Acquisitions on the horizon in real-money gaming sector

In an interview with Mint, Sudhir Kamath, chief operating officer of Nazara, said the company will make strategic acquisitions in the long run, as and when it finds the right opportunities.

“We won’t be rushing to make acquisitions, but they are certainly a part of our overall strategy in the near term. We typically identify opportunities that are at least on track towards profitability, and once we locate the right ventures, we’ll consider them,” Kamath said.

He added that such consolidation is inevitable—not just for Nazara—but across the industry. “Smaller ventures will be affected in terms of the cash available to them, since most firms across the industry aren’t passing on the impact of the 28% GST on net revenue on to users. As a result, it makes sense for larger firms to come in by helping mitigate tech infrastructure costs, and other operating expenditures,” he said.

Smaller firms are eager to stay independent in the near term, although acquisitions are seen by most as “inevitable” in 2024.

A senior industry official who works with multiple gaming startups said, on condition of anonymity, that at least 20 such startups are already considering offers for acquisition. However, companies are currently more cautious with their acquisition offers, since valuations of gaming startups have significantly dropped over the past 18 months—especially since the implementation of the new tax regime on the sector in August this year.

“Many founders are holding out, hoping that there will be a revision of some form in the near term on the taxation rate. They’re hoping for this as startup valuations have significantly altered, which, in turn, isn’t matching the offers on the table,” Kamath added.

Projections of acquisitions in the real-money gaming space come despite reports stating a potential drop in the overall revenue share of the sector.

On Tuesday, an industry report published by EY India said that nearly 400 real-money gaming startups in India contributed to 84% of the overall revenue of gaming as an industry. In the next five fiscals, this share is expected to drop by nearly nine percentage points—to 75.4%—as a result of the impact of the new taxation.

The implementation of the new taxation will also have other impacts. Trivikraman Thampy, chief executive of Games24x7, said that the present priority is to soften the impact that the new tax rate is expected to have on the overall operating margin of the company. “Consolidation across the industry will happen, just like it does across various other industries that welcome new regulations. But at present, we’re working on figuring out how best to mitigate the new tax rate, and how this impact will be passed on to users. There will be some amount of the burden that will come on the users, although there has so far been no impact on the propensity of users to play such games,” he said.

Despite the impact of the new tax rate, companies and investors remain bullish. Nazara’s Kamath said that the company’s exposure to the real-money gaming sector in terms of revenue is about 5% of its top line—which could eventually increase with such acquisitions.

Salone Sehgal, partner at gaming-focused venture capital firm Lumikai, also said that the real-money gaming segment is a behaviour-building sector, which will eventually decline in revenue share as the market matures. “Our exposure to real-money games is at less than 5% of our entire portfolio. For us, this does not dent the confidence—in every emerging market, real-money gaming is where a user’s behaviour building begins, before gradually evolving to monetizable casual gaming, esports and other divisions. This is an entire journey, and India’s policymakers have only formally divided the overall industry into various sub-segments,” she said.