PL Stock Report: Nazara Technologies (NAZARA IN) - Q2FY24 Result Update – Capital allocation key to re-rating - HOLD

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

Rating: HOLD | CMP: Rs820 | TP: Rs840

Q2FY24 Result Update – Capital allocation key to re-rating

Quick Pointers:

• Post recent fund infusion, cash on books stands at Rs13.3bn (22% of market cap).

We cut our FY24E-FY26E EBITDA estimates by ~3-4%, amid persistent weakness in Kiddopia and Ad-Tech business. Despite downgrade at operating level, our FY24/25E EPS estimates have witnessed an upgrade of 14%/6% as we raise our other income assumptions and re-align our tax rate for FY24E given write back during the quarter. Nazara’s operational performance was broadly in-line with our estimate with EBITDA margin of 9.4% (PLe 8.3%) while PAT beat was driven by tax credit of Rs13mn (PLe tax outgo of Rs47mn) arising from demerging of the fantasy sports business of Halaplay into OpenPlay. 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 17%/34% over FY23-FY26E. Retain ‘HOLD’ rating on the stock with a DCF based TP of Rs840 (earlier Rs836). Post recent fund raise, Nazara has cash balance of Rs13.3bn (cash per share of Rs183 on diluted equity base) and we believe capital allocation decisions from hereon will be a key to re-rating.

Revenue increased 12.7% YoY: Revenue increased 12.7% YoY to Rs2,972mn (PLe Rs3,148mn). E-sports revenue was up 25.9% YoY to Rs1,720mn (PLe Rs1,804mn) aided by SportsKeeda. Ad-Tech revenues were down 36.6% YoY to Rs225mn (PLe Rs249mn) due to adverse impact of loss of a large client, while gaming revenue was up 13.8% to Rs1,043mn (PLe Rs1,096mn) amid strong performance.

EBITDA/PAT margin at 9.4%/6.1%: EBITDA increased 30.4% YoY to Rs279mn (PLe Rs261mn) with a margin of 9.4% (PLe of 8.3%) vis-a-vis 8.1% in 2QFY23 amid 33.5% YoY fall in ad-spends to Rs474mn. PAT after MI stood at Rs181mn (PLe Rs106mn) with a margin of 6.1% (PLe of 3.4%). Tax write back of Rs13mn (PLe tax outgo of Rs47mn) resulted in overall PAT beat.

Con-call highlights: 1) Given higher GST rate of 28% on full bet value, Classic Rummy is expected to post an EBITDA loss in 3QFY24, but is expected to achieve break even by 4QFY24. Turnaround will be led by cost optimization, increase in commission and incentivizing users to withdraw less which would reduce tax outgo for Nazara. 2) Esports was a medal event at the recently concluded Asian Games. 3) In Freemium, Nazara has transitioned its main titles WCC2 and WCC3 to online only mode. Customers who want to play offline will have to pay. While this has resulted in a dip in active users it provides better clarity on true LTV of players which will help to improve monetization. 4) PFN was profitable at EBITDA level in September. 5) COGS has increased on sequential basis due to higher sales of accessories (Wings business) amid festive sale. 6) No price hike is planned in Kiddopia, while ARPU declined marginally due to summer win back offers. 7) Kiddopia’s subscriber base declined 2.7% QoQ to 292,488 due to seasonality and inability to scale to up ad-spends. 8) For Animal Jam, revenue scale up is expected in 2HFY24. 9) New marketing head has been hired in the Ad-Tech business.