Nazara Tech down 70% from all-time high. Is now a good time to invest? Here's what ICICI Securities says

After a sharp correction in the stock, domestic brokerage firm ICICI Securities has recently initiated coverage on Nazara Technologies with a "buy" rating, citing the company's strong growth opportunities.

Nazara Technologies is a gaming and sports media platform in India and internationally. The company operates through Gamified Early Learning, eSports, Freemium, Telco Subscription, and Skill-Based Real Money Gaming segments. The company is known for its games in the World Cricket Championship, Chhota Bheem, and the Motu-Patlu series.

In March 2021, the company's shares were listed on exchanges, resulting in one of the most successful IPOs of that year. The shares made a strong debut on the bourses, opening at ₹1,971 apiece, which was significantly higher than the issue price of ₹1,101 apiece.

The shares closed the first day at ₹1,576.8 apiece, which represented a listing gain of 43.2%. The IPO received a strong response from investors, as it was subscribed to nearly 175 times.

Within seven months of its listing, the stock hit an all-time high of ₹1,677 apiece. However, it then experienced a sudden and significant drop and has since plummeted by about 70% to ₹505.

Nazara Technologies boosts its eSports market share through strategic acquisition

According to ICICI Securities, Nazara Technologies capitalised on its acquisition of NODWIN Gaming and is currently dominating the Indian eSports market with over 80% of total market share in India.

The key growth drivers for the company’s eSports business are own event and content IPs, exclusive rights and ownership of live stream and on-demand premium eSports content, monetisation via media rights licensing, and brand partnerships with global game publishers and youth-focused brands, said the brokerage.

Nazara Technologies' eSports revenue growth has surpassed market expectations, increasing by 84% YoY in 9MFY23, driven by strong organic growth in NODWIN Gaming (98% YoY) as physical sports-related events resumed post the COVID-19 pandemic.

Going forward, the brokerage expects the eSports revenue to remain robust, it expects the business to grow at 45% YoY in FY24E on a high base of FY23E. According to their analysis, the growth will be led by 50% YoY growth in NODWIN Gaming and 30% YoY growth in Sportskeeda as IPs scale.

Stabilization in the GEL business

Nazara Technologies entered the gamified early learning (GEL) segment in North America through Kiddopia, the flagship gamified early learning app, which it acquired in FY20.

Through Kiddopia, Nazara caters primarily to children aged between 2 and 6 years. Kiddopia has the advantage of strong unit economics, as evidenced by its largely stabilised CPT, subscriber base, and activation rate.

The number of subscribers for Kidoppia declined from 340k in Q4 FY21 to 300k in Q2 FY23. However, the brokerage stated that it noted signs of stabilisation in GEL segment KPIs from Q3 FY23.

Kiddopia reported subscriber additions in Q3 FY23 for the first time since Q4 FY21. Nazara has now raised subscription charges for Kiddopia to US$9.99 per month, up 11%, and US$80 per year, up 14%, according to the brokerage.

Other businesses are delivering positive performance

The other businesses for the company include adtech, freemium games, real money gaming (RMG), and telecom subscription. 

The company started its adtech business in FY23, following the acquisition of Datawrkz. The business has grown at 55% YoY in 9MFY23, aided by a mix of client retention (69%) and new client addition (31%).

ICICI Securities anticipates this trend to continue in the medium term, as the ad tech market is a fast-growing one with few established players. The brokerage expects this business to contribute around 17–18% of the company's revenues and 19–20% of its operating profits by FY25/FY26.

Furthermore, freemium gaming experienced a 38% YoY growth in 9MFY23. The brokerage forecasts a 20–25% CAGR in revenue growth in this segment over the medium term, given the low visibility on the overall ad-revenue trajectory and the already high operating margins.

As for the real-money gaming (RMG) business, the brokerage expects limited activity until more regulatory clarity emerges. However, if regulations become more favourable, it could trigger acquisitions in the space, it added.

On the telco subscription business front, ICICI Securities predicts that growth in this segment is likely to decline steadily as it is not an area of focus for management and is unlikely to see fresh investments.

Financials

Nazara registered a revenue CAGR of 38% over FY18–22, primarily driven by strong growth in FY21 (83.5%). Moving forward, ICICI Securities models a 31% revenue CAGR for FY23–26E, and it estimates 37% YoY revenue growth in FY24–E, driven by around 45% growth in eSports and approximately 25% YoY growth in GEL.

Nazara posted an EBITDA CAGR of 18% over FY18–22; its margins declined from 28.3% in FY18 to 15.2% in FY22 due to the company's increased focus on growth in recent years. 

However, the brokerage forecasts a 52% CAGR for FY23–26E as margins improve from 7.4% in FY23E to 11.8% in FY26E.

The domestic brokerage firm expects EBITDA growth of 86% YoY in FY24E, led by an EBITDA margin improvement of approximately 250bps YoY, as eSports IPs scale up and GEL profitability improves with a mix of subscriber addition and price increases.

Nazara has registered an impressive PAT CAGR of 352% over FY18–22, and ICICI Securities models a 57% CAGR over FY23E–26E, backed by improving operating performance.

Valuations

Nazara currently has ₹6.6 billion in cash and an additional ₹40 million in Silicon Valley Bank. The brokerage stated that once regulatory clarity emerges, Nazara could use this cash to acquire scale through acquisitions in real-money gaming. Additionally, due to the current liquidity situation, Nazara may also have access to inexpensive acquisition opportunities.

If these triggers come into effect, the brokerage predicts a bull case valuation of ₹800 per share. However, if growth slows down or margin improvements do not materialize, the brokerage sees a bear case valuation of ₹400 per share.

Key risks

As per ICICI Securities' report, Nazara's gaming accessories business (Wings) has led to a significant decline in margins. However, the company's inability to establish its brand and move towards profitability remains a key risk to the eSports business.

Furthermore, a slowdown in the US market or increased competition leading to price reductions could impact profitability and the subscriber base of Sportskeeda and Kiddopia.

The continued delay in regulatory clarifications in real-money gaming (RMG) is also a concern for Nazara. The company has limited its actions in this space due to regulatory uncertainty, and further delays could affect growth opportunities.

Lastly, Nazara's management may face integration issues if they fail to identify the right set of acquisitions, according to the brokerage. 

10 analysts polled by MintGenie on average have a 'buy' call on the stock.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.