India is betting big on animation, gaming. These stocks may benefit.

The Indian government is planning a big push for the fast-growing sectors of animation, visual effects, gaming, comics, and extended reality (AVGC-XR), having proposed the establishment of the National Centre of Excellence (NCoE) in Mumbai. 

This initiative, a follow-up to the 2022-23 budget's announcement, aims to cement India's position as a global player in these industries. As technology evolves and internet penetration deepens, the AVGC-XR sector is set to play a crucial role in media and entertainment, with potential impacts on employment and India's creative economy. But what does this ambitious plan mean for the market, and who stands to gain?

High growth potential in AVGC-XR

The AVGC-XR sector is poised to outpace the broader Indian media and entertainment market, which is growing at 9% annually. Currently, India accounts for less than 1% of the global AVGC-XR market, but that share is expected to reach 1.5% by the end of the decade. The government’s push comes as content creators experiment with advanced VFX and animation techniques, which have been showcased in films like Baahubali and RRR.

Read this | India’s animation, VFX segments set to touch $2.2 billion by 2026, online gaming to reach $4.6 billion: Report

What sets this sector apart is its ability to fuel other high-growth areas such as gaming, education, and even architecture. The rapid growth of OTT platforms, combined with India’s affordable data rates, offers unique opportunities for innovation and expansion.

Boost to employment

According to Ashwini Vaishnaw, minister for information & broadcasting, the AVGC-XR sector could generate up to 500,000 new jobs, a significant boon to India’s workforce. These roles would require specialized skills, addressing the country’s need for more sophisticated employment opportunities. 

Former Infosys chief financial officer Mohandas Pai once remarked that "India has a wage problem, not a job problem," highlighting the importance of creating high-skill jobs that foster innovation. The growth of this sector could be a key driver in enhancing India's soft power globally, much like the IT revolution of the 1990s.

Vaishnaw has been vocal about the potential of the AVGC-XR sector, citing the success of films like The Lion King and Avatar as examples of how animation and immersive technology are reshaping global media. The NCoE will offer cutting-edge training, integrating India’s rich cultural heritage with modern technology to foster the creation of indigenous intellectual property (IP).

Modelled after India’s premier institutions like the IITs and IIMs, the NCoE will provide state-of-the-art infrastructure and resources to build a strong talent pool. This is part of the broader AVGC Promotion Task Force Report, which outlines opportunities for growth in the sector.

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India is emerging as a key destination for high-end, skill-intensive activities in the AVGC-XR sector, equipped with the expertise and resources needed to become a significant global contributor. Global players are increasingly tapping into India's talent pool for offshore service delivery, recognizing its growing potential.

A deeper dive into the sub-sectors

Animation and VFX

The use of animation and VFX is primarily driven by television and OTT platforms, followed closely by films. Gaming, however, is poised to become the fastest-growing segment within animation and VFX, with other sectors like EdTech, medical applications, and architecture also seeing increased adoption.

Globally, North America leads the market with a 31% share, followed by Europe at 28%. The Asia-Pacific region, meanwhile, is the fastest-growing, with a CAGR of 13%.

India’s VFX industry has been steadily advancing, thanks to the adoption of world-class techniques and innovative technology. According to NITI Aayog, the country's animation and VFX sector is valued at $1 billion. Indian content creators are pushing the boundaries of storytelling through advanced VFX, as evidenced by blockbuster films like RRR and Baahubali. Their success has paved the way for more high-budget productions utilizing cutting-edge visual effects.

Gaming 

The global gaming market has been growing at a robust CAGR of 10%. By 2020, the Asia-Pacific region dominated, holding 49% of the market, followed by North America at 26% and Europe at 19%.

Read this | Game, set, match: Free pass likely for foreign investors in online gaming

In India, the online gaming segment surged by 28% in 2021, reaching $2 billion. This remarkable growth is driven by a young population, affordable data, and widespread mobile penetration. With this momentum, India is expected to become one of the leading gaming markets globally, projected to hit $4 billion by 2025.

Comics

The global comic market was valued at $15 billion in 2020 and is anticipated to grow to $24 billion by 2028, with a CAGR of 6%. Indian comic readers have long been introduced to a wide array of international characters, but the domestic comic industry remains a central part of popular culture. 

Iconic figures like Chacha Chaudhary, Tenali Raman, and Akbar-Birbal are household names. Additionally, the popular TV show Taarak Mehta Ka Ooltah Chashmah, inspired by the humorous column Duniya Ne Undha Chashmah, is one of the longest-running and most successful shows in Indian television history.

Extended Reality (XR)

Extended Reality (XR) services are rapidly penetrating various industries, with the number of use cases rising across sectors. Beyond immersive games like Pokemon Go and gaming consoles like Xbox, XR technology is finding applications in healthcare, hospitality, education, and retail. The possibilities for XR's adoption span virtually any industry, with creative use cases continually emerging.

Stocks to Watch

As the AVGC-XR sector gains momentum, several companies are poised to benefit over the coming years.

Animation and Visual Effects: The sector has seen increased activity with the recent listings of Phantom Digital Effects, Basilic Fly Studio, and Digikore Studios. These companies are preparing for substantial growth through both organic and inorganic strategies. However, the Hollywood writers’ strike last year hit the sector hard, and they are now working to regain their growth trajectory.

Also read | Top 3 VFX stocks to add to your watchlist

Nazara Technologies: A leading India-based gaming and sports media platform, Nazara has expanded across Africa and North America, offering interactive gaming, eSports, and gamified early learning products. The company has aggressively pursued mergers and acquisitions, building a network of companies where it holds a majority stake. However, gaming is a highly disruptive industry, with volatile revenue streams, so it’s essential to watch how these acquisitions evolve.

Media & Entertainment Stocks: For investors looking for indirect exposure to the Animation, VFX, or Comic sector, Indian media and entertainment companies like Network18 Media, PVR Inox, and Zee Entertainment offer potential opportunities.

The future of these stocks hinges on how effectively the government implements its policies and when the anticipated benefits start to materialize. While the sector holds exciting promise, much of it remains speculative, and many companies are still privately held. For now, adding these stocks to your watchlist and observing their performance is a prudent approach.

In conclusion, the Indian AVGC-XR sector shows considerable promise. With the right policy interventions, it could become a significant growth story for India in the near future.

Note: This article relies on data sourced from pib.gov.in, mib.gov.in, and a Twitter thread by Ashwini Vaishnaw.

The content is intended solely to provide data points and stimulate discussion. It does NOT constitute investment advice or recommendations. For investment decisions, please consult a certified financial advisor. This article is for educational purposes only.

Ruchit Shah has been actively researching and investing in the Indian markets for the past four years. He is not a Sebi-registered investment adviser.

Disclosure: The writer and his dependents hold positions in the stocks mentioned in this article. Please be advised accordingly.