Nazara Technologies is India’s only listed gaming company with no competitive benchmarking: PL Research Report

Rating: BUY| CMP: Rs 1,794 | TP: Rs 2,342

Game On!

We initiate coverage on Nazara Technologies with a ‘BUY’ rating as it 1) is a unique play on rising gaming culture, given Gen Z & millennials constitute ~65% of India’s population demographics 2) has an early mover advantage in evolving Esports category (organized 82% unique Esports events with 73% share in total prize pool as of 2019), that is likely to disrupt traditional sports landscape in next 4-5 years and 3) offers a direct play on emerging Ed-Tech market via Kiddopia. Nazara has created an enviable business model via selective acquisitions (buys stake in gaming companies and lets erstwhile promoters run the show) to ride on the expected gaming sector boom in India.

We believe that a portfolio approach to gaming eliminates shelf life risks, as business model can be altered depending on technological advancements, innovations and changing taste of consumers. With net cash balance sheet of Rs4.8bn, Nazara has plans to expand its gaming portfolio inorganically which offers distinct option value, in our view. We expect revenue/EBITDA CAGR of 36%/49% over FY21-24E as key categories viz; Kiddopia, Esports and Freemium offer huge scalability in the long term. Recent acquisition of OpenPlay acts as an additional growth kicker, in an otherwise competitive Real Money Gaming (RMG) segment fraught with regulatory hurdles. Initiate with a ‘BUY’ and DCF based TP of Rs2,342.

Kiddopia is a play on Ed-Tech: We believe Kiddopia is an emerging Ed-Tech play and will be a key growth lever for Nazara given 1) high propensity to pay in developed markets resulting in easy monetization 2) increasing thrust on E-learning post-COVID and 3) gamification and learning offer unique combination in attracting eyeballs, especially for toddlers. We expect sales/EBITDA CAGR of 41%/76% over FY21-24E.

Esports to be a disruptor over next 4-5 years: Nazara has presence in Esports/Esports media through established brands like Nodwin/SportsKeeda respectively. We believe Esports is likely to disrupt traditional sports landscape over next 4-5 years amid 1) rising price pool 2) increase in number of broadcasting platforms (drives viewership) 3) increase in number of Esports teams/players (as professional gaming can evolve as a full time career) and 4) growing pie of millennial & Gen Z population who spend higher time on gaming/internet. We expect sales/EBITDA CAGR of 37%/14% over FY21-24E.

In-App Purchases (IAPs) to drive freemium business: We believe IAP model is set to gain traction within mobile gaming segment, due to increase in hard & mid-core gamers that have high propensity to pay. Nazara’s IAPs for WCC3 has increased to 0.1% and management expects IAP conversion of 1% by FY25E. We expect sales/EBITDA CAGR of 31%/46% over FY21-24E, aided by rising contribution of IAPs (share to increase from 20% in FY21 to 35% in FY24E).

Valuation: Nazara is India’s only listed gaming company with no competitive benchmarking. As business model is scalable and focus is on growth, we don’t rule out intermittent volatility in profitability. Since India’s mobile gaming industry is nascent with strong long term growth potential (38% CAGR over next 3 years), we value the stock using DCF methodology and arrive at a TP of Rs2,342. Initiate ‘BUY’.