A deep dive into the gaming stock Zerodha’s Kamaths bet big on

Nikhil Kamath's journey is a compelling tale of ambition and transformation, beginning with a modest ₹8,000 salary as a call centre employee to becoming one of India's wealthiest individuals, boasting a staggering $3.07 billion fortune.

As the co-founder of Zerodha, Kamath revolutionised the brokerage landscape with a groundbreaking zero-brokerage model, shaking up the industry much like Jio did in telecommunications.

Today, he's making headlines once again—not just for his wealth, but for his strategic investment in Nazara Technologies, a gaming giant set to capitalise on India’s booming gaming sector. With 450 million gamers and a rapidly growing market, Kamath is betting big on the future of gaming in India.

Investment arm Kamath Associates & NK Squared, bought equity shares worth ₹100 crore at a share price of ₹714 in Nazara Tech.

We will explore the motivations behind Kamath's investment in Nazara while diving deep into the dynamics of the gaming industry.

Enormous Potential

Kamath believes that the gaming industry, especially esports, has immense potential and could be the next big thing in India.

On X (previously Twitter), he backed up his claims with numbers. He claimed the global gaming industry's market size was already $159.3 billion in 2020, two times the $60.8 billion size of the decade-old film and music industries.

According to PWC, the total size of the Indian online gaming market is expected to grow at a CAGR of 14.5% from ₹33,000 crore to ₹66,000 crore between 2023 and 2028.

EY's New Frontiers report highlights India's gaming penetration at 30%, far behind the USA (56%), China (53%), and Japan (83%), showing vast growth potential.

Also read: Consumer affairs ministry cancels e-gaming study planned for framing new rules

Young and tech-savvy

According to the India Brand Equity Foundation (IBEF), India can ride the gaming wave using the demographic dividend. We are the youngest nation in the world, with 45% of the population, or more than 60 crore people, below 35 years of age.

This tech-savvy youth demographic is increasingly engaging with online activities, with gaming accounting for 53% of internet usage in 2023, trailing only behind OTT platforms, communication, and social media. As smartphone users are expected to exceed 1 billion by 2025, this group will serve as a significant driver for the gaming industry.

As India transitions from a low-income to a middle-income nation, its per capita income is projected to soar, potentially exceeding $26,000 by 2047—an increase of nearly 13 times from the current $2,484.

This economic growth is likely to fuel in-app purchases, which currently make up 70% of mobile gaming revenue, and drive revenue from free-to-play downloads through ads, subscriptions, and sponsorships.

Business model breakdown

The gaming industry faces significant hurdles due to regulatory uncertainties that could impact its growth trajectory.

Understanding the business models is crucial, as they vary between free and paid games.

Free games include freemium, shareware, and ad-funded models, while paid games operate on upfront payments, subscriptions, and Real Money Gaming (RMG). In RMG, players pay an entry fee that contributes to both platform revenue and prize pools for winners.

Regulatory setback

The regulatory landscape for online gaming in India has become increasingly complex, particularly for RMG, which is currently taxed at 28%.

While games outside the RMG category face a straightforward 18% tax on platform fees, the recent tax hike has created turmoil within the industry. States like Tamil Nadu have responded to concerns about gaming-related losses by banning RMG, including poker and rummy, despite the Supreme Court classifying these games as skill-based.

GST was previously applied at a rate of 18% on gross gaming revenue until mid-2023.

Also read: Game, set, match: Free pass likely for foreign investors in online gaming

The government's decision to impose a higher GST rate of 28% on the entire contest entry amount (CEA) has significantly impacted the ecosystem, with companies now facing a dramatic increase in their tax liabilities.

For instance, a platform that used to pay ₹1.8 in GST on a ₹100 entry fee is now burdened with a tax of ₹28. Furthermore, the GST authorities have raised a staggering demand exceeding ₹1.12 trillion due to this tax revision, which remains under judicial review.

Which are the listed gaming companies in India?

There are two major players: Nazara Technology and Delta Corporation.

Delta Corp operates in the gaming and hospitality sector, running casinos in Goa and Sikkim, which generated 80% of its revenue in Q1 FY25.

The company also manages Adda52.com, an online poker platform that contributed 15% to its total revenue, while its hotel operations in Goa and Daman accounted for the remaining 5%.

The business was stable until July last year, but it faced significant challenges following a GST issue that resulted in a retrospective tax demand of ₹23,207 crores for the period from July 1, 2017, to November 30, 2022, prompting them to file an appeal.

As a result of the tax hike, the company's revenue dropped by 34%, falling to ₹181 crore in Q1 FY25 from ₹273 crore in the previous year, with profits plummeting from ₹68 crore to just ₹2.2 crore. These financial setbacks have contributed to a more than 50% decline in the company's stock price from its peak.

Why did Kamath place big bets on Nazara?

Here is the answer:

Following the announcement on GST changes, Nazara's shares initially fell but quickly rebounded due to the negligible contribution of RMG to its overall revenue.

This prompted the company to adopt a cautious approach towards expansion in this segment amidst ongoing regulatory uncertainty.

Nazara, established in 1999, has become a leading gaming and sports media company in India, expanding rapidly through mergers and acquisitions. The firm boasts a diversified gaming portfolio that includes Kiddopia, Sportskeeda, and Nodwin, with gaming representing 36% of its revenue—55% from esports and 9% from ad tech in FY24.

Kiddopia focuses on early learning apps for children, generating 80% of its revenue from the US, while the esports segment, driven by Nodwin, has witnessed a remarkable 71% CAGR growth, highlighting the industry's significant potential.

Kamath's investment reflects confidence in Nazara’s growth prospects as the esports sector continues to flourish in India.

The bold bet

Following last year's tax hike, the RMG segment has faced significant challenges, including increased tax burdens, funding issues, and layoffs, prompting consolidation as larger companies acquire smaller ones. 

Recently, Nazara made a strategic move by acquiring a 47.7% stake in Moonshine Technology, which operates skill-based platforms like PokerBaazi, SportsBaazi, and CardBaazi, for ₹982 crore; Moonshine reported revenues of ₹420 crore and an EBITDA of ₹41 crore in FY24. 

Also read: Why did Nikhil Kamath finally decide to buy a house?

Despite recent setbacks, the RMG market remains the largest segment in India's gaming industry, generating ₹16,500 crore in revenue in 2023 and accounting for 83-84% of the total gaming market. 

For more such analyses, read Profit Pulse.

Will Kamath's bet pay-off?

Nazara has experienced slow growth over the past year, with revenue increasing slightly from ₹1,090 crore in FY23 to ₹1140 crore in FY24. 

Despite flat revenue due to cost control measures, the company managed to boost its net profit from ₹39 crore to ₹57 crore. The management remains optimistic about future growth, targeting ₹300 crore in EBITDA by FY27, up from ₹98 crore in FY24. 

To fuel this growth, Nazara has been actively pursuing mergers and acquisitions, spending over ₹1,800 crore in the last six months, which could potentially double its revenue within two years. 

Recently it acquired Comic Con India, which organises various elements of popular culture, including comics, cosplay movies, merch, and gaming. It also acquired Publish. Me, Fusebox, Ninja, Freaks4U (investment), and Branded.

Recent acquisitions include Comic Con India and various gaming-related companies, alongside the launch of “Nazara Publishing” to promote games developed by Indian creators, aiming to release up to 20 games by mid-2025.

It has also launched its publishing division, “Nazara Publishing,” to publish games developed by Indian developers. By mid-2025, it aims to launch up to 20 games across mobile, web3, virtual reality (VR), and personal computers (PC).

Nazara stands out as the most promising option for Kamath's investment, given its unique position as the only company in India offering a curated list of games across various categories.

The company's experienced promoter, proven track record in scaling acquisitions, and focus on M&A-driven growth make it a compelling choice.

 While its valuation may seem high, it aligns with its industry peers and reflects its strong fundamentals. Despite the challenges in the gaming market, Nazara's strategic approach and potential for future growth make it a worthy investment consideration.

Note: Throughout this article, we have relied on data from www.Screener.in and Tijorifinance. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information.  

The purpose of this article is only to share interesting charts, data points, and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only. 

About the author: Madhvendra has been a passionate follower of the equity market for over seven years. He is a seasoned financial content writer. He loves reading and sharing his honest opinion about publicly listed Indian companies and macroeconomics.

Disclosure: The writer does hold the stocks discussed in this article.