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Nazara Technologies’ Q4FY23 revenue was in line, but earnings beat our estimates as eSports EBITDA margin rose sharply (~430bps YoY). Also, Kiddopia’s EBITDA margin expanded ~680bps QoQ led by US$1.4 sequential decline in cost per trial. Number of Kiddopia subscribers grew marginally QoQ. We look forward to more clarity on margin improvements in key business segments and their sustainability in the near term from earnings call. We re-iterate BUY on the stock with a target price of Rs700.

* Q4FY23 performance. Revenue for the quarter was Rs2,893mn, up 65.2% YoY (down 8.1% QoQ). This was led by eSports business which grew 52.9% YoY to Rs1,401mn. GEL business revenue grew 32% YoY to Rs1,102mn. Consolidated EBITDA margin in Q4 was 9.6% (Isec: 5.2%). Within segments, GEL’s EBITDA margin was 18.2% (vs 21.1% in Q4FY22) and eSports’ EBITDA margin was 7.8% (vs 3.5% in Q4FY22). Adtech’s EBITDA margin was 6.9% in Q4. In Q4FY23, PAT was Rs119mn. Cost per trial for Kiddopia decreased to US$35.9 vs US$37.3 in Q3FY23 though subscriber addition remained flat. NODWIN Gaming also reported improved EBITDA margin of 4.4% in Q4 (vs 3 quarter average of 0.8%).

* Strong medium-term growth visibility. We estimate ~35% YoY revenue growth in FY24E led by ~45% YoY growth in eSports and ~25% YoY growth in GEL. We estimate EBITDA growth of ~47% YoY in FY24E led by EBITDA margin improvement as eSports’ IPs scale up and GEL’s profitability improves on subscriber addition and price increases.

* Attractive risk reward. Nazara has Rs6.3bn in cash. We believe this could be used to acquire scale through acquisition in real money gaming, once regulatory clarity emerges. Also, Nazara could benefit from inexpensive acquisition opportunities in the current liquidity situation. In case these triggers play out, we see a bull case valuation of Rs800 (for Mar’24). In case growth slows or margin improvements do not play out, we see a bear case valuation of Rs400 (for Mar’24), implying a risk reward of 1.1:0.

* Maintain BUY. We maintain our BUY rating on Nazara, given its strong revenue growth trajectory in eSports business and gradual profitability improvement in gamified early learning (GEL). We have a target price of Rs700 on the stock for Mar’24. Our target multiple is 41x FY25E EPS (1.5SD below the 2-year average historical P/E). Key risks: 1) Company’s inability to establish its gaming accessories business leading to lower margins, 2) impact due to increased competition/ slowdown in US markets, 3) continued delay in RMG regulatory clarifications and 4) inability to identify and integrate acquisitions.

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