Nazara Technologies lists at 81% premium; analysts advise booking profit

Ace investor Rakesh Jhunjhunwala-backed Nazara Technologies made a stellar debut on the bourses on Tuesday as the shares of the firm listed at Rs 1,990, an 81 per cent over its issue price of Rs 1,101 on the National Stock Exchange (NSE). Meanwhile, on the BSE, the stock debuted at Rs 1,979, 79 per cent above its issue price. Post-listing, it moved higher to 2,026.90, up 84 per cent.

At 10:02 am, Nazara Technologies was trading 74 per cent higher against its issue price at Rs 1,917.75, after hitting a low of Rs 1,869.05 on the BSE. A combined around 1.4 million equity shares changed hands on the counter on the NSE and BSE so far.

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The initial public offer (IPO) of Nazara Technologies had received a stellar response from all types of investors, with the issue getting subscribed 175 times. The non-institutional investors’ portion subscribed a whopping 390 times, while that of qualified institutional buyers (QIBs) by 104 times and retail investors by 7.55 times, according to exchange data.

Nazara Technologies is an Indian gaming and sports media platform with a presence in India, North America, Africa and the Middle East. Its product portfolio includes offerings across interactive gaming, eSports and gamified early learning ecosystems like World Cricket Championship & Carrom Clash in mobile games, Kiddopia in gamified early learning, Nodwin & Sportskeeda in eSports and eSports media, and Halaplay and Qunami in skill-based, fantasy and trivia games.

The company derives revenues mainly from subscription fees paid by users for accessing gamified early learning content, as well as, from eSports business. These two segments cumulatively accounted for 71 per cent and around 42 per cent of operating revenues for April-September 2020 (H1FY21) and FY20, respectively.

Most of the brokerage houses had a ‘subscribe’ rating on the Nazara Technologies as they believe the gaming industry is set to witness over 30 per cent CAGR over 2020-2023E on the back of high mobile penetration, increasing internet penetration and increasing number of gamers.

Over the last three fiscals, the company has changed its gears and entered newer business segments such as eSports, Gaming – World Cup Cricket, HalaPlay – Fantasy Sports – which offer high growth potential.

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. As the synergies and growth from these investments kick in, the margin profile and consequently return ratios are expected to return to a path of steady growth, Geojit Capital said in an IPO note.

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“Favorable macro-economic and demographic drivers, growth in adoption of gaming and online learning and improvement in digital payment and tech infrastructure in India provides a great opportunity for growth of the company. The combined Gen-Z and millennial population provide a large user base of mobile gamers, sports and eSports fans. Further, with rapidly rising per capita spends and high internet and smartphone penetration, India as a market for each of the company’s offerings is still far from saturation, both in terms of the number and engagement of users as well as monetisation opportunities, thereby providing huge potential for growth,” analyst at ICICI Securities said in a note.

What should investors do now?

Analysts believe that given Nazara Technologies’ stock has surged nearly 100 per cent over the issue price, investors can partially book profit and can add more at a later stage once the stock corrects.

“The stock is currently trading at a high valuation and investors can book partial profits and once the stock corrects, they can add it back in the portfolio,” said Omkar Tanksale, senior research analyst at Axis Securities.

“Over the last four years, the profitability of the company has seen many ups and downs. But as the economy gains traction and spending from customers start gaining momentum, there is upside potential in the business, going ahead,” Tanksale added.

Over FY18-20, the company’s topline has grown by 19.9 per cent CAGR to Rs 2,47.5 crore in FY20. Total operating expenditure increased by 43.2 per cent CAGR (higher than the top-line growth), leading to a consolidated loss of Rs 5.52 crore in FY20.

Commenting on this, Ajit Mishra, VP- Research at Religare Broking said that companies that are in expanding mode generally see such a trend. “The potential this sector has and the traction we are seeing in digital space, the loss is a short-term blip as the long-term visibility remains strong,” he added.

Mishra, too, recommends investors taking some profit off the table.

“Given the market situation, on the back of such stellar listing gains, investors can look to partially take some profit off the table. He, however, added that if an investor has an appetite to hold for a year or two, then they should definitely hold the stock,” he noted.