Rs. 583 cr IPO, entirely OFS
- Mainly by IIFL funds (83% of OFS) and promoter (13% of OFS)
IPO dates: Wed 17th Mar to Fri 19th Mar 2021
Price band: Rs. 1,100-1,101 per share
Listing: 30th Mar 2021
Only 10% issue for retail, hence bumper subscription may lead to listing gains.
This is company’s 2nd attempt at IPO, after 2018 SEBI approval was let to lapse. Interestingly IIFL Securities is now a banker to the issue (not there during 2018) of which IIFL Funds will be pocketing 83% share. This raises potential conflict of interest which is not even disclosed as a risk factor in the RHP.
On 4th Feb 2021, Nazara raised Rs. 100 cr from non-strategic financial investor Instant Growth (Hornbill) at Rs. 862 per share, when it is cash rich (Rs. 208 cr surplus cash as on 30-9-20). One month hence, existing investor IIFL and promoters are offering shares to public at Rs. 1,101 in the OFS. How can secondary issue at a 27% premium to the primary market be justified in a matter of 6 weeks? Doesn’t this amount to short-charging the incoming IPO investors? Incidentally, number of shares being offered by IIFL Funds has increased by 12% since 14-1-2021 DRHP filing. This is within regulations, but one can’t help but connect the dots!
High Growth & Highly Competitive Gaming Industry
Globally, gaming industry is slated to become bigger than movies, music and sports put together. In India, internet penetration, digital payments, recent work from home (WFH) phenomenon have increased the number of gamers to almost 25 crore. With low barrier to entry, this space is bracing up for some cut-throat competition as many biggies with deep pocket such as PayTM, Flipkart, Reliance Jio, Tech Mahindra are eyeing a slice of the pie.
First Gaming Company to List in India
Nazara has taken the inorganic route to growth and acquired 11 business for Rs. 300 cr in past 5 years. Key business segments are:
- Gamified learning (39% of H1FY21 revenue, negative EBITDA): iOS-focused app for 2-6 year olds in US, acquired in Jan 2020; saw 3x jump in paying subscribers to 3.2 lakh within 12 months.
- Esports (32% of revenue, 13% EBITDA margin): Includes live streaming of online/offline tournaments and esports news. Entered this segment in FY18 by buying Nodwin and is now #1 player with 80% market share in fast growing market. FY20’s Rs. 84 cr revenue and 9% EBITDA jumped to Rs. 64 cr and 13% in H1FY21 respectively.
- Telco subscription (21% of revenue, 26% EBITDA margin): Android games offered as VAS to mobile subscribers. Company’s erstwhile cash cow, but FY18 revenue of Rs. 153 cr fell to Rs. 43 cr in H1FY21, with EBITDA margin halving from 49% to 26% respectively.
- Fremium and real money gaming contribute 4% and 3% revenue respectively, with latter facing high regulatory uncertainty.
Most of recent growth has surfaced through M&A, highlighting the need to identify marquee targets and ramp-up quickly, as legacy telco subscription business de-grew.
High Growth with Cash Profit but Negative PAT
Given asset light and scalable business model, FY18 revenue of Rs. 172 cr grew to Rs. 200 cr in H1FY21, split 40:40:20 between India, US and others (Middle East, Africa, APAC). In H1FY21, high upfront promotion expenses to grow gamified learning, which yields revenues with a 24 month lag, reduced EBITDA (excluding other income) to Rs. 4 cr from Rs. 49 cr in FY18. Huge non-cash amortization charge on intangibles from M&A led to negative PAT of Rs. 10 cr for H1FY21, although cash profit was Rs. 9 cr, same as that in FY18. On an equity of Rs. 12.2 cr (face value Rs. 4), H1FY21 EPS was negative Rs.1.78, while cash EPS was at Rs. 3.
High Fancy in Primary Market
At Rs. 1,101, company’s market cap will be Rs. 3,353 cr and EV Rs. 3,050 cr, translating into 1 year forward EV/sales multiple of 4.7x. Due to different market dynamics and nascent stage of business, international benchmark of 3-3.5x can not be applied here.
The IPO is expected to garner strong response on (i) unique theme (ii) small issue size (iii) no listed peers (iv) high growth potential. Share can deliver handsome rewards, replicating performance of some recent ‘new generation’ businesses like Affle, IndiaMart etc.
Bullish prospects of gaming industry, scalable profitable business model and scarcity premium may lead to a successful listing. Hence, those with listing gains in mind may apply. However, unjustified wide variation in offer pricing raises uncomfortable questions, similar to our analysis on Easy Trip Planners IPO, along with high competition intensity may make it risky for long term portfolio holding.
Grey Market Premium (GMP) of Nazara Technologies: Grey Market Premium of Nazara Technologies is an unofficial figure, against guidelines of SEBI and we are strongly against it. To know how it operates, read our article ‘grey market premium’.
Disclosure: No Interest.