A year after the government notified a higher 28% goods and services tax (GST) for online gaming companies, Head Digital Works founder and CEO Deepak Gullapalli said the move took away 20-25% margins, pushing the company into losses.
Before October last year, online gaming firms were paying 18% GST on the platform fee, which is the commission they charge from the participants entering a game. The GST Council revised the rate on online gaming to 28% on full face value or deposits made by the participants to play games, effective October 1, 2023.
“Around 45% of our revenues are going towards GST payments,” Gullapalli told FE. “We are operating on negative margins and making loss currently, but it is not too much. Our revenues are going up as we have significantly invested in new customer acquisition over the last one year,” he said, adding that the GST issue including the retrospective tax notices have slowed down the industry.
The company is targeting to improve its margins to 15-20% over the next three-to-four quarters.
In a bid to achieve the same, Head Digital Works plans to cut expenses where possible including lower cost of customer acquisition and retention. Besides, the company is looking to increase user engagement on the platform so that there are less instant withdrawals and the GST bonus given back to players remain in the system to an extent possible.
Currently, the gaming companies are absorbing the higher GST impact and have not passed it to the consumers.
“Passing the GST burden to consumers is currently ruled out because we don’t want competitors to have a competitive advantage. The impact (of GST on companies) can be reduced by increasing the amount of time (of player engagement),” Gullapalli said.
“We are introducing tournaments, challenges, leaderboards, missions, and various features within the app that will increase the engagement of a consumer,” he added.
Head Digital Works, which is an online skill-gaming platform, operates under the brand – A23. The company has over 70 million users across its real-money gaming verticals – Rummy and Poker.
While the company did not disclose the FY24 numbers, Gullapalli said the revenues have grown over 30%. Notably, in FY23, the company’s revenue from operations rose 45% to Rs 1,050 crore, and the profits grew nearly three times to Rs 58 crore.
“Revenues have been steadily growing at around 40% CAGR (compound annual growth rate). We want to be a healthy company and we will focus on both growth and profitability,” Gullapalli said, adding that focusing on both is important to attract future investors and create value for existing ones.
Over the next six months to one year, Head Digital Works is not looking to diversify its gaming portfolio and will focus on to expand Rummy and Poker. The company will also continue to focus on India as a market and not looking to expand its operations globally.
“We are focused on India right now. There is enough market potential locally. There are lot of regulatory risks and issues globally. There have been lots of consolidations globally and it is not easy to enter those markets,” Gullapalli said.
On plans of raising investments, Gullapalli said, “valuations are not accretive enough to raise money at the moment. We will wait for creating better valuation and then raise capital. Currently, we have cash in reserves”.
Head Digital Works has so far raised $91 million in last 18 years of existence.
Among other issues, Gullapalli said the tax demand notices on gaming companies is an area of concern. Besides, the proliferation of offshore gaming platforms is also affecting the legitimate gaming companies in the market, he said, adding that there is a need for regulation of online gaming sector to recognise clean companies in the market and protect users.
