Target: ₹700
CMP: ₹505
We initiate coverage on Nazara Technologies with BUY rating, given visibility of strong revenue growth in eSports and gradual profitability improvement in gamified early learning (GEL). The stock has corrected nearly 70 per cent from its peak (of ₹1,601) and is now trading near its all-time low level.
We have a target price of ₹700 on the stock for March 2024. Our target multiple is 41x FY25E EPS (1.5SD below the two-year average historical P/E).
We estimate about 37 per cent YoY revenue growth in FY24E, led by about 45 per cent YoY in eSports and about 25 per cent YoY growth in GEL. We estimate EBITDA growth of about 86 per cent YoY in FY24 led by EBITDA margin improvement of about 250 bps YoY as eSports IPs scale up and GEL profitability improves due to subscriber additions and price increases.
Nazara has ₹660 crore in cash (additional ₹4 crore in SVB). We believe this could be used to acquire scale through acquisition in real money gaming, once regulatory clarity emerges. Also, Nazara could benefit from inexpensive acquisition opportunities in the current liquidity situation.
In case these triggers play out, we see a bull case valuation of ₹800 (for March 2024). In case growth slows or margin improvements do not play out, we see a bear case valuation of ₹400 (for March 2024).
This implies an upside: downside skew of 3.7:1, which makes it a compelling Buy, in our view.