Stiff regulations, high taxes: Govt controls electronic sports joystick

Per capita gaming spends still very low in India

Electronic sports (eSports) is a nascent industry. While India has a huge potential user-base, this doesn’t necessarily translate into big revenue.
 
Nazara is the only listed player with Rs 621 crore of revenue in 2021-22 (FY22) - up 37 per cent year-on-year (YoY). The earnings before interest, tax, depreciation, and amortisation is Rs 95 crore – a margin of around 15 per cent. Adjusted profit after tax is Rs 28.8 crore - a growth of over 300 per cent YoY.
 
The company raised around Rs 580 crore in its initial public offering (IPO) at a price of Rs 1,101, and listed about a year ago at a handsome premium, closing Day One at Rs 1,558. It went ex-bonus at 1:1 ratio last week and was trading at Rs 674.9 (up 35 per cent from last Wednesday’s Rs 499). The valuations are very high, with price-to-earnings in excess of 100x. The earnings per share of the company was Rs 4.5.
 
India has approximately 14-15 per cent of the global gamer population, but the local market is estimated at only about 1 per cent at about $1.8 billion, although its high growth is at an estimated compound annual growth rate of 38 per cent in the past three years.
 
An optimist might see this as a potential upside, but it also points to issues with per capita monetisation. Most Indian gamers are mobile-only, young, low-income, and not into real-money games (RMG) – the per capita annual revenue is a maximum of $3 versus the US per capita of $73-75.
 
Fantasy sports – especially cricket – are very popular. RMG is not that popular. But these contribute to a lion’s share of the revenue. Around 86 per cent of revenue comes from mobile.

 

Nazara operates across a wide range of eSports, game publication, gamified early learning, freemium, and RMG segments. It has made multiple acquisitions. It has dominant market share in India’s eSports markets but not in other areas. There is a lot of competition in every segment. Trends like growing smartphone penetration, young population, rising disposable income, and low data cost would be significant growth drivers.
 
Importantly, these segments are all naturally concentrated markets. The 20 most popular games across the top platforms tend to aggregate 90 per cent revenue share. But there is a lot of rapid churn in popularity, with new games making it to the list and old ones falling into disuse. Like in physical sports, eSports also generate revenue from viewership, sponsorship, and advertising. This leads to complex relationships and value chains.
 
Nazara is essentially a holding company with a majority stake in businesses operating across all segments. The biggest revenue contributions come from Nodwin and Sportskeeda.
 
There is another player. Delta Corp, a casino gaming and hospitality firm, also has presence in online skill gaming through its wholly-owned subsidiary, Deltatech Gaming (Adda52). The latter on June 16 filed its draft red herring prospectus with the Securities and Exchange Board of India for raising Rs 550 crore through an IPO — Rs 300 crore fresh equity and Rs 250 crore via offer for sale. The parent, Delta Corp, posted consolidated revenue of Rs 616 crore and net profit of Rs 68 crore in FY22. While it is better than Rs 419 crore and a loss of Rs 24 crore in 2020-21, it is still lower than Rs 798 crore and Rs 197 crore, respectively, in 2018-19. Its share price has been flat, compared to a year ago.
 
There are already some significant regulatory barriers and there could be more. Most states have complete or partial bans on online gambling, fantasy gaming, and poker. In addition, the Goods and Services Tax (GST) Council is considering imposing a 28 per cent tax on online gaming, including games of skill/chance. Right now, platforms pay 18 per cent GST on their fee and commission, so this could be a significant retardant to growth and profitability.
 
Both Delta Corp and Nazara famously have Rakesh Jhunjhunwala as an investor.
 
The shotgun approach to acquisition makes it hard to analyse Nazara, but the approach has always been profit-oriented rather than burning cash for growth. Nazara has healthy operating margins and reasonable cash flows.
 
Analysts had targets of anywhere between Rs 1,070 and Rs 1,800 before the bonus announcement. Adjusted for that 1:1 ratio, that’s Rs 585–900, which implies some upside. For Delta Corp, Bloomberg data shows it does not have active analyst coverage.