Shares of Nazara Technologies Ltd. gained the most in more than a month after Jefferies initiated coverage on the Rakesh Jhunjhunwala-backed online gaming platform with a ‘buy' rating.
Jefferies has set a target price of Rs 2,070 apiece on the stock, implying a potential upside of nearly 30%, according to its report co-authored by Equity Analyst Akshat Agarwal and Equity Associate Ankur Pant.
Over the past five years, Nazara has diversified and pivoted the business towards game publishing (4% of sales), gaming events/e-sports (30% of sales), real money gaming (3% of sales), gamified early learning through subscription-based mobile app (39% of sales), and ad-based sports web portal (7% of sales), through several acquisitions, Jefferies said in the report.
The research firm expects India's gaming and e-sports markets to grow at annualised rates of 38% and 25% to $3.1 billion and $209 million, respectively, over 2020-23, led by rising smartphone and internet penetration and change in media consumption habits. Nazara's presence in these markets, along with the rapidly-growing gamified early learning market in the U.S., “positions it to deliver 28% CAGR in revenue and 46% CAGR in Ebitda over FY21-26E. Growth would be led by the early learning business, e-sports events and sports web portal”, the report said.
Besides, Nazara is building a network of gaming companies via mergers and acquisitions called “Friends of Nazara”, Jefferies said citing its stake purchases in Nodwin Gaming, Sportskeeda, and Nextwave Multimedia, among others. “The sharp acceleration in growth of the acquired companies post-acquisition is a reflection of Nazara's ability to realise synergies. Its capital efficiency is also evident from cumulative capital-raising of less than Rs 200 crore since inception.”
The company, according to the report, aims to “balance growth with profitability, even for its acquired businesses, in order to limit cash burn”.
We see Nazara as a gaming-focused investment vehicle, as 95% of its value comes from subsidiaries.Jefferies' note titled 'Ready to Play: Initiating Coverage'
Jefferies is the first global research house to recommend a ‘buy' on Nazara. It has upside scenario price target of Rs 2,300 apiece and a downside scenario price target of Rs 1,400. CLSA, the only other foreign brokerage to rate the stock, suggests a ‘sell'.
Jefferies also highlighted certain risks facing Nazara.
Competition from larger players and regulatory risks.
Nazara's holding company structure adds dilution risk.
Future acquisitions could also be value-destructive.
Shares of Nazara rose as much as 6.8%, the most since July 8, to Rs 1,694 apiece. The stock, listed on March 30, is up more than 53% from its IPO price of Rs 1,101 apiece. The company's Rs 583-crore maiden offer is the third-most subscribed issue of the year so far.
Of the five analysts tracking the company, four have a ‘buy' rating and one recommends a ‘sell', according to Bloomberg data. The average of 12-month consensus price targets implies an upside of 23.2%.
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