Nazara Technologies

Gaming is rapidly becoming the future of entertainment, eclipsing the global music and film industries in market size. It currently outpaces the music industry by seven times and the movie industry by five times, firmly establishing itself as a dominant force in the entertainment realm. As such, Nazara Technologies stands to reap rich returns from an ever-growing market 

Nazara Technologies stands as India’s sole publicly traded gaming and e-sports enterprise, boasting a multitude of prominent gaming and e-sports brands. With a presence extending from India to the United States, and various other global markets, Nazara Technologies excels in the e-sports realm, spearheaded by its foremost e-sports platform, Nodwin, in India. In the markets of Turkey, the Middle East and North Africa (MENA), they operate Publish ME, while Sportskeeda and Pro Football Network cater to the sports’ media domain. 

Within the realm of interactive gaming, Nazara Technologies offers a gamified early learning ecosystem, Kiddopia and Animal Jam, both of which hold global leadership positions in their respective categories. Their portfolio includes the highly popular World Cricket Championship (WCC), a cricket simulation franchise in India, Classic Rummy in the Indian real money gaming sector, and an extensive collection of casual games distributed through partnerships with telecommunications’ providers in numerous emerging markets. 

Furthermore, Nazara Technologies exercises control over Datawrkz, a digital adtech company, which not only supports its other portfolio entities but also extends its services to external clients, providing user acquisition solutions on the demand side and ad monetisation services on the supply side. 

Sector Overview
The video game industry has undergone a remarkable transformation since its inception in the 1970s, now standing as a colossal USD 200 billion industry. It boasts cutting-edge graphics, captivating game play, and a staggering audience of approximately 3 billion active players worldwide. Notably, around 50 per cent of these players partake in in-game purchases, underscoring the industry’s substantial economic potential. Gaming is rapidly becoming the future of entertainment, eclipsing the global music and film industries in market size. It currently outpaces the music industry by seven times and the movie industry by five times, firmly establishing itself as a dominant force in the entertainment realm. 

India is rapidly emerging as a powerhouse in the gaming industry. By 2027, the Indian gaming market is expected to surge from USD 2.6 billion to USD 8.6 billion. Despite representing only 1.5 per cent of the global market by size, India boasts a significant share of the global player base, with 500 million gamers and 115 million paying users. As younger generations become the primary customers, the Indian gaming market is projected to grow from 20 per cent to 50 per cent in non-real money gaming. The country also displays substantial potential in nurturing its gaming ecosystem, including high-quality studios, e-sports and infrastructure. To support this growth, the total funding in the gaming ecosystem has already exceeded USD 3 billion since 2017. 

Mobile Gaming Sparks Growth— In the world of gaming, mobile gaming has taken the lead, capturing 50 per cent of the market. With the proliferation of mobile devices and growing demand, it’s poised to maintain its dominance. Moreover, the monetisation potential of mobile apps is on the rise, with the global in-app market projected to expand at 24 per cent CAGR to reach USD 176 billion, while the global in-app advertisement market is anticipated to grow at 20 per cent CAGR, reaching USD 120 billion by 2023. 

E-Sports to Emerge as a Billion-Dollar Market — E-sports is poised for a remarkable growth trajectory in India. Official recognition by the Indian government as a professional sports category is driving substantial progress. The segment’s medium, akin to movies and music. While a significant portion of this spending is concentrated on specific games, increased awareness has the potential to drive further expansion in hypercasual, casual and mid-core gaming in India. 

Financial Overview
Looking at the financials of the company, in Q1FY24, on a consolidated basis the company reported revenue of ₹254.4 crore, which grew by 14 per cent as compared to ₹223.1 crore in Q1FY23, while the EBITDA of the company surged by 10 per cent and stood at ₹33.1 crore as against ₹30 crore in Q1FY23. Similarly, the net profit of the company jumped 31 per cent to ₹20.9 crore as compared to ₹15.9 crore in Q1FY23. 

Moreover, looking at the segment performance of the company in Q1FY24, revenue from the gaming segment grew the most by 24 per cent and stood at ₹109.5 crore, while EBITDA grew by 41 per cent and stood at ₹26.9 crore and the EBITDA margin stood at 24.6 per cent. Kiddopia, a key component of the gaming segment, experienced a 10 per cent YoY revenue growth and an EBITDA increase from ₹9.7 crore to ₹16.1 crore in Q1FY24, resulting in an EBITDA margin surge from 18.4 per cent to 28 per cent. 

In the e-sports segment, revenue stood at ₹117.8 crore, which grew by 15 per cent as compared to Q1FY23, while EBITDA for the segment stood at ₹10.3 crore and EBITDA margin was at 8.7 per cent. Nodwin, the major sub-segment of e-sports reported revenues of ₹68.6 crore with a negative EBITDA of ₹4.8 crore in Q1FY24. The key Intellectual Properties were deferred to Q2FY24, and revenue from these IPs is anticipated in the upcoming quarters. Increased marketing and brand spending in the gaming accessories business affected Q1FY24. 

In the adtech business segment, the revenue stood at ₹27.1 crore, which declined by 16 per cent and EBITDA stood at ₹1.3 crore, which decreased by 62 per cent on a YoY basis while the EBITDA margin stood at 4.8 per cent. Moreover, this segment was focused on higher-margin clients and diversifying its customer base, leading to an overall gross margin improvement of 4.5 per cent from 18.4 per cent in Q1FY23 to 22.9 per cent in Q1FY24. Although there was a revenue decline of 16 per cent in Q1FY24 due to the loss of a large, low-margin client, the company anticipates revenue and EBITDA growth from Q3 onwards. 

Furthermore, looking at the annual performance of FY23 on a consolidated basis, the company reported revenue of ₹1,091 crore which grew by 55 per cent from ₹622 crore in FY22, while the operating profit of the company surged by 18.6 per cent and stood at ₹102 crore as against to ₹86 crore in FY22. Similarly, the net profit of the company jumped 19 per cent to ₹61 crore as compared to ₹51 crore in FY22. 

Furthermore, looking at the key financial metrics of Nazara Technologies, currently the company has a market capitalisation of ₹5,238 crore. Additionally, taking into account the key ratios, the company has a debt-to-equity ratio of 0.03, interest coverage ratio of 17.8 times and a current ratio of 2.18. Moreover, the company has a ROCE of 7.17 per cent and a ROE of 3.56 per cent. Furthermore, looking at the valuation metrics, the company trades at a PE ratio of 108 times which is below its historical median of 121.4 times and has an EV/ EBITDA of 31.7. 

Outlook
E-sports is on the cusp of significant growth in India, aided by official recognition from the Indian government as a professional sports category. The segment’s value is projected to skyrocket from USD 140 million in 2022 to USD 1.1 billion by 2025, with the number of e-sports’ players expected to increase from 200,000 to over 1.5 million. The first-ever televised BGMI tournament, a collaborative effort between Nodwin Gaming and Star Sports, attracted over 36 million viewers, 40 per cent of whom were under the age of 21. 

Substantial media revenues were generated from both broadcast TV and OTT. Moreover, the prize pool has also increased to ₹2.1 crore, marking a 40 per cent boost over Season 1. Season 2 of the BGMI Master Series (e-sports tournament), set to air on Star Sports, is on the agenda for Q2FY24. The key IPs were postponed to Q2FY24, with expectations of revenue generation in the forthcoming quarters. The increased spending on marketing and branding within the gaming accessories business had an impact on Q1FY24. Despite a 16 per cent revenue decline in Q1FY24 in the adtech business due to the loss of a major, low-margin client, the company foresees revenue and EBITDA growth starting from Q3. 

We expect that revenue and EBITDA growth will accelerate in the coming quarters, given the seasonality and the strategic decision to delay key e-sports launches to take advantage of the upcoming opportunities. Recent announcements regarding the skill-based real money gaming business are projected to have a minimal impact on the overall financial performance, as its contribution stands at 4.7 per cent of the revenue and 0.5 per cent of EBITDA in Q1FY24. 

Furthermore, the company continues to cultivate a robust pipeline of merger and acquisition opportunities across various segments of operation, with a specific focus on acquiring gaming IPs and strengthening its teams. Moreover, as the industry grows, Nazara Technologies will be able to scale its business as it has built strong partnerships, IPs and market share in the industry by which they will be able to capitalise on the upcoming opportunities, especially in the e-sports segment. Hence, we recommend BUY.