Nazara Technologies coming with an IPO to raise Rs 583 crore

Nazara Technologies

• Nazara Technologies is coming out with a 100% book building; initial public offering (IPO) of 52,94,392 shares of Rs 4 each in a price band Rs 1100-1101 per equity share.
• Not less than 75% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
• The issue will open for subscription on March 17, 2021 and will close on March 19, 2021.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 4 and is priced 275 times of its face value on the lower side and 275.25 times on the higher side.
• Book running lead managers to the issue are ICICI Securities, IIFL Securities, Jefferies India and Nomura Financial Advisory and Securities (India).
• Compliance Officer for the issue is Pratibha Mishra.

Profile of the company

The company is the 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, and offerings across the interactive gaming, eSports and gamified early learning ecosystems including World Cricket Championship (WCC) and CarromClash in mobile games, Kiddopia in gamified early learning, Nodwin and Sportskeeda in eSports and eSports media, and Halaplay and Qunami in skill-based, fantasy and trivia games.

The company’s goal is to cater to billion plus mobile internet players across emerging markets who have embraced social multiplayer interactive gaming as the foremost form of entertainment. The company seeks to achieve this by providing interactive mobile games, eSports content and gamified early learning apps which are entertaining, locally relevant and result in positive engagement and longer retention of users of company’s platform. Given the company’s market-first position in India across sports simulation and eSports, it is well placed to leverage the opportunity that interactive mobile games, eSports content and gamified early learning apps offer. Its effort has been to grow revenue and profitability concurrently by leveraging its capabilities of in-house content creation, game engine development, technology stack development, its relationships with other participants in gaming ecosystems and its skilled leadership.

Proceed is being used for:

• Achieving the benefits of listing equity shares on the Stock Exchanges.
• Carrying out the sale of up to 52,94,392 equity shares by the selling shareholders.

Industry overview

Indian gaming industry is projected to grow over 31.7% year on year (YoY) due to the growth of digital infrastructure and significant rise in quality and engaging of gaming content. By 2024, the gaming industry in India is set to be valued at $3,544 million. India’s online gaming industry has already attracted over $350 million in investments from venture capital firms between 2014 and 2020. (FICCI, IBEF) In India, the average revenue per gamer has increased from $2.3 in 2016 to $8.8 in 2020. The penetration of gaming in India has also doubled from 15% in 2016 to 30% in 2020. The rise in online gaming activity propelled by the growth in the number of gamers by almost ten times in the last decade, also led to comparable growth in game developing companies over the same period. The proliferation of cheap smartphones, high-speed internet and reduction in data prices are the key drivers for this rapid growth. The mobile gaming segment in the Indian gaming industry is the largest in terms of revenue. This segment was valued at $272 million in 2016 and is estimated to be about $1.2 billion in 2020 growing at a CAGR of 39.6%. The mobile gaming segment is expected to reach a market size of $3.1 billion by 2023.

The mobile gaming market in India is the largest gaming segment and was pegged at $0.3 billion in 2016. Being the largest gaming segment in India, this is the fastest growing sector as compared to PC and Console gaming. This segment is valued at $1.2 billion in 2020 and is expected to reach a value of $3.1 billion by 2023, growing at a healthy CAGR of 39.6% during this period. India offers a significant opportunity for mobile gaming publishers and investors, as it is poised for stellar growth in the coming years. The growth rate of mobile gaming in India stands at an extremely healthy CAGR of 39.6% as compared to the growth rates in China and the US, which stood at 14.6% and 12.2%. The global growth rate of the mobile gaming market is only one third of India’s, measuring at 13.3%. Growth in the Indian mobile gaming market will be predominantly characterized by the rising adoption of smartphones, drop in data prices, increased internet penetration, high internet speeds etc.

Pros and strengths

Leadership position in diversified and scalable business: The company’s current position of leadership in India across a diversified set of offerings provides it a strong foundation for continued growth. Its successful business model and established presence in India, a market with economic, technical and cultural complexities, has given company a competitive advantage. It has successfully leveraged its capabilities for in-house content creation, game engine development and propriety technology stack development, ability to deliver positive LTV/CAC ratios across offerings and its relationships with telecom operators, app stores and other participants in gaming ecosystems. The company’s content is developed in India for the Indian as well as global audience, allowing it to achieve scale. It has an operating leverage in gamified early learning on account of captive development of content being undertaken in India, while the company generate revenues inter alia from North America.

Portfolio of premium intellectual property and content across regions and businesses: The company owns and has sustained access to premium IP and popular, local brands across eSports and mobile games in India. It is able to apply local market knowledge and technical expertise to provide highly relevant and localized content that appeals to its diverse user base. Ownership of IP as a developer and publisher for of mobile games, and as a producer of premium esports content (live and on-demand) combined with company as an operator for eSports organising leagues and ability for to distribute games and exclusive content distribution leveraging its existing across multiple distribution channels, leads to significant value creation.

Large and engaged community of users, with attractive monetization opportunities: The company’s insight into and deep understanding of the behaviour and journey of its key demographics and users across businesses enable it to attract and retain users in an optimised manner. The company continuously strives to enhance user experiences and engagement through new content and features and increased social interactions. Mobile gamers spent an average of 287 minutes per week across its key freemium mobile games. The company has established diverse revenue models, capitalising on its localised insights across markets. It relies on the freemium model for monetization of its mobile gaming businesses, allowing users to download and access fully functional apps and content for free. In eSports, including eSports media, revenues are generated through licensing of media rights and brand sponsorships.

Successful inorganic growth through strategic acquisitions: The company has expanded its portfolio of business offerings through multiple acquisitions, and successfully integrated these businesses into its operations. It has been successful in selectively identifying strategic acquisition and investment targets in the past, and in integrating, developing, synergizing and leveraging the existing businesses and brand equity of its past acquisitions and investments to enter into new business segments and geographies, diversify its revenue streams, obtain employee talent and thus expand its presence across the value chain.

Risks and concerns

Dependent on telco subscription business for substantial portion of profits: For Financial Year 2020 and the six month period ended September 30, 2020, as per company’s Restated Consolidated Financial Information, revenue from its telco subscription business was Rs 817.96 million and Rs 427.62 million, respectively, accounting for 33.05% and 21.33% of its consolidated revenues from operations for Financial Year 2020 and the six month period ended September 30, 2020, respectively. There can be no assurance that its telco subscription business will continue to remain a successful or profitable business, or that it may not decline for any reason whatsoever, including reasons beyond its control. For instance, changes in policies of payment collection models adopted by its telecom partners, any adverse changes to the regulations governing the telecom operators or their statutory obligations, or the increasing popularity of free-to-play and freemium mobile games, the easy availability of mobile games content across platforms without the involvement of telecom operators and a reduction in payment barriers may all result in a decline of the telco subscription business.

Derive significant portion of revenue of eSports business from few customers: The company is dependent on a limited number of customers for a significant portion of its revenues from eSports business, and do not have long-term contractual arrangements with most of its significant customers. It conducts business with certain customers on the basis of annual or event specific agreements or only purchase orders or invoices that are issued from time to time. The loss of one or more of company’s significant customers or a reduction in the amount of business it obtains from them could have an adverse effect on its business, results of operations, financial condition and cash flows. The reliance on a select group of customers may also constrain its ability to negotiate arrangements, which may have an impact on its profit margins and financial performance, and thereby an adverse impact on its cash flows and results of operations.

Face competition: The company face competition in each of its businesses from both new as well as existing players, and the failure to compete effectively with any of them could materially and adversely affect its business, financial condition, cash flows and its results of operations. Its competitors range from established entertainment and gaming companies such as Sony Interactive Entertainment, Reliance Jio, Tencent and Microsoft Game Studios to emerging gaming start-ups such as Dream11, Mobile Premier League (MPL), Games 24x7 and it expects new competitors to continue to emerge. It competes with its competitors across a range of factors, including, among others, high-quality content, development staff, technology stack and data analytics capabilities, scope and quality of its product and service offerings, user experience, and brand recognition. Its competitors may launch similar products or services, with different pricing and service packages that may have greater appeal than its offerings.

Rely on wide portfolio of IP to operate businesses: The company rely on a wide portfolio of IP to operate its businesses and it may not be able to effectively protect these against infringement or safeguard its IP in a cost-efficient manner. While it has included adequate provisions in its existing arrangements with its employees, co-developers and third parties with whom it conduct business to confirm its ownership of IP and to limit access to, and disclosure and use of, its proprietary information, it cannot assure you these contractual arrangements and the other steps it has taken to protect its IP may not prevent the misappropriation of its proprietary information or deter independent development of similar games by others.

Outlook

Incorporated in 1999, Nazara Technologies is a leading mobile game company in India. The company offers a range of diversified gaming products across the Interactive gaming, eSports, and gamified early learning ecosystem across emerging markets i.e. India, Africa, South East Asia, Middle East, and Latin America. It is one of the leading live eSports streaming and on-demand eSports media content providers in India. CarromClash and World Cricket Championships in mobile games, Kiddopia in gamified early learning, Nodwin and Sportskeeda in eSports, and Halaplay and Qunami are some of its offerings. The business operates in different segments; Subscription-based business, Freemium Business, eSports, Gamified early learning, and Real money gaming. Subscription business focuses on mass mobile internet users comprising mainly first-time mobile gamers. The company’s team of KMPs and SMPs has been instrumental in implementation of its vision and purpose and driving it to achieve market leading positions across its business offerings. On the concern side, although it has been profitable in the past, it expects to make investments in growing its business and may undertake acquisitions of other synergistic companies, which could reduce its profitability compared to past periods. It relies on third party tools for the security and authentication necessary to effect secure transmission of confidential customer information, such as customer names and passwords, and there can be no assurance that such security controls over customer data will be able to prevent, counter or respond to any security breach or the improper disclosure of confidential information in a timely manner, or at all.

The issue has been offered in a price band of Rs 1100-1101 per equity share. The aggregate size of the offer is around Rs 582.38 crore to Rs 582.91 crore based on lower and upper price band respectively. On performance front, the company’s revenue from operations increased by Rs 778.11 million, or 45.85%, from Rs 1,696.98 million in Financial Year 2019 to Rs 2,475.09 million in Financial Year 2020. The increase in company’s income was primarily due to an increase in revenue from eSports and increase in revenue from gamified early learning acquired during this period. The company incurred a loss after tax of Rs 266.15 million in Financial Year 2020, as compared to a profit after tax of Rs 67.13 million in Financial Year 2019. The company intends to introduce more products and services tailored to overseas markets. It also plans to selectively cooperate with local distribution partners to effectively promote its offerings overseas. It intends to continue to be present and expand its presence in emerging markets by capitalising on its first mover advantage in these markets, and leveraging its existing network of partnerships across the local ecosystem. It also intend to deepen its presence in existing geographies by offering mobile games and content in vernacular languages and capturing the next segment of mobile gamers arising from the increased internet penetration in its existing markets.