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CLSA expects this Jhunjhuwala-backed gaming company stock to crash 41%

Rakesh Jhunjhunwala
A lot of investors on Dalal Street try and fine-tune their portfolio in tandem with marquee investor Rakesh Jhunjhunwala's investing strategies. Jhunjhunwala, often referred to as India's Warren Buffett, is said to have a knack for picking multibaggers. But his investment in Nazara Technologies has been mostly a no-show in terms of returns ever since its stellar debut on bourses.

The stock that listed on both BSE and NSE on March 30 at a hefty premium of 80 per cent, has since then failed to offer any returns. It was on the day of listing only that the stock had touched a high of Rs 2,026.90. From then to now, BSE barometer Sensex has moved from 50,000 to over 54,000 levels, up 8 per cent, but shares of Nazara Technologies have declined to Rs 1,855 - down nearly 8.5 per cent.

ALSO READ: Nazara Technologies posts Rs 13.6-crore net profit for June quarter

What's more? Global brokerage CLSA in its August 2 report said that it expects the Nazara Technologies' stock to crash by over 40 per cent from current levels to Rs 1,095. Jhunjhunwalal held a 10.82 per cent stake in the company as of June 30, 2021, data show.

In its latest report, CLSA retained a SELL rating on India's first listed gaming company on revenue miss in June quarter and pricey valuations.

Nazara Technologies reported a 45 per cent jump in sales at Rs 131.20 crore in Q1 FY22 as against Rs 90.50 crore in the same period last year. It reported a profit of Rs 13.50 crore in the quarter under review compared with a net loss of Rs 21.70 in the year-ago quarter.
"Nazara’s Q1FY22 revenue was below our estimates. Both key businesses, eSports and gamified e-learning missed. The two account for 81 per cent of consolidated revenue. Gamified e-learning or Kiddopia paying subscribers came in at 321,763 million in Q1, down 5 per cent quarter-on-quarter (QoQ). And Nazara’s eSports revenue in was Rs 53 crore, up 10 per cent QoQ, but below our estimates likely due to lower media rights revenue, hit by a lower number of events," the brokerage said.

While Ebitda and PAT were both ahead of CLSA estimates, it was mainly on the fall in advertising and promotion expenses, which the brokerage said are expected to increase in the coming quarters.

Despite the Q1 miss, CLSA retained its forecast of 35-73 per cent CAGR in consolidated revenue and Ebitda by FY24CL. However, even with revenue at $117 million and Ebitda at $23 million by FY23CL, the stock is expensive at 6x FY23CL EV/sales and 32x EV/Ebitda, it noted.

ALSO READ: Nazara Tech to acquire majority stake in Publishme for Rs 20 crore

The key risk in mobile gaming, the brokerage observed, is intense competition from both new as well as existing players. "The business has relatively low entry barriers in developing mobile or online games, also Nazara is dependent on telco subscription business (16% in FY21). If it continues to make successful acquisitions and scale them then there would likely be upside risks to our growth forecasts," CLSA added.

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