Business Model

Nazara presents itself as a leading India-based diversified gaming and sports media platform with presence in India and across emerging and developed global markets such as Africa and North America, and offerings across the interactive gaming, eSports and gamified early learning ecosystems including World Cricket Championship (WCC) and CarromClash in mobile games, Kiddopia in gamified early learning, Nodwin and Sportskeeda in eSports and eSports media, and Halaplay and Qunami in skill-based, fantasy and trivia games.

Funding Strategy  

According to the offer document, Nazara has focused on growing a profitable business, with an emphasis on self-sustainability rather than relying on external investments which was reflected in the company’s fund-raising history, wherein it had raised Rs 12.63 cr (in two tranches in 2005 and 2007) and Rs 76.53 cr in 2018. The company also boasts that it had historically been EBITDA positive and has generated sufficient cash flows from its operations, resulting in cash and cash equivalents and other bank balances aggregating to Rs 184.28 cr at the end of September 2020. The offer document also claims that Nazara had been the most aggressive investor in India gaming ecosystem and has invested over Rs 300 cr in last five years.

Promoters’ Commitment 

Novel business ideas, long standing experience (of more than two decades), impressive business potential, etc., etc would have attracted any promoter to commit the maximum to gain the controlling interest. But, it is not so in the case of Nazara. The promoters collectively hold 6,966,828 shares, representing only 22.88% of the equity capital. What’s more, their actual cash contribution towards the company is virtually negligible. If the company’s prospects were so encouraging, why do the promoters have such a low stake? If not now, when will they hike it?

Financial Track 

The 21-year-old Nazara has had so many acquisitions (Halaplay, CrimzonCode, etc.) and tie-ups with celebrities (Sachin Tendulkar, M S Dhoni, Virat Kohli and Hrithik Roshan), popular start-ups (Next Wave, Nodwin, Absolute Sports, Sports Unity, Paper Boat, etc.) telecom giants (BPL, Hutch,Vodafone, Airtel and Tata Tele) and some big ticket investors (WestBridge, IIFL, Rakesh Jhunjhunwala, Instant Growth, and others) in last 16 years. Do these tie-ups and acquisitions have helped the company to put up a consistent performance?

The company’s consolidated revenue, which was at Rs 211 cr in FY16, steadily declined to Rs 170 cr in FY19. Revenue grew impressively to Rs 248 cr in FY20 but, that resulted in an operating loss of Rs 7 cr and net loss of Rs 26 cr. Net cash generated from operations too turned negative after many years.

The company claims that the pandemic COVID-19 had, unlike other industry verticals, accelerated the growth of the gaming industry. Global lockdowns caused an explosion in the engagement within the gaming community as people who were stuck at home sought alternative means of entertainment – bringing the gaming activity into the social mainstream. Despite the upsurge in gaming business, Nazara ended up a loss of Rs 12.75 cr in the first half of FY21 and net cash flow from operations continued to be negative.

Nazara Tech Consolidated Financials (in Cr)
Period Ended	Sep-20	Mar-20	Mar-19	Mar-18	Mar-17	Mar-16
Months	6	12	12	12	12	12
Revenue	200.46	247.51	169.70	172.04	190.16	211.16
Operating Profit	4.51	-7.34	15.40	12.94	62.21	75.62
OPM%	2.3	-3.0	9.1	7.5	32.7	35.8
Other Income	6.55	14.64	16.40	9.90	8.76	7.84
EBIDTA	11.06	7.30	31.80	22.84	70.97	83.46
EBIDTA %	5.3	2.8	17.1	12.6	35.7	38.1
Interest	0.51	1.24	1.38	1.83	0	0
Depreciation	18.72	26.88	19.54	8.22	1.16	0.95
Net Profit	-12.75	-26.37	3.91	-1.58	56.82	63.69
Equity	11.44	11.20	10.99	10.79	1.99	1.99
Reserves	484.21	495.94	396.12	341.03	214.43	156.49

On a standalone basis too, the company has failed to post consistent performance. From Rs 117 cr inFY16, the top line continuously receded and ended at Rs 43 cr in FY19. It marginally improved to Rs 46 cr in FY20. Operating margin turned negative for FY 18 and FY19.

Nazara Tech Standalone Financials (in Cr)
Period Ended	Mar-20	Mar-19	Mar-18	Mar-17	Mar-16
Months	12	12	12	12	12
Revenue	46.12	43.45	66.35	77.36	116.96
Operating Profit	9.46	-8.06	-37.40	8.91	20.59
OPM%	20.5	-18.5	-56.4	11.5	17.6
Other Income	6.63	11.96	34.98	3.62	24.15
EBIDTA	16.09	3.90	-2.42	12.52	44.74
EBIDTA %	30.5	7	-2.4	15.5	31.7
Interest	0.52	0	0.21	0	0
Depreciation	5.11	0.76	1.16	1.08	0.91
Net Profit	7.33	2.46	-11.74	7.30	31.68
Equity	11.20	10.99	10.79	1.99	1.99
Reserves	332.21	241.67	211.50	83.37	73.27

Valuation 

The promoters’ average cost of residual holding would be negative. Most of the selling shareholders’ average cost of their residual holding will be extremely negative. The share was worth Rs 862 only in February this year when the company allotted 11,60,093 shares to Instant Growth Ltd. Yet, the IPO has been priced at an exorbitant rate of Rs 1101 for Rs 4 paid-up share.

The company has cited the following qualitative factors which form the basis for computing the Offer Price:

• Portfolio of premium intellectual property and content across regions and businesses.

• Large and engaged community of users, with attractive monetization opportunities.

• Successful inorganic growth through strategic acquisitions.

• Strong leadership team backed by marquee investors.

• Leadership position in a diversified and scalable business.

For argument sake these qualitative factors may sound good. But, have they contributed quantitatively to support the price? The company’s performance lacks consistency. Promoters have little financial commitment. Management has no class in adhering to regulatory compliances. Moreover, who will have the confidence to buy a two consecutive year loss-making company’s share at such a steep price?

HOW NAZARA COMPARES WITH DELTA CORP
Financials
(Amount in Cr)	Nazara Tech	Delta Corp
Market Cap	3149.96	5225.28
Revenue	247.51	773.41
Other Income	14.64	33.34
EBIDTA	7.30	309.83
Interest	1.24	5.06
Net Profit	-26.37	184.78
Equity Cap	11.44	26.68
Reserves	484.21	1927.51
Stock Features
Current Price (Rs)	1101	196
Face Value (Rs)	4	1
Book Value	173.24	73.25
Promoter Stake %	20.7	33.3
Profitability
OPM %	-3.0	35.8
Net Margin %	-10.1	22.9
Cash EPS	8.74	8.78
Earnings Per Share	-0.66	6.96
Growth
CAGR 3Yr Revenue%	9.2	19.9
CAGR 3Yr EBIDTA %	-53.1	21.4
Discounting
Price/Earnings	–	28.15
Price/Cash EPS	126.01	22.31
Price/Book Value	6.36	2.67
Price/EBIDTA	431.4	16.9

Failed Commitments  

In the past, Nazara has miserably failed to fulfill its commitments. It had entered into a letter agreement dated November 24, 2017 with the IIFL Funds, under which it was required to make the IPO within three years which was not fulfilled.

As per the original undertaking given to Rakesh Jhunjhunwala and Utpal Sheth who acquired the company’s shares from WestBridge, Nazara were to list the shares by December 7, 2018 which the company failed adhere with.

Omissions & Commissions  

Changing of face value of shares (split) in an odd ratio (2.5:1) is more to boost the offer price and confuse the investing public than anything else.

The company has more than 2500 public shareholders. When private placements with the public are banned in this country, how such large number of public shareholders came into the company’s fold?

The corporate governance practiced by the company is so pathetic that there had been instances of non-compliances with respect to regulatory filings for corporate actions taken by the company. Also, there have been instances of lapses such as delays, non-filing and factual errors in corporate records, in relation to certain corporate actions taken by the company.

For the allotments made by the company on September 5, 2000 and May 11, 2007, the relevant papers (Form 2) filed with the RoC are not traceable. The company has filed the Forms on December 22, 2017, with a delay of 6,316 and 3,877 days, respectively!

Copy of the Form filed with Roc for change of name from Nazara.com Private Limited to Nazara Technologies Private Limited is not traceable.

In relation to allotments made by the company on September 5, 2000 and July 6, 2005, Form FC–GPRs are not traceable. Further the Form 2’s filed with RoC in relation to allotment of shares on April 10, 2000, July 6, 2005 and September 28, 2005 had erroneously recorded that all shares were issued at par whereas the shares were actually issued at a premium!

There have been instances of lapses in compliance like late filing of form CHG 4, delay in filing of Form MGT-6, reflecting a change in beneficial interest for certain shareholders, owing to non-intimation of the change in beneficial interest by the relevant shareholder, appointment of a director without obtaining shareholders’ approval, reduction in number of shareholders below the statutory prescribed limit, lapse in signing annual returns, non-implementation of a risk management policy, non-compliance with corporate requirements while accepting a loan from a director, and failure to obtain requisite corporate authorizations for related party transactions.

Surely, Nazara has no class and stature to list its share on the stock exchange!