PL Stock Report: Nazara Technologies (NAZARA IN) - Q1FY24 Result Update - A mixed bag - BUY

Nazara Technologies (NAZARA IN) - Jinesh Joshi - Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: BUY | CMP: Rs694 | TP: Rs834

Q1FY24 Result Update - A mixed bag

Quick Pointers:

♦ Kiddopia/Animal Jam report healthy EBITDA margin of 28.0%/22.7%.

♦ Season-2 of BGMI master series (to be aired on Star Sports) is scheduled in 2QFY24.

We increase our EBITDA estimates by 8%/4% for FY24E/FY25E as we 1) re-align our margin assumptions for Kiddopia and Animal Jam amid strong performance in 1QFY24 2) tweak our A&P spends outgo and 3) build-in recovery in Nodwin business, despite EBITDA losses during the quarter as multiple IP’s are lined up in coming months. Nazara reported a mixed bag of results with revenue miss of 10%, however, EBITDA margin was above our estimates of 12%. Despite ongoing challenges in Ad-Tech (loss of a large client), Kiddopia (stagnant subscriber base) and Real Money Gaming (GST levy of 28% on full bet value), return of BGMI and strong traction in SportsKeeda is likely to drive sales/EBITDA CAGR of 20%/39% over FY23-FY25E. Moreover, Nazara had cash balance of Rs6.2bn as of FY23 while Nodwin (Esports subsidiary) raised Rs2.3bn in May-23. In addition, there are plans to further raise Rs7.5bn in near future. We believe the cash ammunition will act as growth capital to expand inorganically from hereon. Retain our BUY rating with a DCF based TP of Rs834 (earlier Rs804).

Revenue increased 14% YoY: Revenue increased 14% YoY to Rs2,544mn (PLe Rs2,813mn). E-sports revenue was up 15.2% YoY to Rs1,178mn (PLe Rs1,200mn) aided by SportsKeeda. Ad-Tech revenues were down 15.6% YoY to Rs271mn (PLe Rs433mn) due to a loss of client while Gaming revenue was up 23.5% YoY to Rs1,095mn (PLe Rs1,180mn).

EBITDA/PAT margin at 13.0%/7.7%: EBITDA increased 10.2% YoY to Rs331mn (PLe Rs338mn) with a margin of 13.0% (PLe 12.0%) amid 29.7% YoY fall in ad-spends to Rs457mn. PAT after MI stood at Rs195mn (PLe Rs138mn) with a margin of 7.7% (PLe of 4.9%).

Con-call highlights: 1) Kiddopia’s CPT increased to US$39 due to an issue with Google ad-platform that disrupted marketing campaign leading to an increase in customer acquisition cost. 2) Kiddopia is expected to generate EBITDA margin of 20-23% in FY24E. 3) Christopher Franklin has joined as CEO of NextWave Multimedia. 4) Nodwin has potential to grow at 30-35% on annualized basis but was into EBITDA loss due to higher spends in gaming accessories business. However, Nodwin is expected to be profitable in FY24E. 5) Revenue of PFN business was Rs25mn in 1QFY24.6) Employee cost was up 59.5% YoY due to consolidation of PFN and WildWorks (35-40 people). 7) There is no impact on Esports due to hike in GST rate to 28% on full bet value as no money is put in as a wager by contestants in this category. 8) Kiddopia ARPU has been flat since last 4-5 quarters despite 2 price hikes as a) old users are renewing at earlier rates and b) there is a shift in monthly/annual subscriber mix (pulling down overall ARPU). 9) Contract for BGMI master series with Star Sports is for 3-years and the IP is expected to be profitable. 10) GST council is scheduled to meet on 02nd Aug to revisit their earlier decision of levying 28% tax on full bet value. 11) Valorant and Counter Strike are other few games beyond BGMI that have viewership potential from an Esports standpoint.

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