Prabhudas Lilladher IPO report on Nazara Technologies
Over FY17-20, Nazara’s sales grew at a CAGR of 9.2% and reached a level of Rs2bn in 1HFY21. While the company was profitable earlier, it reported losses of Rs266mn/Rs101mn in FY20/1HFY21 respectively, as the share of high margin telco-business declined due to disruption created by JIO (content offered for free including games). With management appearing more focused on scaling the business rather than maximizing EBITDA, profitability can remain under pressure in the near term. Nonetheless, given the opportunity pie (size of the Indian gaming industry is pegged at US$1.5bn and is growing at a CAGR of 30%+), we believe the 3 segments viz; Gamified Early Learning, E-Sports and Freemium business (contributing ~76% of 1HFY21 revenues) can easily grow in the range of ~20-25% in the near to medium term providing scalability to the business. As per our rough cut projections, the issue is priced at EV/Sales multiple of 5.4x FY23E and is in-line with global gaming companies of decent size like Tencent Holdings, Electronic Arts and Zynga (trading at EV/Sales multiple of 4x-8.5x on CY21 basis and 3.5x-7.0x on CY22 basis). Recommend SUBSCRIBE.
Valuation and Outlook
We recommend SUBSCRIBE on Nazara Technologies as it 1) is a unique gaming play on India’s population demographics (Gen Z & millennials constitute ~65% of the population mix) 2) provides an early mover advantage in the evolving E-Sports category (organized 82% of the E-sports events with a share in total prize pool at 73% in 2019) 3) offers a proxy play on emerging Ed-Tech market via Kiddopia (there are ~25mn toddlers in the US; current subscription base is only ~0.3mn) and 4) has strong BS (debt free) with cash balance of Rs1.8bn as of 1HFY21.
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