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Revenue missed, margins expanded; maintaining our Buy

Affle India’s Q3 FY23 revenue grew 10.8% y/y, 6.1% q/q, to Rs3.76bn. The company is faced with pressure in developed markets (US, Europe), which bring ~20% to its revenue. India and other emerging markets (~80% of revenue) grew 23% y/y. The gross margin expanded 280bps y/y, 138bps q/q, to 39.3%, as inventory and data costs (as percent of revenue) fell to 60.7%, from 63.5% a year ago, 62% the prior quarter. Factoring in the slowdown in developed markets, we cut our FY24e/ FY25e revenue 5.3%/3.8%. We retain our Buy rating on the stock, with a lower TP of Rs1,300 (earlier Rs1,330), based on the DCF, assuming a 12% WACC and a 6% terminal growth rate, at an implied PE of 41x FY25 EPS.

We anticipate a 26% revenue CAGR over FY23-FY25. The company’s developed market business (bringing ~20% to its revenue) contracted in Q3, since customers were cutting spending and delaying budgets. In developed markets, repeat-customer conversions and transactions would be more sharply focused on. In emerging markets (~80% of revenue; India, ~35ppts; others, ~45-50ppts, the company grew ~23% y/y). We anticipate a 26.1% CAGR in revenue over FY23-FY25, largely led by user-conversion, keeping prices constant.

Conference call highlights. 1) In India and emerging markets, Affle’s competitive moat is much stronger and global emerging markets are resilient. 2) The company sees long-term opportunities from customers focusing on online-to-offline conversions, licensing, expansions, etc. 3) Inventory cost as percent of revenue is expected to be range-bound at around the current quarterly rate (61% of revenue). 4) Inorganic acquisitions would be similar to past acquisitions but the focus would be on profitable companies, which would not weigh on margins

Risks: Data protection and privacy policy could affect the business

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