Rakesh Jhunjhunwala-Backed Nazara Technologies' Shares Fall As CLSA Initiates Coverage With A ‘Sell’ Rating
An attendee plays a video game in Los Angeles. (Photographer: Patrick T. Fallon/Bloomberg)

Rakesh Jhunjhunwala-Backed Nazara Technologies' Shares Fall As CLSA Initiates Coverage With A ‘Sell’ Rating

Shares of Nazara Technologies Ltd. fell to the lowest in two months as CLSA initiated coverage on the online gaming platform with a bearish investment recommendation, citing expensive valuation and heightened competition.

The research firm put a 'Sell' rating on the Rakesh Jhunjhunwala-backed firm, a leader in e-sports in India, with a target price of Rs 1,095 apiece, implying a downside of 34% from the current market price.

“In Indian mobile gaming, casual (Ludo King), real money (Rummy, Poker) and online fantasy sports dominate with 90% share of $1.2-billion sector revenue. E-sports (competitive games) at $108 million are under 10% of the sector revenue. E-sports remain niche despite growing 55% since 2018. E-sports audience is 17 million versus India’s 365 million mobile gamers,” the research firm said in a note authored by analyst Deepti Chaturvedi.

Nazara, with Rs 170 crore e-sports revenue in FY21, is focused on tournament intellectual properties. Popular global e-sports such as PUBG, Fortnight and Call of Duty, according to CLSA, are finding favour in India. But sector competition will intensify.

“Jio Games in a tie-up with MediaTek launched Gaming Masters e-sports event and is partnering to bring Microsoft xCloud to India. Competition from other top players includes MPL’s skill-based e-sports platform, Paytm First Games and Dream 11, which is backed by Tencent and owns a stake in PUBG,” CLSA said in the note.

Nazara Technologies’ balance sheet, according to the research firm, had net cash of Rs 480 crore in FY21, but promoter ownership is low at 21%. CLSA forecasts the company’s revenue and Ebitda to grow at an annualised rate of 35-73% over FY21-24. But the stock valuation is expensive at 6x FY23 EV/sales and 29x EV/Ebitda, it said. “As India’s first listed gaming company, Nazara carries a hefty scarcity premium of 3x to CLSA’s India coverage and 10-75% even to global gaming peers.”

CLSA also cited certain risks for the company.

  • Risk of global operations: About 60% of the company’s revenues are derived from international sales, particularly from North America, Africa and South Asia. Thus, the company may be subject to currency risks or changing regulations, among others.

  • Falling telco subscription revenues: For FY20 and FY21, revenue from telco subscription business accounted for 33% and 16% of Nazara Technologies’ consolidated revenue, respectively. CLSA forecasts its telco subscription to decline.

  • Data pricing and low propensity to pay: Mobile data rates in India are likely to rise, but the same would likely still remain the lowest in the world. Also, revenue per paying user as well as the percentage of players willing to pay for in-app purchases is much less than other south-east Asian countries like Indonesia.

  • Regulatory risks: India has regulations and policies governing online gaming, including real money and chance-based games.

However, Nazara Technologies in the last four years has done successful strategic acquisitions. “If it continues to make successful acquisitions and scale them, then there would likely be upside risks to our growth forecasts,” CLSA said.

Shares of Nazara Technologies fell more than 5% in early trade on Friday to Rs 1,577.50 apiece, the lowest since April 19, 2021. With today’s fall, the stock has declined for five straight sessions—the worst losing streak since its listing in March.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.