Indiagames founder Vishal Gondal, alongwith Cisco and Adobe, is in talks with strategic investors to buy back the company from UTV Software, reports Business Standard, citing unnamed sources. MediaNama has been unable to independently confirm the development, but our sources also indicate that such a deal is in discussion, and that UTV would be willing to sell if they get $100 million (around Rs. 450 crore) for their stake. Business Standard reports the deal ranges between Rs 360 crore-Rs 450 crore. At the time of filing this report, we were unable to get a response on this deal from Gondal and Indiagames COO Samir Bangara. We’re yet to receive a response from UTV Software as well.

Need To Know: Indiagames

– Valuation: UTV had bought 51% equity stake for Rs 68 crore in Indiagames in 2006, valuing the company at around Rs. 133.33 crore, and later increased its shareholding to 58%. At Rs. 450 crore, this deal for 58% would mean a valuation of Rs. 775.8 crore, an increase in valuation of 5.81 times, in a little over four years.

– Shareholding: As of 31st March 2010, the shareholding in UTV Indiagames was as follows:
Indian Promoters: 19.59%
Private Corporate Bodies: 60.40%
Employees: 5.38%

– Financial Performance: Indiagames’ business has been on the verge of profitability for a while: last quarter they reported an undisclosed profit, and a Rs. 1.5 crore loss during the previous quarter. In FY10, according to Indiagames’ FY10 Annual Report (download here), the company reported operating revenues of 37.7 crore, and a loss after tax of Rs. 3.48 crore, compared to a profit of Rs. 0.22 crore the previous fiscal year. Remember that FY10 was a particularly tricky financial year, with the market in the midst of a downturn.

Business Standard suggests that Indiagames is expected to clock revenues of Rs 45 crore for FY11, and report an operating profit of Rs 2 crore. That’s not unlikely, since Indiagames’ Cricket based games appear to be doing well internationally, and the market, overall, has taken a turn for the better. However a valuation of Rs. 775 crore on Rs. 45 crore revenues would mean that valuation is around 17 times revenues.

– Segment Performance: In FY10, the Indian market contributed to 90% of Indiagames’ total mobile revenues, but it underwent a decline by 22%, while its International business declined by 50% on average. This business segment accounted for 219 employees as of March 31st 2010. Indiagames’ Games on Demand (PC games distributed via broadband partners), reported gross revenues of Rs. 2.29 crore, and an operating loss of around Rs. 2.23 crore for FY10. This business had 19 employees as of March 31st 2010.

Why Would UTV Want To Exit?

UTV’s gaming gamble is yet to pay off – Ignition and True Games don’t yet account for much revenue except costs (though UTV has closed minimum guarantees for El Shaddai), and have been in investment mode for a long time. Comparatively, Indiagames hasn’t needed as much investment and has been close to profitability, but there is a sense that there isn’t as much of an upside either: according to Indiagames’ FY10 annual report, “Contrary to expectations, the mobile gaming industry in India has experience average growth”.

We expect that Indiagames, probably the largest mobile games distributor in the country, would have been the main beneficiary of any growth, but perhaps it doesn’t offer UTV any significant upside in the short term; despite launching a new DTH gaming platform, entering the WAP platform business with deals with Etisalat, Tata Docomo for 3G gaming and Idea Cellular for Idea GameStation, and the success of its Cricket based initiatives, it also lost the key Electronics Arts catalogue to Nazara last year. A sale at a few multiples of valuation would probably help UTV show investors that there is scope for return on investment in the gaming business.