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We initiate coverage on Nazara Technologies with BUY rating, given visibility of strong revenue growth in eSports and gradual profitability improvement in gamified early learning (GEL). The stock has corrected ~70% from its peak (of Rs1,601) and is now trading at its all-time low of Rs486. At current market price, it is trading at 45x 1-year forward P/E. 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). We estimate ~37% YoY revenue growth in FY24E, led by ~45%YoY in eSports and ~25%YoY growth in GEL. We estimate EBITDA growth of ~86% YoY in FY24E led by EBITDA margin improvement of ~250bps YoY as eSports IPs scale up and GEL profitability improves due subscriber additions and price increases. Nazara has Rs6.6bn in cash (additional Rs40mn in SVB). 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). This implies an upside: downside skew of 3.7:1, which makes it a compelling BUY, in our view

* What happened in eSports? eSports’ revenue growth has exceeded market expectations in 9MFY23, growing at ~84% YoY. This was led by strong organic growth in NODWIN Gaming (~98%YoY) as physical sports-related events returned post covid pandemic. Sportskeeda’s revenue grew 59% YoY in 9MFY23 led by 100% YoY growth in US business. However, EBITDA margin shrank ~800bps YoY and absolute EBITDA declined ~32%YoY. This was due to 900bps YoY margin decline in NODWIN business as the company extended presence in gaming accessories market with the brand ‘Wings’ and invested in new IPs. Margin loss in eSports business was one of the key reasons for the stock de-rating in FY23.

* Outlook on eSports: eSports’ revenue outlook remains strong. We expect the business to grow at ~45% YoY in FY24E on a high base of FY23E (~88% YoY). In our view, the growth will be led by 50% YoY growth in NODWIN Gaming and 30% YoY growth in Sportskeeda as IPs scale. Margin outlook is also positive as we expect scale efficiencies to accrue from the new IPs created in FY23E and gaming accessories business. For context, the steady state EBITDA margin for accessories business is likely to be in the range of 10-15% by FY26E. This would make it margin accretive to the core NODWIN business. We estimate EBITDA margin for overall eSports business to improve by ~200bps YoY in FY24E.

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