Rekha Jhunjhunwala Portfolio: ICICI Securities Pick of The Week For 33% Upside

As of Friday's closing session, Nazara Technologies has a market capitalization of Rs 5,958.10 Cr, making it a mid-cap company in the consumer discretionary category. The firm is a well-known, India-based, diversified gaming and sports media platform that offers services in gamified early learning, eSports, and interactive gaming ecosystems. Although Nazara Technologies has provided a 32% year-to-date return, ICICI Securities believes there is still 33% more potential upside with a target price of Rs 1,080 from the current market price of Rs 812.65.

"Nazara Technologies (Nazara) has a cash balance of > INR8bn (standalone) post the preferential allotment of around INR 5.1bn. We believe this puts Nazara in a strong position to capitalise on the funding freeze in RMG space. Most platforms are not fully passing on the 28% GST rate to end user due to the fear of losing share to competition, which is intensifying their cash crunch.

Our channel checks suggest most funding opportunities in the space are (>60-70%) down rounds. Given the steep correction in valuation and the belief that regulators could revise taxation in H1CY24, consolidation is getting delayed. However, we note there has been some correction in salaries and some conversations have begun regarding the potential buy-outs. This could benefit Nazara as it tries to buy/build a play in RMG space," said the brokerage.

"According to media reports, implementation of the new taxation policy in RMG is likely to result in ~900bps share loss for the category as a proportion of overall gaming revenues over the next five years. As of now, nearly 400 start-ups operate in the space and given a cautious investor sentiment towards RMG space, consolidation in the space seems like a distinct possibility. As per media reports, Nazara is currently focusing on finding opportunities in RMG space that are on path to profitability and available at fair valuations," the research analysts of ICICI Securities said.

Commenting on what makes it bullish on Nazara Technologies, ICICI Securities said, "eSports' revenue outlook remains strong (39% CAGR from FY23-25E) led by in NODWIN Gaming (42% CAGR from FY23-25E) and Sportskeeda (27% CAGR from FY23-25E). Margin outlook is also positive as we expect scale efficiencies to accrue from IPs with gradual improvement in gaming accessories business. We expect GEL's profitability to improve with a mix of subscriber addition and price increases."

On the valuation front, the research analysts of the brokerage firm stated "We maintain our BUY rating on Nazara, with target price of INR 1,080. Our target multiple stands at 38x 1-yr forward EV/EBITDA (ex-minority). Key risks: 1) Impact due to increased competition/ slowdown in US markets, and 2) inability to identify and integrate acquisitions."

During Q2FY24, Rekha Jhunjhunwala held 65,88,620 shares of the company, which is 8.99 per cent of the total paid-up capital of Nazara Technologies.

Disclaimer

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