Nazara Technologies, a Mumbai based company promoted by Vikash Mittersain and Nitish Mittersain, is one of the leading mobile games companies headquartered in Mumbai and is a leading India based diversified gaming and sports media platform with a presence in India and across emerging and developed global markets such as Africa and North America, with offerings across the interactive gaming, eSports, and gamified early learning ecosystems.

Nazara Technologies was originally incorporated as a private limited company with the name Nazara.Com Private Limited on December 8, 1999. Subsequently, the name of the company was changed to Nazara Technologies Private Limited on July 4, 2003. Thereafter, the company was converted into a public limited company and the name of the company was changed to Nazara Technologies Limited on December 13, 2017.

The operations of the company are compartmentalized in five segments, i.e., Gamified Early Learning, eSports, Telco Subscription, Freemium and Realmoney Gaming. Currently majority of the revenue of the company comes from subscription fees paid by its users for accessing gamified early learning content as well as from eSports business. These two segments cumulatively accounted for 71.03% and 41.73% of the revenue from operations of the company for H1FY2021 and FY 2020, respectively. While gamified early learning accounted for 39.2% of the revenue in H1FY 2021, the eSports and Telco Subscription contributed 31.8% and 21.3% of the revenue for the same period, respectively. The Freemium and Realmoney Gaming accounted for 4.5% and 3.1% of the revenue in H1FY2021.

The company have expanded its portfolio of business offerings through multiple acquisitions, and successfully integrated these businesses into its operations. In FY 2018, it acquired Next Wave to further augment its cricket mobile game offerings, and through IP-led cricket games such as WCC, WCC 2, Beach Cricket and Bat Attack Cricket. It now commands the greatest mindshare in the mobile cricket segment. It also entered eSports through the acquisition of Nodwin Gaming in FY 2018, and eSports media through Sportskeeda, by acquiring Absolute Sports in FY 2020. Some of recent strategic investments of the company, such as in Paper Boat Apps, has provided it an entry into gamified early learning. It also acquired Halaplay Technologies in FY 2019, marking its entry into skill-based, fantasy gaming.

The company owns some of the most recognisable IP, including WCC and CarromClash in mobile games, Kiddopia in gamified early learning, Nodwin and Sportskeeda in eSports and eSports media, and Halaplay Technologies (Halaplay) and Qunami in skill-based, fantasy and trivia games. Nazara was among the first entrants in the Indian market in eSports (through Nodwin) and cricket simulation (through Nextwave).

As a result, as of September 30, 2020, the company operates across diverse business segments, with revenue generated from a mix of subscription, advertisement, brand sponsorship, media rights licencing and in-app purchases of virtual items.

Gamified early learning business is through which the company deliver learning experience through gamification, leveraging its expertise of creative engaging game designs and marrying it to the education needs of early learners. The company has entered the gamified early learning segment in North America through Kiddopia, its flagship gamified early learning app, which it acquired in FY 2020. Through Kiddopia, the company cater primarily to children aged between two and six years. Kiddopia has the advantage of strong unit economics, evidenced by its subscriber acquisition costs getting recovered in nine months and a high life-time value of subscribers, with monthly subscriber retention rates of 25.82% as of December 2020 for activations in December 2019.

eSports is proving to be the largest disruptor to the global traditional sports market, as an outcome of sports and gaming intersecting to create fast-paced, high-thrill spectator entertainment content. The company is currently among the leading live eSports streaming and on-demand eSports media content companies in India. The company is currently dominating the Indian eSports market with over 80% of the total market share in India.

In eSports, the company has capitalised on its acquisition of Nodwin Gaming in FY 2018, which, amongst the few companies that have championed the case for eSports in India. Nodwin has established itself as a pioneer, owing to its strong relationships with global gaming publishers and platforms including market leaders such as Electronics Sports League and Valve Corporation.

The company have exclusive partnerships with Electronics Sports League and manage gaming events such as the ESL India Premiership and KO Fight Nights. The key growth drivers for its eSports business are its own event and content IPs, exclusive rights and ownership of live stream and on-demand premium eSports content, monetisation via media rights licensing, and its brand partnerships with global game publishers and youth focus brands.

The company have formed several partnerships, most notably with the Indian telecom giant Airtel. Airtel India Esports Tour will cover all NODWIN tournaments across gaming titles of PUBG Mobile, CS:GO, Clash of Clans, FIFA, etc. The coverage will extend to all iconic tournaments such as the India Premiership by Nodwin, Dreamhack India, The Northeast Cup and KO Fight Nights. This will also cover tournaments operated by the company such as the PUBG Mobile Pro league in India.

The Telco Subscription business of the company currently comprise of offerings of over 1,021 android games. This business primarily targets mass mobile internet users in emerging markets, comprising largely of first-time mobile gamers, through this segment. Monetisation in telco subscription is undertaken through periodic, daily, weekly, or monthly subscriptions by its subscribers, through carrier billing, pursuant to the arrangements of the company with telecom operators.

Freemium mobile games business of the company includes offerings such as free-to-play sports simulation games and children's games, such as games designed based on cricket, carrom, table tennis and bowling. World Cricket Championship, the cricket gaming franchise of the company, is the largest mobile-based cricket simulation game. The company launched WCC 3, the third edition of this franchise, in calendar year 2020.

Real money Gaming business: The company entered skill-based gaming in India and have strategically created presence in the real money gaming segment. With the acquisition of Halaplay Technologies, and investments in Sports Unity, the company is also participating in sports fantasy gaming and trivia games. The company is also engaged in the business of real money gaming in Kenya, under a valid bookmakers off-the course license issued by the Betting Control and Licensing Board, Kenya.

Telco subscription business the revenue comes from players subscribing to the daily/weekly/monthly game subscription packs and in Freemium, the revenue is from In-app sale of virtual items as well as in-app advertising. In case of eSports, the revenue is from brand partnership and media rights licensing of exclusive own content generated by the Group. Sponsorship revenues primarily comes from sale of various forms of sponsorship for offline and online events and promotional campaign on customers' online platforms or TV platforms or social media and from sponsorship at its in-person eSports experiences. In case of Gamified early learning, subscription is from app stores paid by young parents. The revenue for Real money gaming is from platform fee collected from the games played on the platform.

The Subscription Business is focussed on mass mobile internet users in the emerging markets, comprising largely of first-time mobile gamers. Due to the low propensity of gamers to pay for online content, the company has tailored its product offerings to deliver maximum value for gamers at affordable price points. The 'sachet pricing' strategy in Subscription Business allows gamers to access entire catalogue of over 1,000 android games, upon signing up for a daily, weekly, or monthly subscription. Billing for Subscription Business is channelled through telecom operators (carrier billing), which has eased the payment process for gamers and collection of revenue by the company.

As part of in-house Freemium Business, the company understands local gamer behaviour in designing games and innovatively incorporating local, licensed, intellectual property to drive the growth of network of games is one of its key strengths. Localised gamer insights are reflected in the popularity of some of its mobile games on the Google Play Store, such as, `World Cricket Championship 2', 1Chhota Bheem Race', and `Motu Patlu Game'. These games have consistently been part of the top three games on the top free charts on the Google Play Store ahead of certain globally established names such as Candy Crush, Subway Surfer and Temple Run.

The IPO comprises offer for sale of 5294392 equity shares. Since it is purely an offer for sale, the company will not get any proceeds from the issue. The object of the issue to get listing benefits as well as to provide exit option for investing shareholders.

Selling shareholders in the offer for sale includes promoters Mitter Infotech, who is selling 691900 equity shares. Other selling shareholders are investors, i.e., IIFL Special Opportunities Fund (selling 1267435 shares), IIFL Special Opportunities Fund Series 4 (selling 1036286 shares), IIFL Special Opportunities Fund Series 5 (selling 873989shares), IIFL Special Opportunities Fund Series 2 (selling 816804 shares), IIFL Special Opportunities Fund Series 3 (selling 393349 shares), Good Game Investment Trust (selling 150000 equity shares), Seedfund 2 International (selling 25000 equity shares),Porus Jain (selling 23725 shares), Azimuth Investments (selling 14959 shares) and Seedfund 2 india(selling 945 shares).  

Post IPO, the shareholding of selling promoter shareholder, i.e., Mitter Infotech will stand declined at 17.28% from 19.56% pre-IPO. It will decline to stand at 5.74% for IIFL Special Opportunities Fund, 4.69% for IIFL Special Opportunities Fund Series 4 , 3.96% for IIFL Special Opportunities Fund Series 5, 3.70% for IIFL Special Opportunities Fund Series 2 , 1,78% for IIFL Special Opportunities Fund Series 3, 0.66% for Good Game Investment Trust 1.21% for Seedfund 2 International, 0.08% for Porus Jain, 0.08% for Azimuth Investments and 0.05% for Seedfund 2 India selling 945 shares.

Strengths

Current position of leadership in India across a diversified set of offerings provides the company a strong foundation for continued growth. The company has market-first position in India across sports simulation and eSports and better placed to leverage the opportunity that interactive mobile games, eSports content and gamified early learning apps offer. In eSports, the company has the largest market share across unique IPs, unique events, unique event days and prize pool with a market share of 78%, 82%, 85% and 73%, respectively, for the calendar year 2019. Similarly, for Kiddopia App, from May 2018 to December 2020, its average trial to activation rate has been 75.31%, and its average retention rates after one month, six months, a year and 18 months of activation have been 81.86%, 48.99%, 31.40% and 21.73%. The company has successfully leveraged its capabilities for in-house content creation, game engine development and propriety technology stack development, ability to deliver positive life-time value and consumer acquisition cost (LTV/CAC) ratios across offerings and its relationships with telecom operators, app stores and other participants in gaming ecosystems.

Strong user base spanned across 58 countries spread over Indian sub-continent, Middle East, Africa, and North America. The company continuously strive to enhance user experiences and engagement through new content and features and increased social interactions. And it offers strong attractive monetization opportunity as being a strongly engaged community of users. Mobile gamers spent an average of 287 minutes per week across its key freemium mobile games. Moreover, the user base also is a strong foundation on which it can scale new products.

Established presence of the company in India, a market with economic, technical, and cultural complexities, has given it a competitive advantage in terms of content creation as well as cost. Strong capacities and capabilities to develop content in India for the Indian as well as global audience, allowing it to achieve scale. The company now has an operating leverage in gamified early learning on account of captive development of content being undertaken in India, but revenue generation happen inter alia from North America.

The company is well-positioned against competitors operating only in India and operating only in single segment of gaming, as its presence in multiple markets and diverse cohort of gamers not only provides it with insights of heterogeneous consumer segments, but also offers it economies of scale resulting in operating leverage.

Strong tailwinds across mobile gaming and eSports in India and across the globe, with a further acceleration seen in the calendar year 2020 on account of COVID-19. The mobile gaming market in India is the largest gaming segment and was pegged at USD 1.2 billion in 2020, driven by raising adoption of smartphones, drop in data prices, increased internet penetration, high internet speed, etc. Being the largest gaming segment in India, this is the fastest growing sector as compared to PC and Console gaming. This segment is expected to reach a value of USD 3.1 billion by 2023, growing at a healthy CAGR of 39.6% during this period. Being a relatively nascent market, the growth rate for mobile gaming in India closely reflects the growth that China had between 2013 and 2020 (CAGR of about 41%). Compared with the early rise of mobile games in the United States which has a CAGR of 21% between 2013 and 2020, the Indian mobile gaming market is projected to have a healthy growth in the future. Globally the Mobile gaming, with a market size of USD 76.57 billion in 2020, is expected to reach USD 116 billion by 2023. Mobile competitive gaming and eSports have gained significant traction globally and brought gaming to mainstream media and entertainment. The gaming industry has also expanded its reach and application to other industry verticals, with gamified early learning being a key segment where education and gaming combine to provide a novel way of learning.

Strong track record of completing strategic acquisitions and successful integration to expand its access to diversified cohorts of gamers and enter new geographies in a cost-effective manner. Through strategic acquisition and leveraging its in-house content creations capabilities, the company has built a wide product mix and built a network of 57.54 million average MAUs across all games as on December 31, 2020 The company is astute in deployment of cash generated to fund its inorganic growth in the past, and all its acquisitions have historically been funded through internal accruals. The subscriber base of the Kiddopia app has now grown to 316428 paying subscribers as of Dec 2020 from a modest 115220 paying subscribers at the time of acquisition of Paper Boat App by the company in FY 2020.

Promoters of the company are highly experienced, with Vikash Mittersain having several years of experience in multiple business sectors, and Nitish Mittersain, who has been associated in the promotion of the company for 20 years. Its CEO, Manish Agarwal, has approximately 20 years of experience in various fields including the gaming space and marketing. The company also benefit from a second, specialised level of leadership in P.R. Rajendran, P.R. Jayashree, Akshat Rathee, Gautam Virk, Porush Jain, Anupam Dhanuka, Anshu Dhanuka, Pratik Shah and James Savio Saldanha, founders and key personnel from its subsidiaries and associates, who have significant experience in various verticals within the mobile entertainment and gaming industry.

Weakness

The company has limited operating history in gamified early learning and cater to the online gamified learning market for young children in North America. Any adverse changes in extant policies or its inability to continue to attract and retain subscribers may materially and adversely affect its business and prospects.

In real money gaming as the player activity is a direct outcome of the live sports events in India or across the world, any delay or cancellation of sports events as such during COVID-19 pandemic will affect the business growth.

Skill-based fantasy and trivia real money games are subject to regulatory uncertainty. The Realmoney Gaming in the country is highly competitive and may attract strict regulations from governments restricting its growth. The interpretation of what constitutes online betting or gambling and the extent of regulatory oversight for such forms of gaming varies from jurisdiction to jurisdiction, and in India, from state to state as well. The company is a new entrant to this business and its Realmoney Gaming revenue has declined by sharp 80.34% on annualised basis from Rs 42.64 crore to stand at Rs 6.29 crore in H1FY2021. The company made sharp operating losses in both FY 2020 and H1FY2021 and, thus, requires greater deployment of resources.

WCC franchise accounted for 76% and 81% of total MAUs for the freemium business of the company, for FY 2020 and nine months ended December 31, 2020, respectively.

Any disruption in the telecom market or churn in subscriber base of its telecom partners will impact the telecom subscription business of the company. It is dependent on its telco subscription business for a substantial portion of its profits. Moreover, the EBITDA margin of telco subscription is on steady decline from about 49.1% in FY 2018 to 32.1% in FY 2020 and further to 26.4% in H1FY2021. This is while the company improves the margin of eSports and Freemium from 8.3% and 14.3%, respectively, in FY 2018 to 12.7% and 23.4% in H1FY2021.

The EBITDA margin of Gamified Early Learning business, the largest business segment by revenue in terms of contribution, is still in red even though the margin improved from negative 18.1% in FY 2020 to negative 5.1% in H1FY2021. However, the Real Money Gaming impacted by Covid pandemic and fall in revenue has seen its EBITDA margin deteriorate further from negative 81.5% in FY 2020 to 93.2% in H1FY2021.

The company reported a net loss (restated) in FY 2020 and for the six months ended September2020and may incur additional losses in the future. One of its Group Companies has incurred losses in the last three Financial Years. The company has had negative cash flows in the past and it is possible that it may experience negative cash flows in the future.

Any failure to exploit and grow its existing relationships within gaming ecosystem, distribution network and scale may affect its profitability and business growth.

Its ability to maintain its leadership position and help build the eSports market in India is dependent on various external factors and third parties.

Its white-label eSports events are seasonal in nature. Further, it derives a significant portion of its revenue of its eSports business from a few customers, most of whom it does not have long term contractual arrangements with.

Any inability to protect its IP or any third-party claims in relation to infringement of its existing intellectual property rights or in the future could materially adversely affect its business, reputation, financial condition, results of operations and cash flows.

Its inability to cater to the evolving consumer preferences, in India and abroad, in the mobile games industry may affect its business operations, cash flows and results of operations. The company may fail to anticipate or successfully adopt and incorporate new technologies in its offerings. Further its ability to acquire, synergise or consolidate and manage complementary businesses, assets and technologies may result in operating difficulties and other adverse consequences.

The company may not be able to maintain or grow the size of its user base or level of engagement of its users, which could materially and adversely affect its business, financial condition, cash flows and results of operations.

Halaplay and Sports Unity have unsecured loans, which may be recalled at any time. Any recall of such loans may have an adverse effect on its results of operations, cash flows and financial condition.

Growth of the company or its success is tied to the continued growth and use of the internet and smartphones, and the reliability and adequacy of online infrastructure in India and emerging markets and data pricing.

Significant portion of its revenues from eSports business is dependent on a limited number of customers and do not have long-term contractual arrangements with most of its significant customers. Significant part of Media rights licensing revenue, which accounts for about 58.78% of the overall revenues of its eSports business as of and for FY 2020, is based on a single contract. Failure to renew the current media licensing rights which was to expire by March 31, 2021, or rope in new broadcaster will impact the performance of the company. Moreover, eSports offerings rely on arrangements with game publishers and arrangements with broadcasters for live streaming of offline and online tournaments and the game publishers may allow such broadcaster directly in the future thereby preventing the company from monetising rights with company's broadcaster. If the company cannot effectively monetise its eSports offerings, it may materially and adversely affect its business, financial condition, cash flows and its results of operations.

There have been certain instances of non-compliances, including with respect to certain regulatory filings for corporate actions taken by the Company in the past. Consequently, it may be subject to regulatory actions and penalties for any such non-compliance and its business, financial condition and reputation may be adversely affected.

Conflicts of interest may arise out of common business objects between the company, Subsidiaries, Associates and Group companies. The company and certain Subsidiaries, Associates and one of its Group companies operate in the freemium segment while offering distinct kinds of mobile games, except for Next Wave and MLTL, which offer sports simulation cricket mobile games. Further, the company and certain Subsidiaries and Associates operate in the real gaming segment while offering distinct kinds of games.

The company is required to maintain certain approvals or licenses required in the ordinary course of business and the failure to obtain them in a timely manner or at all may adversely affect its operations.

There are certain proceedings involving the company which if determined against it, may have an adverse effect on its business, cash flows and results of operations.

Relative lower entry barrier to develop mobile or online free to play games, the competition will be intense from both incumbent players as well as new entrants there by forcing the company to allocate more resources to developing and marketing competing games and applications.

On February 4, 2021, the company allotted 1160093 Equity Shares to Instant Growth Limited pursuant to the IGL SSA at a price of Rs 862/share.

Valuation

Revenue of the company for FY 2020 was up by 46%, driven largely by 71% growth in revenue of eSports and contribution from new revenue streams such as Gamified Early Learning business and Real Money Gaming, which was newly acquired. Despite higher sales, at operating level it was a loss of Rs 5.52 crore as the operating profit margin turn negative 2.2% compared to 9.6% in the corresponding previous period. After accounting for lower other income, lower interest, and higher depreciation, the PBT was a loss of Rs 19 crore compared to a profit of Rs 11.82 crore in the corresponding previous period. After accounting for taxation, the PAT was a loss of Rs 24.80 crore compared to a profit of Rs 7.66 crore in the corresponding previous period. Eventually, the net profit (after MI) was a loss of Rs 2.13 crore (compared to a profit of Rs 17.51 crore) with 127% jump in minority interest to Rs 24.49 crore and 91% rise in share of loss from associates. Loss is due to new business lines of Gamified Early Learning business and Real Money Gaming, which continue to be in operating loss.

On annualised basis, sales for H1FY2021 was up by 62% and the net-loss widened by whopping 372%.

Price/BV on upper price band of Rs 1101/equity share works out to 6.8 times. There are no comparable peers with similar line of business but Delta Corp, which is a casino (live, electronic, and online) gaming in India, quotes at a price/BV of 2.7 times.

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