Investors allotted shares in IPO of Nazara Technologies (Nazara) can book profits. The gain on the stock over the offer price of ₹1,101, now stands at around 45 per cent. The stock opened at ₹1,971, a gain of almost 80 per cent over the offer price, but has cooled off since then.
We had recommended investing in the IPO as it offered a high risk-high reward opportunity. Post listing gains, the stock now trades at close to 12 times EV/Sales (FY21 annualised based on 1H FY21 revenue) vs near 8 times at the IPO price. This skews the equation more in favour of risk than reward. Even at the IPO price, the stock was trading at significant premium to leading global gaming stocks like Activision Blizzard which trades CY20 EV/Sales of around 8.5 times with EBITDA margins at 40 per cent, and Electronic Arts which trades at CY20 EV/Sales of around 5.75 times with EBITDA margins at 26 per cent. As compared to this Nazara had EBITDA margins of around 6 per cent in 1H FY21. While the company’s revenue from operations grew at a CAGR of 20 per cent to ₹248 crore during FY18-20 and Nazara also clocked robust revenues of Rs 200 crore in 1HFY21 alone, not much can be extrapolated from these trends as far as future growth is concerned as the company has adopted an acquisition led model. Its net profit has been around break-even to modest losses between FY18 to now. It has a net cash of over ₹200 crore in its balance sheet.
Business
Nazara 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. Its offerings are across interactive gaming, eSports and gamified early learning ecosystems. Some of the company’s most popular games, brands and products are World Cricket Championship, CarromClash, Sportskeeda and Kiddopia. For the 6 month period ended September 2020, the company’s revenues were well diversified with India representing 41 per cent of revenue, North America 41 percent and the rest from Middle East, Africa and APAC. Exposure to North America increased significantly in this period vs 12 per cent of revenue in FY 20 following an acquisition.
The company may be in early stages of growth opportunity in India, however how well the company executes over next few quarters needs to be tracked. Right now, the opportunity appears fully priced in.