Rakesh Jhunjhunwala-backed Nazara Technologies has enjoyed a decent performance since listing, holding significantly above the IPO price so far. The stock is still 37% above its issue price, with valuations too expensive, according to brokerage and research firm CLSA. Seeing the high valuations, CLSA has initiated coverage of Nazara Technologies with a ‘Sell’ rating, expecting as much as 27% downside from current levels. Big bull Rakesh Jhunjhunwala, a pre-IPO investor in Nazara Technologies, owns a 10.82% stake in the company. The stock was down as much as 12% on Friday.
Gaming industry nascent
Currently in India, mobile gaming, casual, real money and online fantasy sports dominate with 90% share of the $1.2 billion sector revenue. Nazara Tech is a leader in ESports, which makes $108 million or under 10% of the gaming sector revenue. “ESports remains niche, despite growing 55% since 2018. ESports audience is 17 million vs India’s 365 million mobile gamers,” CLSA said. Although Nazara finds no peer on the bourses, however, on ground the situation is expected to intensify. Competition from top players includes MPL’s skill-based eSports platform, Paytm First Games, Jio Games, and Dream 11, which is backed by Tencent and owns a stake in PUBG.
Nazara Technologies derives revenues mainly from subscription fees paid by users for accessing gamified early learning content, as well as from eSports business. “The eSports business for Nazara grew by 102% YoY in FY21. The gamified early learning business which was acquired Nazara in FY20 has seen a growth of 3x in FY21 (adjusted for full year) with the addition of over 142,000 subscribers during the year,” CLSA said. The brokerage firm expects revenues to expand at 35% CAGR over FY21-24CL to reach Rs 11.1 billion. Net profit is estimated to reach Rs 1.6 billion.
Valuations too high
“Given the exciting growth potential of India’s mobile gaming industry, the stock valuation will be driven by how Nazara’s growth unfolds and the market at large values the sector opportunities alongside scarcity premium to the first listed mobile gaming company in India,” analysts at CLSA said. However, the CLSA’s India coverage universe (ex-financials) of 111 stocks currently trade at an average of 2x FY23CL EV/sales, while Nazara Tech’s stock trades at 6x FY23 EV/sales which makes valuations expensive. Even on EV/Ebitda comparison, Nazara trades at 29x FY23 compared to an average of 10x EV/Ebitda for the CLSA universe implying a valuation premium of near 3x.
Comparing Nazara to global peers, CLSA said that large five global gaming stocks trade at an average of CY22/FY23 EV/sales of 5.4x and EV/Ebitda of 17x, whereas Nazara Tech trades at 6x EV/sales and 29x EV/Ebitda which makes valuations significantly more expensive. “Hence with Nazara’s stock valuation running ahead of forecast growth and carrying a hefty scarcity premium,” CLSA noted while pinning a target price of 1,095 on the stock.
At the end of the January-March quarter, ace investor Rakesh Jhunjhunwala held 32,94,310 equity shares of Nazara Technologies, or 10.82% stake. Nazara Technologies shares were down 12% on Friday as bears took control of Dalal Street, trading at Rs 1,463 apiece.
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