Rakesh Jhunjhunwala-Backed Nazara Technologies Stock Rallies On Yes Securities Boost
Yes Securities expects Nazara Technologies Ltd.’s stock to rise 20-50% from current levels in the next three years on account of the general gaming market frenzy, bright prospects of this industry in India, and growing interest in platform businesses.
“Nazara has well recognised brands across gamified early learning (Kiddopia); e-sports (Nodwin, Sportskeeda); freemium games (WCC); online real money games (Halaplay); and telecom subscription business,” the brokerage said in a report, as it initiated coverage on the stock.
“Apart from legacy business of telecom subscription, other segments (especially e-sports and real money games) are expected to see sustained high growth, driven by rising popularity of online games among 18-35 years old,” it said. Planned expansion in the foreign market, especially the U.S., too, has helped.
The Indian gaming industry, according to Yes Securities, is expected to achieve $3.5 billion (about Rs 25,800 crore) in 2023 from $1.5 billion (Rs 11,000 crore) in 2020 at a compounded annual growth rate of 32.6%. That, it said, will be led by growing smartphone penetration, a rise in the number of mid/hard core gamers and a gradual increase in in-app purchases. “The Covid-19 lockdowns have seen more youth seriously exploring online gaming.”
That, Yes Securities said, makes the medium term “look promising” for the Rakesh Jhunjhunwala-backed company, though it remains “uncertain” over the long term.
The brokerage suggests a ‘reduce’ rating for the online gaming platform. But its price target of Rs 2,208 apiece implies an upside potential of 23.8% in 12 months.
Yes Securities listed certain uncertainties in the long term:
Nazara didn’t grow between FY17 and FY19 until it made strategic acquisitions across sub-segments of the gaming industry.
The company has not demonstrated its ability to build blockbuster games, acquisition is only way to achieve growth.
Acquisitions are an expensive affair. Hence, it raises concern on the impact on shareholders returns. Acquisitions will require frequent equity dilution of a promoter holding that’s already at low 20.7%.
Barrier to entry is low as it is relatively easy to develop a mobile-based game on the basis of current technologies.
Moat for the business may not be strong. “We’ve seen best of games fall out of favour over time. Developing mobile games is a hit and miss business as several factors determine the success or failure of a game.”
Shares of Nazara gained as much as 8.3%, the most since July 2, to Rs 1,932.4 apiece around 12:30 p.m. on Monday. Of the seven analysts tracking the company, five have a ‘buy’ rating and two recommend a ‘sell’, according to Bloomberg data. The average of the 12-month consensus price targets implies an upside of 10.6%.