Compelling buy! Nazara Techcan rally up to 44%, says ICICI Securities

March  21, 2023

After correcting nearly 70%from its peak of Rs 1,601 per share, brokerage firm ICICI Securities believesthat Nazara Tech is a compelling buy.

Given the visibility of strong revenue growth ineSports and gradual profitability improvement in gamified early learning (GEL),brokerage ICICI Securities initiated coverage on Nazara Tech with a Buy rating.The brokerage set a target price of Rs 700 on the stock, which indicates anupside potential of 44% from the current market prices.

"Nazara has Rs 6.6 billion in cash (additionalRs 40 million in SVB). We believe this could be used to acquire scale throughacquisition in real money gaming, once regulatory clarity emerges. Also, Nazaracould benefit from inexpensive acquisition opportunities in the currentliquidity situation," ICICI Securities said.

"In case these triggers play out, we see abull case valuation of Rs 800 (for Mar’24). In case growth slows or marginimprovements do not play out, we see a bear case valuation of Rs 400 (forMar’24). This implies an upside: downside skew of 3.7:1, which makes it acompelling Buy, in our view," it added.

ICICI estimates 37% YoY revenue growth in FY24E,led by 45%YoY in eSports and 25% YoY growth in GEL. It also estimates EBITDAgrowth of 86% YoY in FY24E, led by EBITDA margin improvement of 250 bps YoY aseSports IPs scale up and GEL profitability improves due to subscriber additionsand price increases.

In 9MFY23, its eSports’ revenue growth hasexceeded market expectations, growing at 84% YoY. This was led by strongorganic growth in NODWIN Gaming (98%YoY) as physical sports-related eventsreturned post covid pandemic. Sportskeeda’s revenue grew 59% YoY in 9MFY23 ledby 100% YoY growth in US business.

However, the EBITDA margin shrank 800 bps YoY andabsolute EBITDA declined 32%YoY. This was due to a 900 bps YoY margin declinein NODWIN business as the company extended its presence in the gamingaccessories market with the brand ‘Wings’ and invested in new IPs.

"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 NODWINGaming and 30% YoY growth in Sportskeeda as IPs scale," ICICI Securitiessaid.

"Margin outlook is also positive as weexpect scale efficiencies to accrue from the new IPs created in FY23E andgaming accessories business," it added.In Tuesday's trade, Nazara Tech stock rose 1.3%to Rs 492 on BSE. On a year-to-date basis, the stock has fallen over 20%. whileit has plunged over 45% in the last one year.