scale, as evidenced by an average of 4.017 crore monthly active users (MAUs) for the financial year 2020 and an average of 5.754 crore MAUs across all games for the 9-month period ended December 31, 2020. Given its market-first position in India across sports simulation and eSports, Nazara is well-placed to leverage the opportunity that interactive mobile games, eSports content, and gamified early learning apps offer. It will be able to grow revenue and profitability concurrently by leveraging its capabilities of in-house content creation, game engine development, technology stack development along with relationships with other participants in gaming ecosystems. The company’s growth is also driven by big investors such as IIFL, Rakesh Jhunjhunwala, and Utpal Sheth. Given the reasonable valuations relative to long term growth prospects one can invest for listing gain.