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Mixed operating performance; pick up in revenue growth at the cost of margin

Result Synopsis

Nazara Technologies (NAZARA) reported mixed financial performance for the quarter. While, sequential revenue growth was ahead of estimates; EBITDA margin came in quite below expectation. It reported sequential revenue growth of 18.2% QoQ, led by 33.5% QoQ increase in revenue of esports( contributing 49% to revenue) and 13.9% QoQ increase in the revenue of Gamified Early Learning. There was sequential decline in EBITDA margin(down 542 bps QoQ) led by higher cost of content and increased marketing cost. The business remains profitable as it generated PAT of more than Rs 100mn for the quarter.

Indian Gaming industry is expected to achieve $3.5bn in 2023 from $1.5bn in 2020 at CAGR of 32.6% led by increasing smartphone penetration, increase in the number of mid/hard core gamers and gradual increase in In?app purchases. The revenue base of Nazara has become more diversified across business segments, thus helping to reduce the overall risk. High cost of content and higher marketing cost continues to weigh down on operating margin. Its acquisitions driven business strategy remains a risky one as such acquisitions often come at premium valuation. We estimate revenue CAGR of 53.8% over FY22?24E with average EBIT margin of 8.7% over the period. We maintain our NEUTRAL rating on the stock with revised target price of Rs 687/share based on EV/EBITDA of 18x on FY24E. The stock trades at EV/EBITDA of 32.6x/17.9x on FY23E/FY24E.

Result Highlights

* Reported revenue of Rs 2,638mn( up 18.2% QoQ). The growth was led by 33.5% QoQ increase in revenue of esports( contributing 49% to revenue). Gamified early learning grew by 13.9% QoQ, Adtech grew by 10.6% QoQ, Real money gaming increased by 6.5% QoQ, Freemium Games down 25.7% QoQ, and Telecom business was down 22% QoQ inline with trend.

* For esports, the strong sequential growth was led by growth in media revenues led by Master Series and Playground Ips. The growth of Sportskeeda was on account of increasing presence in core American sports such as Football, Basketball etc.

* For Kiddopia, the subscriber base was down 0.6% QoQ to 300k, with marginal increase in ARPU to $6.8/month.

* EBITDA margin was down 542 bps QoQ to 8.1%, on higher cost of content( up 27% QoQ), increased marketing expense( up 28% QoQ).

* Reported Cash and Equivalents of Rs 6.5bn vs Rs 7.3bn ( March 31, 2022). Revised guidance for FY23, with revenue growing by 70-75% YoY and EBITDA margin above 10%.

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