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Strong sequential revenue growth led by pick up in Gamified Early Learning

Result Synopsis

Nazara Technologies (NAZARA) reported mixed financial performance for the quarter. While, sequential revenue growth was ahead of estimates; EBITDA margin came in slightly below expectation. It reported sequential revenue growth of 19.3% QoQ, led by 11.6% QoQ increase in revenue of esports( contributing 48% to revenue) and 34.4% QoQ increase in the revenue of Gamified Early Learning. There was sequential increase in EBITDA margin(up 165 bps QoQ) led by control on marketing cost. The business remains profitable as it generated PAT of Rs 181mn 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 59.8% over FY22?24E with average EBITDA margin of 11.1% over the period. We maintain our NEUTRAL rating on the stock with revised target price of Rs 658/share based on EV/EBITDA of 18x on FY24E. The stock trades at EV/EBITDA of 27.6x/16.4x on FY23E/FY24E.

Result Highlights

* Reported revenue of Rs 3,148mn (up 19.3% QoQ). The growth was led by 34.4% QoQ increase in revenue of Gamified early learning (contributing 26% to revenue). Esports grew by 11.6% QoQ, Adtech grew by 31.3% QoQ, Real money gaming increased by 2.7% QoQ, Freemium Games grew 27.3% QoQ, and Telecom business grew by 12.8% QoQ.

* Nodwin revenue grew by 98% in 9MFY23 driven as multiple physical events came back after Covid-19 as well as strong growth in gaming accessories business.

* For Kiddopia, the subscriber base bounced back by 3.7% QoQ to 311k, with flattish ARPU of $6.8/month. Kiddopia has taken another price hike in December increasing monthly pricing to $9.99 from $8.99 and annual pricing to $79.99 from $69.99 previously. Wildworks, which was acquired on 31st August, contributed to revenue of Rs 298 million in 9MFY23.

* EBITDA margin increased by 165bps QoQ to 9.7%, due to decrease in SG&A expenses (down 32.4% QoQ).

* Company is actively looking to foray into web-based games

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