Nazara Technologies- IPO Review

Detailed Analysis of Nazara Technologies IPO

Introduction:

• Nazara Technologies, a gaming company backed by marquee investors like Rakesh Jhunjhunwala, Utpal Seth has came up with Offer for Sale of Rs. 583 Cr. The bid for the public offering commences from 17^th of March 2021.
• Nazara Technologies, is a Mumbai based company and is leading gaming and sports media platform with presence in India and global markets as well.
• In the grey market, Nazara Technologies stock are demanding a very strong premium of Rs. 900- Rs. 910.

Detailed Review of Nazara Technologies IPO

1) IPO DETAILS:

1. Nazara Technologies IPO window opened for subscription from 17^th of March 2021 to 19^th March 2021.
2. Size of Initial Public Offering of Nazara Technologies is Rs. 583 Cr. which is purely an offer for sale. In total 52.94 Lakh Equity shares will be sold by promoters in this OFS.
3. Promoters and their respective stake sale in this public offering are as follows:

i) Mitter Infotech LLP (Promoters) – 6.91 Lakh Equity Shares.

ii) IIFL Special Opp. Fund (Series1,2,3,4,5) – 43.87 Lakh Shares.

iii) Good Game Investment Trust – 1.5 Lakh Equity Shares

iv) Seed fund 2 International – 0.25 Lakh Equity Shares

v) Porush Jain – 0.23 Lakh Shares

vi) Azimuth Investments – 0.14 Lakh Shares

• Post -IPO, promoter’s stake in the company will come down to 20.7% from current stake of 24.16%.
• The price Band of the IPO is Rs. 1,100- Rs. 1,101. The Face value is Rs. 4 per equity share.
• Nazara Technologies will be listing on both BSE as well as NSE.
• Lot Size of the IPO includes 13 shares in single lot and in multiple thereof upto 13 lots.
• Of the Total Issue, 75% is reserved for Qualified Institutional Buyers (QIB), 15% for Non-Institutional Bidders (NIB) and 10% for Retail Investors. Upto Rs. 2 Cr. Equity Shares are reserved for Employees. Additional, eligible employee may receive 10% discount over offer price.
• The Objective of issue of IPO are:

i) Promoters wants to encash their stake in the company wholly or partly.

ii) Achieve the benefits of listing in exchanges.

2) Nazara Technologies- Company Overview:

• Nazara Technologies was incorporated in 1999, India’s leading India based diversified gaming and sports media platform with presence in India and across emerging and developed global markets.
• Company is engaged in offering extensive range of interactive gaming, eSports and gamified learning ecosystems.
• Nazara has well-diversified business geographically and the company operates in 64 countries spread across India, Asia, Africa, America and Middle East.
• Nazara Technologies is market leader in its various business segments. Market Leadership – Esports (80% share), Cricket Mobile Game (60% share), Sports Fantasy #1, Kids Mobile Gaming #1 and Leading player in money gaming quiz.
• Company is having Monthly Active Users (MAUs) of 5.75 Cr. across all the games as on 9MFY21.
• Global Gaming Industry is currently $162 billion as of 2020. The global gaming industry is expected to grow at 13.1% CAGR rate and may cross the mark of $300 billion by 2025. This growth rate assures high growth and earning visibility in Gaming business in India.
• Company’s growth and Brand Value is also driven by the investments of Ace Investor Rakesh Jhunjhunwala who owns 11.5% stake in Nazara Tech as of 30^th Sept. 2021. Other key investor in the company is IIFL Securities and Utpal Seth.

3) Nazara Technologies- Business Verticals:

The Company has the following business verticals:

i) Early Learning/Children’s Learning:

• Nazara Technologies entered the Gamified Early Learning Segment in 2019 with their flagship app “Kiddopia”.
• Kiddopia caters primarily to children in the age group of 2-6 years.
• Company aims to deliver immense learning experience through gamification.
• Company holds 50.9% in Kiddopia

ii) E-Sports Business:

• With a dominating market share of 80%, Nazara Tech is market leader in India eSports Market.
• Also, Company also leads the market share in the section of live eSports streaming and on-demand eSports media content company in India.
• Their brand Sportskeeda is the largest eSports destination website in India. It connects fans, pundits and athletes from all over the world.
• This segment has alone stake of 63.9% in Esports market of India.
• Further Company also owns Nodwin Gaming under eSports business segments, which the company acquired in FY18.
• Nodwin Gaming is primarily engaged in the business of providing e-sports gaming consultancy related to organizing gaming events, sponsorship and related consultancy. Company holds 57.05% in Nodwin

iii) Real Money Gaming:

• Company also has presence in Real Money Gaming through Halaplay.
• Halaplay provides a platform for fantasy sports to play cash based quick, simple and interesting games and Nazara Tech holds ~69% in HalaPlay Fantasy

iv) Telco Subscription:

• This business is focused on Android platforms and hence as of now there are 1021 android games, which is distributed over 58 countries as well.
• Through this segment company targets mass mobile internet users and first time mobile-gamers.

v) Freemium:

• Under this business verticals, Nazara offers mobile games which includes free-to-play sports stimulation games and children’s games.
• Some existing franchise name under this segment are World Cricket Championship, Beach Cricket, etc.
• Company has recently launched WCC-3 which is next-gen sequel to the World’s No. 1 mobile cricket game.

4) Financial Performance:

i) Revenue from Operations:

• Nazara Technologies faced sluggishness in their Revenue during FY17, FY18 & FY19. Revenue of the company during this period were Rs. 190 Cr., Rs. 171 Cr. & Rs. 170 Cr. respectively.
• But in FY20, revenue of the company soared up by 46% and crossed the level of Rs. 200 Cr. Revenue in the FY20 stood at Rs. 248 Cr.
• It seems that company may again report a strong revenue growth of 40%-50% in current fiscal year also, as the revenue of the company stands at Rs. 201 Cr. as in the H1FY21. If this happens it will be positive for the company.

ii) Revenue from Operations- Segment Wise:

• Early Learning business Segment which includes children gamified learning app “Kiddopia” contributes 39% of the total revenue mix of the company.
• Next to Kiddopia, Real Money Gaming segment delivers 32% of the total revenue of Nazara Technologies.
• Contribution of other business segments like Telco Subscription, Freemium and eSports towards the company’s revenue mix are 21%, 5% and 3% respectively.

iii) Revenue from Operations- Geography Wise:

• Majority of the revenue of the company is generated from India which is 59%.
• Whereas, 13% of the revenue comes from Africa and 12% from North America business.

iv) Profitability Trend- EBITDA & EBITDA Margin:

• Company has posted remarkable EBITDA figures during FY17 to FY19 meanwhile the company faced sluggishness in their revenue.
• EBITDA Margin decreased over the years from 32% in FY17 to 6% in FY19 and even become negative in FY20.
• EBITDA Margin has improved in H1FY21 and came back to positive level of 3% & numbers has also been improved and is currently at 6.1 Cr.
• Low EBITDA margin, despite high growth in revenue clearly indicates that heavy amount has been spent on marketing and advertising in order to promote the brand.
• Results of expenditures on marketing and advertisement is proving to be fruitful as profitability are reported in recent financials.
• Further, Games especially Mobile Games are addictive in nature and hence company has a strong growth as well as earning visibility.

v) Profitability Trend- PAT & PAT Margin:

• PAT in FY17 was Rs. 61 Cr. and and in FY18 it rose up to Rs. 72.8 Cr..
• There was massive downfall in PAT in FY19, and it reached to level of Rs. 6.3 Cr.. Situation of profitability even become worse in FY20, when there was net loss of Rs. 21.3 Cr.
• As of H1FY21, there is loss of Rs. 6.9 Cr., but with improvement in performance of the company, PAT may also follow upward journey in coming time period.
• Likely, PAT MArgni has fallen drastically from 43% in FY18 to -4% in FY19 and -9% in FY20.

vi) Key Ratios- ROE & ROCE:

• Since EBIT has travelled downward and even negatively, so it will directly impact the company’s ROE and ROCE as well.
• ROCE has continuously fallen from 32% in FY17 to -4% in FY20. ROCE as per H1FY21 is -1%, which shows that company is on recovery mode and may soon post positive ROCE as well.
• Likewise, ROE has also perpetually fell from 27% in FY17 to -4% in FY20.

5) Key Strengths:

• Nazara Technologies follows Asset light Business Model. Thereby, not a capital-intensive industry.
• Leading eSports Company in India with significant market share.
• Company is having diversified business in terms of gaming products and geographical presence.
• Company is having large no. of active users (5.75 Cr. MAUs).
• Nazara Technologies possess strong leadership and is backed by marquee investors like Rakesh Jhunjhunwala.

6) Key Risks:

• The Company is currently loss making, posted net loss of Rs. 21.3 Cr. in FY20.
• Company is having too many subsidiaries operating in diverse segments and markets. Efficient handling of the segments should persist.
• Since cash-based games are often linked to Gambling by app stores, there is high regulatory risks particularly on their Real Money Gaming Segment.
• Monetizing several offerings like fantasy sports and e-sports poses a serious challenge.

7) Valuation:

Since the company is loss making as of now, valuation of the company is not possible. Along with that, there is no listed peers in the market which are engaged in similar business.

Conclusion:

Market is cherishing the IPO of Nazara Technologies on the unique business model and optimistic belief of future outlook of Gaming Industry in India. Addition to this, presence of marquee investors in the business add to the positivity of the market. On account of all these reasons, this IPO is witnessing a demand not only from Retail Investors but from Institutional Investors as well. Investor looking this stock from investment opportunity should a bit for further performance of the company. While, individuals looking for listing gains can bet on this, as GMP looks very attractive as of now.