JM Financial Downgrades Nazara To ‘Sell’ Over Unclear Growth Narrative

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Nazara Technologies has multiple growth segments but lacks a strong core to drive synergies and put the flywheel in motion, the brokerage said

JM Financial highlighted the uncertain regulatory environment about esports in the country and the risks of increased competition

Earlier this week, Jefferies increased the target price for Nazara to INR 860 from INR 780

Brokerage firm JM Financial has downgraded gaming and media startup Nazara Technologies to ‘sell’ from an earlier ‘hold’ rating, saying that its long-term compounding growth narrative is unclear.

In a research report, JM Financial analysts said that Nazara has multiple growth segments but it lacks a strong core to drive synergies and put the flywheel in motion.

“Flywheel, or a self-reinforcing perpetual motion business, requires a strong core to propel itself. We believe Nazara lacks a strong core, even though it has acquired multiple businesses on the periphery,” the analysts said.

In the last few months, Nazara has invested in various gaming firms aggressively. In August, it acquired a 100% stake in the US-based gaming firm WildWorks in an all-cash deal.

Prior to that, it invested INR 20.10 Cr in its existing material subsidiary Absolute Sports Private Limited that runs sports news website Sportskeeda. Besides, Nazara’s subsidiary NODWIN Gaming acquired a 35% stake, valued at INR 10.01 Cr, in gaming accessories brand Wings in April this year. In March, Nazara also announced acquisition of a 33% stake in Datawrkz.

Analysing the startup’s latest acquisition, the report said that while WildWorks expands Nazara’s total addressable market (TAM) in gamified early learning space and adds incremental revenue in the near term, it adds to the growth challenge Nazara is facing.

Uncertain Regulations And Other Causes Of Concern

The analysts also noted that Nazara’s largest value-driver, the esports segment, continues to remain in trouble due to the uncertain regulatory environment. They specifically hinted at the recent incident of Google Play Store and Apple Store delisting BGMI in India, one of the most popular games with 100 Mn registered users in the country.

Moreover, amid such difficult circumstances, there is also a possible higher competition awaiting Nazara, JM Financial noted.

With Google allowing rummy and fantasy sports apps on its play store, it opens a “floodgate” for new user acquisitions, likely at lower customer acquisition cost (CAC), it said. 

“However, note that Nazara drives only 6% of its revenues from rummy. It is up against industry leaders whose marketing budgets are 4-13x of Nazara’s Rummy revenues,” the analysts said. “Given the synchronous multi-player nature of RMGs (real money gaming), bigger platforms tend to attract and retain more players.”

Based on its analysis, JM Financial marginally reduced its EBITDA margin estimates for Nazara by 30-90 basis points (bps) considering the incremental investments in WildWorks and lower margin profile of NODWIN’s recent acquisitions.

However, the brokerage raised its FY23-FY25 revenue estimates by 11%-16% on integrating WildWorks’ numbers.

Despite the unclear growth prospects, the brokerage firm has rolled forward its target price (TP) of INR 650 to September 2023 from the previous target of INR 540. The current TP signifies a downside of over 11% to the stock’s last close.

Shares of Nazara fell during the last two sessions, ending 1% lower at INR 734.85 on the BSE on Wednesday.

JM Financial analysts also believe that a growth turnaround in its gamified early learning subsidiary Kiddopia could provide a boost to the organic growth outlook of Nazara.

“A meaningful presence in RMG space would give long term revenue and growth visibility to Nazara, in our view. If done successfully, it will make us positive on the stock,” the analysts added.

Jefferies Bullish On Nazara

In contrast with JM Financial, international brokerage Jefferies expressed its optimism on the gaming startup in a research note earlier this week.

Jefferies’ analysts not only reiterated the ‘buy’ rating on the stock but also increased its TP to INR 860 from INR 780, which signifies an upside of 17% to the stock’s last close.

“The recent price increases in Kiddopia and acquisition of WildWorks will help drive growth in early learning segment,” the brokerage said.

While Jefferies too believes that despite RMG being an attractive market Nazara wouldn’t likely make a big play until there is more clarity on regulations, it said that Google’s decision to allow RMG platforms for a year is a positive and will help Nazara lower its CAC in this segment.

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