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Strong growth in converted users; maintaining our Buy

Affle India had good results in Q1 FY23. Its greater spending on mobile advertising, tapping connected devices, deeper penetration in the top-10 verticals, newer regions, tier-2 and -3 cities in India, we believe, would drive its long-run growth. We expect it to continue to strategically invest in inventory and data costs (62.8% of sales in FY22, 63.3% in Q1 FY23) to expand its reach across connected devices and gain deeper insights regarding the next billion online shoppers. Factoring in the better-thanexpected results, we raise our FY23e/FY24e earnings 10%/9% and retain our Buy rating with a higher target of Rs1,330 (from Rs1,220 earlier), based on DCF, assuming a 12% WACC and a 6% terminal-growth-rate, at an implied PE of 45x FY24 EPS) .

Q1 FY23 result update. The company reported strong, 127.9% y/y, revenue growth to Rs3.48bn, beating our expectations ~5% (organic growth reported ~45% y/y). The growth was driven by strong momentum in CPCU, which delivered 61.9m converted users (up 96.5% y/y, 9.5% q/q). EBITDA shot up 95.9% y/y to Rs687m. Margins, though, contracted 323bps y/y to 19.8%, chiefly because of higher data and inventory costs, which as percent of revenue rose to 63.3% (from 58% a year ago), primarily on the consolidation of the lowmargin Jampp business, which was not there a year back.

Conference call highlights.1) Negligible exposure to Europe; that in the US is in a nascent stage, 2) Since developed markets have slowed and Affle’s focus is largely on emerging markets, the impact from developed markets on it will be negligible, 3) Digital spend will be more protected and its advertising budget would shift from traditional to digital even with an advertising budget cut, 4) The Jampp EBITDA margin was ~10% (~20% contribution to EBITDA), 5) The increase in CPCU was driven by Jampp whereas the increase in conversions was driven by Affle’s organic business.

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