Q2FY24 Review: Nazara Technologies: Steady quarter, acceleration likely in 2H

10 Nov 2023 , 11:36 AM

Nazara Technologies (Nazara) reported Q2 revenue growth of 13% YoY, above IIFLe of 9%, as growth in eSports (+26% YoY) and Gaming (+14%) was partially offset by Adtech (-37% YoY). Ebitda margin at 9.4% (-360bps QoQ/+130bps YoY) were below IIFLe of 12%, as Nazara accelerated investments to drive growth. Management expects to continue investing to drive strategic leadership in segments like Freemium/eSports/RMG/Adtech, without compromising on profitability. Nazara raised fresh capital of Rs5.1bn in the quarter, which places it well to seize acquisition opportunities of Game Studios, Esports and Adtech segments. Analysts of IIFL Capital Services tweak FY24-26 EPS estimates and their 12-month SoTP-based TP increases to Rs800 (from Rs760) on roll forward. They forecast Nazara to deliver 21%/45% revenue/EPS Cagr over FY23-26. The stock is trading at 55x on FY25 P/E. Maintain ADD. 

Esports and Gaming drive growth: 

Among segments, Kiddopia growth moderated in Q2 clocking 5.5% YoY growth, as the company continues to face challenges to scale up marketing spends. Wildworks revenues were flat sequentially. Nodwin grew by 20% YoY, on the back of return on BGMI, multiple marquee events planned for H2 should lead to further acceleration of growth. Sportskeeda grew by 47% YoY, driven by growth in US. Real Money Gaming declined by 10% YoY, on TN ban. Datawrkz declined by 37% YoY, due to continued impact from the loss of a large client. 

Margins impacted by investments: 

Ebitda margin stood at 9.4% (- 360bps QoQ/ +130bps YoY) as Nazara accelerated investments for growth. Nodwin’s margins improved to 1% (vs -7% in Q1FY23) on growth recovery, despite investments in gaming accessories business. Sportskeeda’s margins declined to 23.2% (vs 34.3% in Q1), due to integration with Pro Football Network. Gamified Early Learning margins declined sequentially on higher marketing spend, despite improving Wildworks profitability 

Risk-reward balanced, given multiple moving parts: 

The stock is trading at 55x on FY25 P/E. Analysts of IIFL Capital Services SoTP-based 12-month TP is Rs800; they would look for continued organic revenue growth momentum across business segments and improved visibility on margin trajectory to turn more constructive. Key risks: Aggressive M&A, regulations.