The Company

What started as a small game developer company in the early 2000’s, has now metamorphised into an investor itself. One can think about Nazara as a GP within an LLP structure, a FM within an AIF structure, or a fiduciary offering exposure to a large spread of new age verticals. The focus will be gaming. We break down this journey first, and then our take on the future. The former is a necessity as humans ignoring history do at their own peril; the latter is a necessity as investors focusing only on the past are at the brink of peril.

Nazara started as a game publisher, working with telecom companies to provide simple, quirky games to users as value added services. This was the era of 2G and Nokia feature phone handsets in India. As India transitioned to 3G, the bandwidth and devices improved. It was still, a small step forward in terms of data adoption. This was the era where Nazara used to make ~50% EBITDA margins. A giant leap was made via the 4G revolution ushered by Jio. Android had already established itself as the OS of choice. This led to a gradual decline of Nazara’s value proposition due to two reasons. One, they had massive competition as thousands of such games flooded the playstore for free. Second, users had multiple options to play high quality games. These trends were seen globally, and thus led to sharp decline in this business. This is today called ‘Telco Subscription’ in disclosures.

The Article In Focus

Fast forward to 2017, Nazara decided to start acquiring companies and scaling them up. The focus was on the upcoming gaming sector in India. The first tranche of investments were made in Next Media Works, which is another gaming publisher and Nodwin, which is an Esports IP creator. This was followed up with multiple other investments, namely Kiddopia (Early learning segment, ages 2-6, in USA), Sportskeeda (news publishing website with global presence), Halaplay and OpenPlay(real money gaming) etc. It is here that the excellence of Nazara is first seen. Post that, we shift to the core value generator, i.e. Nodwin.

The MOAT

We earlier alluded that Nazara is a GP in a LLP setup. Thus, its essential business is to ensure that it makes the right acquisitions. More important, its job is to ensure that it doesn’t make a bad acquisition. This has been proved in the past three years. These years have seen exorbitant valuations for all startups. Valuations were driven by growth and not bottomline. It is in this environment that Nazara stuck with its thumb rules of not undertaking acquisitions at exorbitant valuations. Secondly, real money gaming had the highest growth and thus most expensive valuations. For Nazara, equity mattered as it used that to make acquisitions. Thus, it made all the sense for them to invest in this space. But there was a minor regulatory uncertainty here. Had one spoken with industry experts or analysts, everyone opined that the probability of that regulation coming in adverse of the industry was minimal. And yet, other than a small acquisition of OpenPlay, it didn’t really invest large in Real Money Gaming segment. This conservative stance played out so well when government decided to tax real money gaming at 28% on receipts and not revenues.

It is this conservative stance which allows for errors.

It is this conservative stance which allows for failures.

It is this conservative stance which allows for reasonable payback even if the things are to turn south.  

We now look at the returns of companies where Nazara has invested. We then look at its purpoted thumb rules. We then move on to Nodwin, the Esports IP behemoth discussion.

This is an indicative list of its old investments. There are few done post these like Datawrkz and Animal Jam which are recent.

 Source: Company, Perpetual Capital

The reason for its success, as much as is Nodwin, is only a handful of w/offs and acquisitions at reasonable multiples. There largely seem to be three broad thumb rules in existence:

1. Refraining from buying companies are exorbitant sales multiple
2. Refraining from buying large loss making companies purely for topline; rather the focus is to ensure profitable growth even for high growth segments like Esports
3. Attempt to retain the incumbent promoters and paying consideration in form of shares + cash.

Source: Company, Perpetual Capital

These rules create the ideal scenario for ensuring high success rate in an otherwise challenging business activity.

As we have established the base of the company, we now will shift to explain its golden goose – The Esports IP business – Nodwin in Part 2 of our article. Part 3 will involve discussions on all its investees and our thoughts on its valuations.