Rakesh Jhunjhunwala-backed gaming company Nazara Technologies shares continued to surge for the second consecutive session in Friday’s deals as brokerage firm Jefferies has initiated coverage on the gaming stock with a ‘Buy’ rating. It sees Nazara as a gaming-focused investment vehicle, as 95% of its value comes from subsidiaries.
Shares of Nazara Technologies were up more than 2% to ₹1,729 per share on the BSE in Friday’s early deals. The gaming stock got listed on the stock exchanges on March 30 and is currently trading over 55% from its IPO issue price of ₹1,101 per share. Indian ace investor Rakesh Jhunjhunwala, known as the ‘Big Bull’, holds 10.82% stake or 32,94,310 shares in the gaming firm as of June 2021 quarter.
“Nazara offers a direct way to play the gaming ecosystem as it is building a network of gaming companies via M&A that benefit from each other. Its presence in the rapidly-growing gamified early learning market in US, mobile gaming and eSports market in India, could drive 28%/46% CAGR in revenues/EBITDA in FY21-26E, by our estimates,” Jefferies said in a note on August 25. It has initiated coverage with Buy at ₹2,070 target price, with upside scenario target of ₹2,300 and downside scenario target of 1,400.
The brokerage said that Nazara is building a network of firms via M&A, called “Friends of Nazara”, which benefit from each other. Nazara aligns the interests of the original founders with its own by letting them keep meaningful minority stakes (18-49%) and bringing them onboard to run the acquired business.
“The sharp acceleration in growth of the acquired companies post-acquisition is a reflection of Nazara’s ability to realise synergies. Nazara is also focused on profitable growth. Its capital efficiency is evident from cumulative capital raising of less than Rs2bn since inception. Nazara has Rs4.9bn cash as of Mar-21. Nazara aims to balance growth with profitability, even for its acquired businesses, in order to limit cash burn,” the note stated.
Besides competition from larger players and regulatory risks, Nazara’s holding company structure adds dilution risk. Future M&A could also be value destructive, Jefferies said.
For the quarter ended June, Nazara Technologies posted a net profit of ₹13.6 crore as compared to a loss of ₹21.7 crore in the year-ago quarter. Its revenue during April-June 2021 jumped 45% to ₹131 crore against ₹90.5 crore YoY.
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