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Deepening focus on profitability

Affle India (Affle) reported revenue of Rs3,546mn, +2% QoQ, 29.1% YoY slightly below our estimate of Rs3,584mn due to macro headwinds in developed markets. Sequential growth in India (~10% QoQ) and other emerging markets was strong in Q2FY23. Management mentioned macro headwinds in developed markets had a negative impact of ~US$3-4mn on H1FY23 revenue (Rs236-314mn assuming average US$/INR rate of 78.56 in H1FY23).

Converted users reached a new high of 64.7mn (up 4.5% QoQ, 32.7% YoY) during the quarter. CPCU rate declined by ~2.3% QoQ to Rs51 likely due to decrease in the share of converted users from developed markets. International markets’ revenue contribution declined by 190bps QoQ to 67.9% in Q2FY23.

Management expects industry to grow at 10% in H2FY23 (benefitted by festive season seasonality) over H1FY23 and grow organically 25% YoY in FY23. We believe Affle can grow better than industry given its past track record and major exposure to emerging markets, which are not much impacted by macros. We model 27% YoY organic revenue growth (i.e. excluding one quarter (Q1FY23) revenue of Jampp) for FY23.

Affle has deepened its focus on profitability, delivering EBITDA margin expansion of ~50bps QoQ, ~130bps YoY to 20.3%. EBITDA for the quarter stood at Rs 723mn (up 5.3% QoQ, 38.8% YoY). Inventory and data costs remained flat QoQ likely due to 1) company’s efforts to improve platform efficiencies and bring down inventory and data costs as scale increase and 2) lower share of revenue from developed markets. Employee costs increased 7.8% QoQ due to investments in business development resources and currency adjustments.

Management expects to focus on improving profitability led by 1) resilient pricing i.e. every incremental revenue earned at healthy pricing and 2) realising operating leverage due to increase in revenue driven by volumes, 3) higher volumes will also help in better negotiation of inventory and data costs. It expects growth in EBITDA and PAT to be higher than that in revenue in H2FY23.

We have reduced our revenue estimates by 4.2%/7.4% factoring demand headwinds in developed markets and increased EBITDA margin estimates by 50bps/20bps leading to a decline in EPS estimates by 0.5%/7.7% for FY23/24, respectively. We arrive at a DCF-based target price of Rs1,396 on FY24E EPS. The stock is trading at 64x/46x on FY23E/FY24E EPS of Rs18.5/25.8 with revenue CAGR of 35% and normalised EPS CAGR of 37% over FY22-FY24E.

Other key highlights

* Connected devices in Affle’s in-house data management platform on LTM basis increased to an impressive 2.8bn in Q2FY23 vs 2.5bn in Q1FY23 and 2.4bn in FY22. Revenue share of direct customers remained stable at 74% in H1FY23 vs FY22. The company has depth and breadth of data accumulated over the years across industry verticals and is therefore, better able to predict which consumer cohort is likely to convert for which particular vertical and the correlation between them.

* Affle has grown 61% revenue CAGR in Q2 over the last 3-year period, much ahead of industry growth trend, as per the management.

* Affle is benefiting from synergies with Jampp and has also launched tech platform in LAT-Am and other markets in Q2FY23.

* Management continues to invest in organic growth agendas and is also actively evaluating inorganic growth opportunities. Management expects industry to grow at 25% CAGR over long term.

* Re-aligning strategy to focus more on profitability: Management mentioned that given the challenging macro environment in developed markets, it is deepening its focus on profitability. It is re-aligning execution strategy and operating resources to focus on platform-level profitability, maximizing strategic partnerships, improving employee productivity, optimising other operating costs, negotiating lower prices for inventory and data and ensuring healthy pricing. Management expects growth in EBITDA and PAT to be higher than revenue in H2FY23.

* Normalised PAT came in at Rs587mn, up 39.6% YoY, 6.2% QoQ

* In balance sheet, other financial assets increased significantly because of investments in fixed deposits with longer tenure (>12 months).

* Investment in Bobble AI continues to be classified as ‘held for sale’ with 26.4% stake in the company. Deal with Krafton to sell stake in Bobble AI did not conclude and Affle is exploring other possibilities to sell its stake in Bobble AI. Management mentioned Bobble AI will continue to remain a key strategic partner to support its vernacular strategy.

* Affle’s promoter – Affle Global pte has made financial minority investment in Cashkaro. Affle India team is exploring opportunities for strategic partnership between the two companies.

* Key risks: 1) Failure to compete in the highly-competitive industry, 2) adverse developments regarding data protection, and 3) lack of success in turning around the acquired companies.

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