Nazara Technologies IPO comes with risks and promises of high returns

The Nazara IPO is an offer for sale, wherein existing shareholders are selling shares worth about ₹580 crore.

2 min read . Updated: 16 Mar 2021, 11:20 PM IST Pallavi Pengonda

Between 2017-18 and 2019-20, Nazara’s revenues have grown 20% annually, even as the nature of its biz has changed

Nazara Technologies is India’s first online gaming company to list on the bourses, and that in itself should be enough to see its initial public offering (IPO) sail through. “Since companies such as Dream11 (backed by Tencent) are not listed, Nazara will get a scarcity premium," said an analyst with a multinational broking firm, requesting anonymity.

The Nazara IPO is an offer for sale, wherein existing shareholders are selling shares worth about ₹580 crore. IIFL Special Opportunities Fund, which had invested ₹330 crore in November 2017, is selling down nearly three-fourth of its position at a handsome profit. At the higher end of the IPO price band, its investment has doubled, and annual returns stand at nearly 23%. IPO investors are likely to pile on, expecting the high growth, high returns story to continue.

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Between 2017-18 and 2019-20, Nazara’s revenues have grown 20% annually, even as the nature of its business has changed considerably. In FY18, the company derived as much as 89% of its revenues from subscription services linked to telcos. But analysts said the fast growth of 4G resulted in this business taking a hit. Indeed, the contribution from telco subscription dropped to 21% of revenues in the six months to September (H1FY21).

During this period, Nazara’s revenues have got a boost from acquisitions such as Paper Boat Apps and Nodwin Gaming. In H1FY21, gamified early learning and e-sports accounted for 39% and 32%, of the revenues, respectively.

Gamified early learning business includes games plus learning for the 2-6 year age group. Analysts said this business may have got a boost from covid and one has to wait and watch to see how demand pans out in the long-run. Kiddopia is the flagship app in this segment. Nazara entered the e-sports segment via the acquisition of Nodwin Gaming in FY18 and e-sports media through Sportskeeda, via acquisition of Absolute Sports in FY20.

Commenting on Nazara’s strategy of entering high growth segments, analysts at GEPL Capital said: “Although this growth has come at the expense of Ebitda margins and return ratios, the pivot was an essential strategy to foray into diverse lucrative opportunities, leveraging an ecosystem of partners and creating business moats."