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Rising gaming competition is key risk for Nazara Technologies’ stock valuation

Nazara did well on the Ebitda front in FY21, reporting a profit of Rs45 crore.Premium
Nazara did well on the Ebitda front in FY21, reporting a profit of Rs45 crore.

  • Nazara did well on the Ebitda front in FY21, reporting a profit of Rs45 crore. This compares well against a loss of Rs5.6 crore at the Ebitda level in FY20. While this is comforting, it goes without saying that investors would closely follow the revenue and profitability momentum going ahead

Shares of Nazara Technologies Ltd fell more than 10% on the National Stock Exchange in early deals on Friday. Currently, the stock trades at around Rs1,525 per share, which is lower than the listing day close of Rs1,592 apiece on 30 March.

Nazara is a mobile gaming and sports media platform. In the financial year 2021, consolidated revenues stood at Rs454 crore. The company derived 39% of its revenues from gamified learning and 37% from e-sports.

In eSports, the company has led with partnerships such as ESL and Nodwin/ Krafton and sponsors such as Airtel for a PUBG mobile tour. True, there is a vast potential for gaming firms such as Nazara. Even so, analysts believe competition in the sector would emerge as one of the main worries for the company in the days to come.

Deepti Chaturvedi of CLSA said in a report on 17 June, “Jio Games in a tie-up with MediaTek launched Gaming Masters eSports event and is partnering to bring Microsoft xCloud to India. Competition from other top players includes MPL’s skill-based eSports platform, Paytm First Games and Dream 11, which is backed by Tencent and owns a stake in PUBG."

Further, it’s not as if Nazara's stock valuations are particularly tempting. Investors should note that despite the decline in share price on Friday, the stock is still significantly higher than its issue price of Rs1,101 apiece.

Chaturvedi points out, “With Nazara’s stock valuation running ahead of forecast growth and carrying a hefty scarcity premium, we initiate coverage on the stock with a SELL recommendation and 12-month target price of Rs1,095. Our price target is based on 17 times FY23 CLSA (estimated) EV/Ebitda, in line with global gaming peers." EV is enterprise value. Ebitda is short for earnings before interest, tax, depreciation and amortization; a key measure of profitability for companies.

To be sure, Nazara did well on the Ebitda front in FY21, reporting a profit of Rs45 crore. This compares well against a loss of Rs5.6 crore at the Ebitda level in FY20. While this is comforting, it goes without saying that investors would closely follow the revenue and profitability momentum going ahead.

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