Rakesh Jhunjhunwala’s Rs 600 crore bet looks set to deliver ‘real money’

NEW DELHI: Following a stellar debut, shares of Rakesh Jhunjhunwala-backed gaming firm Nazara Technologies had a rather dull show on Dalal Street in the first five months since.listing.

But a couple of brokerages have initiated coverage on the stock of late, with a bullish view. Technical charts, too, suggest the scrip could offer healthy returns going ahead.

The latest to join the bandwagon is Prabhudas Lilladher, whose ‘buy’ rating on the stock took the total number of ‘buy’ counts to four against one ‘sell’ recommendation.

Fundamental analysts suggest a median price target of Rs 2,150 on the stock, suggesting a potential 17 per cent upside. Technical analysts, on the other hand, believe the stock is headed towards its upper end of a range, and if it manages a breakout there, an upside towards Rs 2,500 level is possible. This target suggests up to 36 per cent upside.

On Thursday, the scrip closed at Rs 1,837 on BSE, up 2.61 per cent. This was 67 per cent higher than the IPO issue price of Rs 1,101, but about 7 per cent lower than the listing price.

Big push to real money gaming
Nazara last week announced the acquisition of OpenPlay, which is expected to help it make further inroads into the real-money gaming (RMG) segment that roughly accounts for 2 per cent of the company’s revenues annually.

Manish Agarwal, CEO at Nazara, told ETMarkets.com that his company had earlier been reluctant to enter the space due to regulatory challenges. But following Madras High Court’s favourable judgement on ‘game of skill’ last month, it acquired OpenPlay for Rs 186 crore.

OpenPlay is a skill gaming company offering fantasy sports, quiz, rummy and various other games. Unlike gambling, ‘skill of game’ refers to a gaming format where participants have a chance to win real money based on outcome or skill. Here luck plays a lesser role unlike a roll of a dice in a Ludo game.

The opportunity is large. The RMG segment in India is valued at Rs 12,000-13,000 crore, which is expected to grow at a CAGR of 30-40 per cent over the next three-four years.

Real money games are classified into two formats: non-fantasy RMG games such as cards, board and action games and also online fantasy sports.

Rummy, Teen Patti and Poker continue to lead the non-fantasy RMG category, but newer formats are also gaining traction with the entry of multiple quizzing platforms such as BaaziNow and Zupee, analysts said.

In online fantasy sports, platforms like Dream11, MyTeam11 and My11Circle Cricket are some of the key players.

Agarwal said his company is targeting Rs 100 crore revenues from the RMG segment, whose contribution to total revenues was not significant at Rs 15 crore in FY21.

“We would like to invest more in this space. We want to build scale and consolidate the market. The focus would be on getting more gamers to the platform. At present, OpenPlay’s Ebitda margins are at around 20 per cent level. We would want to make an optimum balance between margin and growth,” he said.

Prabhudas Lilladher expects OpenPlay acquisition to increase the segment’s sales by eight times in three years due to consolidation impact for RMG segment. “The business has 20 per cent Ebitda margin as compared with Ebitda loss of Rs 34.7 crore reported by Halaplay in FY20 and Rs 5.8 crore loss in FY21 respectively,” it said.

Fundamental views
Prabhudas Lilladher said the acquisition of OpenPlay would act as an additional growth kicker, in an otherwise competitive RMG segment fraught with regulatory hurdles. It likes Nazara India for three reasons.

The brokerage finds Nazara as a unique play on rising gaming culture, given Gen Z & millennials constitute 65 per cent of India’s population demographics. Nazara, it said, has an early mover advantage in evolving Esports category, which it said is likely to disrupt the traditional sports landscape in the next 4-5 years. Also, Nazara offers a direct play on the 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 a business model can be altered depending on technological advancements, innovations and changing taste of consumers,” it said.

Jefferies said Nazara offers a direct way to play the gaming ecosystem as it is building a network of gaming companies through M&A that benefit from each other.

“Its presence in the rapidly-growing gamified early learning market in US, mobile gaming and eSports market in India could drive 28 per cent annual growth in revenues and 46 per cent in Ebitda over FY21-26, by our estimates,” the brokerage said.

Technical Views
Mehul Kothari, Assistant Vice President, Technical Research at Anand Rathi Shares and Stock Brokers, said the Nazara stock has been stuck in a broad range of Rs 1,500-2,000 post listing.

He believes only a decisive move would dictate further trend. “At this point in time; the stock is approaching the higher end of the range. Once the Rs 2,000 level is broken on a daily closing basis, we could witness an extended move towards Rs 2,500,” he said.

Chandan Taparia of Motilal Oswal Securities said the scrip has been moving up for the last few days and is making a higher base. Taparia sees immediate support for the stock at Rs 1,720 and resistance around Rs 2,100 level.

Q1 show healthy
The gaming firm reported a net profit of Rs 13.60 crore for the June quarter compared with a loss of Rs 21.7 crore in the year-ago quarter. Revenue for the quarter jumped climbed 45 per cent YoY to Rs 131.2 crore from Rs 90.5 crore in the year-ago period. The e-sports segment’s revenue doubled to Rs 53.20 crore, while that of Gamified early learning segment grew about 46 per cent to Rs 52.1 crore in the June 2021 quarter from the year-ago period.

The scrip has been trading flat since it reported its quarterly results in July-end.

Nazara has no listed peer. But a comparison with global peers can be worth noting. Jefferies last week pegged Nazara at 7.7 times FY22 EV/sales and 56.4 times EV/Ebitda. Global peers, as per the below chart, trades at an average of 4.6 times CY21 EV/sales and 14.2 times CY2022 EV/Ebitda.

Prabhudas said it does not rule out intermittent volatility in profitability, as Nazara’s business model is scalable and the focus is on growth. “Since India’s mobile gaming industry is nascent with strong long term growth potential (38 per cent CAGR over next 3 years), we value the stock using the DCF methodology and arrive at a target of Rs2,342,” it said.

Jefferies said it views Nazara at 10 times FY23 EV/attributable sales and finds it reasonable in the context of its growth vis-a-vis global peers. It has a base target of Rs2,070, an upside scenario target of Rs 2,300 and a downside target of Rs 1,400 on the stock.

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