About the company:
Nazara Technologies is the latest company to come with an IPO. The IPO has strong market sentiments with Rakesh Jhunjhunwala as one of the shareholders in the company. The company has seen a strong pace of growth and continues to see a positive momentum across its offerings including Freemium gaming, eSports and Gamified Learning while its legacy profitable Telco business continues to see a slowdown. While the growth is optimistic, the company has seen a consistent trend of declining profits and unpredictable cash flows which raises concerns around long-term sustainability. With these factors in mind, we recommend investors looking for listing gains to subscribe to this IPO.
COMPANY OVERVIEW
Nazara Technologies Limited is a leading India-based diversified gaming and sports media platform with presence in India and across emerging and developed global markets such as Africa and North America, and offerings across the interactive gaming, eSports and gamified early learning ecosystems including World Cricket Championship (WCC) and CarromClash in mobile games, Kiddopia in gamified early learning, Nodwin and Sportskeeda in eSports and eSports media, and Halaplay and Qunami in skill-based, fantasy and trivia games.
Given their market-first position in India across sports simulation and eSports, Nazara is well placed to leverage the opportunity that interactive mobile games, eSports content and gamified early learning apps offer. Their effort has been to grow revenue and profitability concurrently by leveraging their capabilities of in-house content creation, game engine development, technology stack development, relationships with other participants in gaming ecosystems and their skilled leadership.
Their content is developed in India for the Indian as well as global audience, allowing them to achieve scale, as evidenced by an average of 40.17 million Monthly Active Users (MAUs) for FY 2020 and an average of 57.54 million MAUs across all games for the 9-month period ended December 31, 2020.
Business Verticals
Gamified Early Learning: The company derives 39% of its revenue from this vertical. It runs the app Kiddopia under this vertical which focuses primarily on delivering an immersive, self-directed, learning experience. The app is targeted towards kids in the age group of 2-6 years and has seen significant traction in the North American markets. Till date, the app has been downloaded more than 5 million times and currently has over 300,000 active subscribers. Kiddopia has witnessed over 300% revenue growth since its initial funding.
The subscriber base of the app, which comprised of 115,220 paying subscribers at the time of acquisition of Paper Boat App FY2020, has grown to 316,428 paying subscribers as of December 2020. Kiddopia is seeing its subscriber acquisition costs getting recovered in nine months and a high life-time value of subscribers, with monthly subscriber retention rates of 25.82% as of December 2020 for activations in December 2019.
eSports: Nazara Tech generates about 31.8% revenues from this segment as of H1FY21. The company is the largest player in this segment in India. eSports platforms include Sportskeeda and Nodwin Gaming for the company with it having strong IPs, media rights, publishers and brand partnerships which help generate strong revenues.
The segment has been seeing an increasing contribution of media rights from eSports amplified by growing number of global and local OTT platforms.
Freemium: In a Freemium model, also known as the in-app-purchase (IAP) model, users can access the game's basic features for free but will have to purchase in-game functions and features (for example, new maps and items) that are either not available otherwise or might require considerable investment of time (aka grinding) to procure. Such purchases, at times, could be in the form of buying in-game currency (coins, gold, etc.) that can then be redeemed within the game or in the app store. In 2018-19, over 95% of all consumers spend on mobile gaming came from IAPs. IAPs are mostly opted for by a section, typically consisting of casual gamers, who contribute most to the revenues.
In the freemium segment, the company launched WCC3 in FY2020. While the revenue from freemium declined in FY2020 and the H1 FY 2021, the management believes that on account of a decline in the advertising rates in India, future growth in this segment will be driven by in-app purchases, in line with consumer trends in this space, and WCC3 caters to such IAPs. Accordingly, daily IAP revenue having increased from USD 815 during the first week of May 2020 to USD 1,694 during the last week of December 2020.
Telco Business: Telco has been a slow-growing segment of the company. Its revenue share has significantly declined from 89% in FY 2018 to about 21% in H1FY21. This decline is attributable to both a decline in business as India operations went down with the launch of Jio services as well as strong growth exhibited by other verticals of the company.
Nazara Technologies derives revenues from this segment in international markets including Africa, Middle east and some South Asian countries currently. While the business has been a slow mover, it has delivered strong EBITDA margins of ~35%. With the decline of revenue share of this segment, the EBITDA has been declining for the company as well.
POSITIVES
Strong revenue growth: The company has been seeing a strong growth in its revenues of 20 percent CAGR over the past 3 years fuelled by high growth businesses such as gamified learning, eSports and freemium gaming along with the company undertaking the strategy to acquire niche segment companies that add to its offerings and further drive revenue and EBITDA.
One-of-a-kind niche business: Nazara Technologies operates in the gaming and sports media industry. The industry has practically no peers in India making the company one-of-a-kind. Accordingly, Nazara holds a strong command in the domestic gaming market with successful platforms in the eSports segment such as Sportskeeda and Nodwin which has been seeing good traction. Other businesses such as freemium mobile gaming with WCC series have been hits and have a large player audience benefitting the company with ad-based revenue and in-app purchases.
Prudent fund management: The company has adopted a mix of organic and inorganic growth strategies wherein it acquires companies in the industry to further grow its capabilities. While the strategy focuses on acquisitions, the company has mostly funded these acquisitions using its own cash and accordingly has no debt on its books. The company maintains Rs 184.28 crore of cash and bank balances (H1FY21) currently. Along with this, the company has only seen 2 fund raises of Rs 12.63 crore (in two tranches in 2005 and 2007) and Rs 76.53 crore in 2018.
Strong growth from eSports segment: The segment has seen a phenomenal growth from Rs 3.6 crore in FY2018 to Rs 84.2 crore for FY2020, posting a staggering growth of over 20x in the 3-year period. In-line with the pace, the revenue share of the segment has grown from 2% in FY2018 to 32% as of H1FY21. This growth is fuelled by the rise in partnerships undertaken by the company, which rose from just 8 to 36 over this period. Along with this, the traffic has grown from 28.79 million visits/month in FY2018 to 59.02 million visits/month as of YTD FY21.
RISKS
Unstable Profitability and Cash Flows: While revenues have delivered an impressive growth rate, the profits have been on a decline. The EBITDA of the company has seen a consistent decline over the past 3 years, mostly attributable to the reduction in the Telco business (with margins of 30%+) while other verticals with high-growth and low margins picked up. Along with this, the net profits have also suffered with the company reporting a loss of Rs 26.62 crore in FY2020. Cash flows also continue to exhibit similar trends with erratic operating cash flows which makes it difficult to estimate cash flow trends to gauge growth.
Intense competition in Gamified Learning space: Kiddopia has a strong user base in the North American markets and has been seeing a plateauing of its CPT (Cost per Trial). But, with a large number of global players getting into the Edu-tech space also offer similar platforms. With the subscription retention at 25.8%, customers can easily shift from its platforms as new apps and solutions emerge. Accordingly, the company will have to continue innovating in this space with higher spending to protect its market share.
Regulatory risks: Operations in skill-based fantasy and trivia real money games are subject to regulatory uncertainty. Skill-based real money gaming is also fraught with statutory risk and there have been recent instances of multiple states banning any form of online real money gaming in the respective states given that it is a state as well as central subject as per Indian constitution. Such restrictions may impact growth in this segment for the company.
Decline in Telco Business: Telco business is a slower business for the company but has contributed highly to profits in past years. Its decline can result in lower profits for Nazara over the long-term. With a decline in profits, the company will find it difficult to fund future acquisitions and may resort to borrowings which can impact the balance sheet position of the company.
CONCLUSION
Nazara Technologies is a strong player in the nascent gaming industry of India and has multiple growth levers at its disposal which can fuel growth in the future. Favourable macro factors and dominance in the market aided by IPs and platforms are strong positives for the company. Yet, the financials of the company continue to remain unimpressive with a streak of reducing profits and unpredictable cash flows. Along with this, the company stands to face intense competition from global players as well as regulatory risks in the future.
With Rakesh Jhunjhunwala among marquee shareholders in the company, the market sentiment is pretty strong for Nazara Technologies. Accordingly, investors looking for listing gains can subscribe to this IPO.
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