Ace investor Rakesh Jhunjhunwala-backed Nazara Technologies may not have performed along expected lines after it listed on the bourses on March 30 but some brokerages think its long-term prospects look bright and the stock may clock healthy gains.
Brokerage firm Equirus Securities Private Limited has initiated coverage on the stock with a "buy" call, fixing the target price at Rs 1,820 which is a 17 percent upside from the stock's June 28 closing of Rs 1,559.55 on BSE.
The gaming company listed on Indian bourses on March 30, 2021, with the stock opening at Rs 1,971 on BSE against the issue price of Rs 1,101, and closing at Rs 1,576.8.
The company raised Rs 583 crore through its IPO that was subscribed 175.46 times during March 17-19. For the March quarter of FY21, it reported a consolidated profit of Rs 4.2 crore against a loss of Rs 7.02 crore in the year-ago period.
Revenue for the said quarter grew sharply by 41.7 percent to Rs 123.38 crore compared to the year-ago quarter.
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Long-term growth story but with some riders
Nazara Technologies is present in the fast-growing segment of interactive gaming, eSports and gamified early learning solutions. It is one of the best play in the internet sector.
The company owns properties like World Cricket Championship (WCC) and CarromClash in mobile games, Kiddopia in gamified early learning, Nodwin and Sportskeeda in eSports and eSports media, Halaplay and Qunami in skill-based, fantasy and trivia games.
The online gaming sector is booming globally and as the industry is still at a nascent stage in India, Nazara may have an advantage over its competitors.
"Globally, the gaming industry has undergone a paradigm shift in the past few years with industry revenues at $158 billion– bigger than both music and movie industries combined," said Equirus Securities.
"The Indian gaming market, currently small in size at $1.5 billion in 2020, is estimated to clock a 32 percent CAGR to $3.5 billion by 2023, surpassing estimated Bollywood revenues of $2.7 billion."
As per Equirus, India has only 1.7 crore e-sports viewers but has the potential to become the mainstream sports after cricket as the ecosystem develops.
In gamified learning, Nazara has a winning app in Kiddopia but scaling it up in the US and other markets is the key focus area, Equirus said.
In the freemium category, Nazara has not been able to crack the winning formula yet, and growth in in-app purchase (IAP) revenues holds the key, Equirus said.
Freemium is a pricing strategy in which basic features are offered for free but users to pay for additional features or services.
The firm on June 16 signed a binding term sheet to acquire a majority stake in Arrakis Tanitim Organizasyon Pazarlama San Tic Ltd Sti (Publishme), the largest mobile game publishing agency in the Middle East and Turkey.
Equirus Securities is of the view that acquiring stakes in companies that are leaders in their niche categories and geographies is an unbeatable strategy.
"Nazara has scaled up via strategic acquisitions, and terms this ecosystem as ‘Friends of Nazara’. Revenues of Nodwin, Sportskeeda and Paper Boats have grown about eight times, two times and three times, respectively, after the acquisition," said Equirus.
Despite visible positives, shares of Nazara Tech have not matched the enthusiasm of IPO. After a bumper listing, the stock lost steam and is down about a percent from its March 30 closing.
Equirus estimates a 38 percent/49 percent/86 percent revenue/EBITDA/PAT CAGR for the stock over FY21-FY24E.
"Margins are set to be capped as the focus is on growing the market size and share. With a net cash balance of Rs 480 crore, acquisitions will remain a key growth strategy and right execution critical," said Equirus.
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