Can Nazara make it big?

Valuations too cheap to ignore; humongous potential ahead

Nazara Technologies is a leading India-based diversified gaming and sports media platform with a presence in India and across emerging and developed global markets such as Africa and North America, with offerings across interactive gaming, eSports, ad-tech, and gamified early learning ecosystems.

They came out with their IPO in 2021, famous for being backed by Mr. Rakesh Jhunjhunwala at an adjusted price of ~Rs 550, where their Rs 583 Cr issue got oversubscribed by over 175 times!

Before moving on, let’s have a look at how its share price has performed since then:

After getting listed at over Rs 800, its share price further went up to cross Rs 1600 in 2021. In 2022, like any other technology company, their valuations took a knock & the company now trades back around its IPO price, implying an equity valuation of Rs ~4,000 Cr. Nazara has no major debt on its books.

Valuing Nazara as a normal company by projecting future profits & cashflows, might not be an appropriate way of measuring its correct value. Rather, Nazara technologies should be considered an investing company/VC as they today derive almost all of their value through them today. Their ability to help its acquired companies grow & to also identify future acquisition opportunities holds the key.

We shall take a case of their most successful acquisition to date: Nodwin Gaming

NODWIN GAMING

Nazara acquired a majority stake (~55%) in Nodwin Gaming in January 2018 by paying ~Rs 77 Cr

Started in 2015, Nodwin today is South Asia's largest Esports & Gaming Company. They are known to organize esports events in collaboration with global esports entities like Electronic Sports League (ESL)

Here is how its revenues have panned out over years:

Revenues not only grew ~13 times in the last 4 years from FY18 to FY22 post-acquisition but it’s also expected to double in FY22-23. Just a matter of fact, Nazara’s consolidated revenues in FY20 (before covid) were ~Rs 263 Cr & Nodwin single-handedly will pass that mark big tank this year. They recently organized Dreamhack 2022 Hyderabad, which was a big hit. You can find its coverage on channels of many popular’s YouTubers, gamers & bloggers like Mortal, Payal Gaming, Thug, Scout, etc. & with thousands of fans arriving to meet their stars(More details here: https://dreamhack.com/india/activities/meet-and-greet/)

But because of skyrocketing growth of Nodwin (low margin), overall EBITDA margins have fallen significantly / halved over past quarters; much less than margins guided by the management.

Along similar lines is the story of its other subsidiaries like Sportskeeda( acquired in 2019) & few recent acquisitions worth noting, such as Datawrkz, Wildworks, Wings, etc.

At an overall level, even though at a nascent stage, the esports market size in India has quickly scaled to INR3 billion in FY2021 and we expect it to reach INR11 billion by FY2025 as per an EY report.  However, the sport has a much larger economic impact: it is expected to generate an economic value of around INR100 billion between now and FY2025. The esports industry is expected to grow at 46% CAGR over the few four years and streaming platforms can generate the largest chunk of esports revenues.

We believe Nazara can turn into a multi-bagger from here, but here are a few risks worth mentioning:

Key risks:

1. Resignations: Nazara's ex-CEO Mr. Manish Agarwal resigned from the company in the last quarterly earnings report & so did the CEO of its subsidiary, Sportkeeda just a few days back. Any further resignation can actually break the whole idea of investing in it.

2. Global tech/Nasdaq performance: Since the newly listed tech firm’s valuations are correlated to Nasada’s performance, any further collapse in the valuations of global tech firms can be a cause for concern in the short/medium term.

[Update: We got a beautiful research report on Indian Gaming by Lumikai, India’s first interactive media & gaming focused fund. Link for the report: https://www.lumikai.com/post/india-s-gaming-market-hit-2-6-billion-in-fy22-and-is-projected-to-reach-8-6-billion-in-fy27]

Disclaimers- 

Personal & client investment/interest in the shares exist; this isn’t investment advice; DYOR (do your own research) is recommended; Investing & trading are subject to market risk; the Decision maker is responsible for any outcome