Sector Sensex / Nifty CMP Recommended Target Price Time Horizon

Information Technology 37558/11301 332 “BUY” 400 12 Months

Overview: Newgen Software Technologies Ltd.

Newgen Software Technologies Limited was incorporated as a private limited company with the name ‘Newgen Software Technologies Ltd’ on June 5, 1992. Newgen Software Technologies Ltd., is a global provider of BPM, ECM and CCM solution with the footprint in over 60 countries with large, mission-critical solution deployed at Banks, Government, IT/BPO’s companies, Insurance firms and Healthcare solutions. Company is process multi-vertical industry expertise and have a built application on companies’ platform for 17 different verticals. The customer base includes some of the global Fortune 500 companies.

Investment Rationale

Software product company with strong industry recognition: Newgen is a software product company providing a platform that enables organizations to rapidly develop powerful applications addressing the strategic business needs. The application created on the platform enables organizations to drive digital transformation and competitive differentiation. The company has been recognized by Gartner, the world leading IT research and advisory company, in their Magic Quadrant research.

Proven Track Record: Company’s top line is consistently growing at double digit from last five years and management think this will sustain or improve on that.

Diversified business across several verticals: The client has used the platform to build diverse application in many banking, government/PSUs, BPO/IT, Insurance and Healthcare. Moreover, application was built on company’s platform in 17 verticals. The company has 520 active customers over 60 countries across various sectors.

Diversified revenue stream with multiple geographies of low customer concentrations: The company has diversified revenue stream including from license fees or subscription fees, implementation and development charges, ATS/AMC and support charge.

Management Efficiency: Over the last five years management has met their guidance. As on FY2018 company’s EBITDA margin stood at 21% and management believe that this will reach at 25% over the next two-three years.

Stock Details

BSE Code 540900

NSE Symbol NEWGEN

Face Value (Rs.) 10

Market Cap (Rs. Cr.) 2310

Book Value 60

CMP (Rs.) 332

EPS (Rs.) 11

P/E (x) 24

Beta (12M) 0.64

52W H/L 371/205

Shareholding Pattern % holding

Promoter & Promoter group 66.33

DII / MF 7.40

FII 11.63

Public & Others 14.64

10th May, 2019

Focused on driving innovation through in-house R&D: The company has 11 patents in India and 3 patents in USA. The total patent count for the company across the globe is 41.

Company Background

Newgen Software Technologies Limited (Newgen) was established on 5th June, 1992. It is a software products company offering a platform that enables organizations to rapidly develop powerful applications addressing their strategic business needs. The applications created on the company’s platform enable organisations to drive digital transformation and competitive differentiation. The clients use the platform of the company to rapidly design, build and implement enterprise-grade custom applications through intuitive, visual interface with minimal coding.

Newgen’s Products Offerings:

Enterprise Content Management (ECM): OmniDocs Enterprise Content Management Software allows digitisation of enterprise content and information. The platform provides smart tools for enterprises to capture and extract information from various sources, classify, store, archive or retrieve as well as dispose of any content and documents required in day- to-day business operations. It provides the flexibility to access or deliver content over mobile and cloud creating a highly connected and digital workplace. It offers a robust US DoD 5015.02-STD certified Records Management System to ensure compliance with regulatory requirements in relation to management of records.

Business Process Management (BPM): OmniFlow Intelligent Business Process Suite (OmniFlow iBPS) is an integrated system which allows enterprises to manage a complete range of business processes, including designing and modelling flow of work, executing the flow of work through workflow engine and monitoring the flow of work for future improvement. OmniFlow iBPS also offers dynamic case management capabilities which allow decision-makers to respond to real time opportunities, challenges and other unanticipated situations while maintaining a high level of collaboration.

Customer Communication Management (CCM): OmniOMS Customer Communication Management suite offers a unified communication platform that allows enterprises to improve communication with clients by delivering personalized, targeted and consistent communication through various channels. Being built on the same technology architecture, these suites are well-integrated and offer ease of implementation and use. These suites can be deployed on-premise as well as on cloud. Further, the clients prefer to use these product suites on cloud on a subscription basis.

Business Model

The Business has multiple revenue stream:

(1) Sale of software products: Sale of products (software) includes the revenue from sale of licenses for company’s software products. Company enter into licensing agreements with their customers for each product whereby company's customers are required to pay licensing fees to company. The licensing fee constitutes a one-time upfront fee on a per-user basis. Additional license fees are payable for an increase in the number of users or for purchase of additional products.

(2) Annuity based revenue: ATS/AMC: Charges for annual technical support and maintenance (including updates) of licenses, and installation

Support: Subscription fees for licenses in relation to platform deployed on cloud

SaaS: Charges for support and development services

(3) Sales of services : Implementation: This refers to the service of installing and integration of companies products with the

customer's existing platform or system. Company charges implementation fees based on fixed cost on month basis for this service.

Digitisation: This services refers to scanning of document and archival to document management.

27%

17%

2%24%

26%

4%

Segment Revenue

Sale of Products

ATS/AMC

SaaS

Support

Implementation

Digitisation

54%

14%

4%

8%

6%

14%

Industry Wise Breakup

Banking

Government/PSUs

Insurance

BPO/IT

Healthcare

Others

Seasonal Business

According to company’s management Newgen Software is a seasonal business because most of the IT purchasers decide to purchase softwares after the budget has been declared. Thus, according to management H1 contribute 40% and H2 contribute 60%.

Key Customers

India ICICI Bank, Axis Bank, YES Bank, IDBI Bank, Kotak Mahindra Bank, Reliance General

Insurance, ICICI Prudential Life Insurance Company, Max Life Insurance, Bajaj Electricals, Shriram Transport Finance Company, Strides Shasun

EMEA United Arab Bank, RAK Bank, Arab National Bank, Alawwal Bank, Ecobank, NIC Bank

USA Trust Company of America, Mercantil Bank, National Commercial Bank Jamaica

APAC Philippines Resource Saving Bank, Law Society Pro Bono Services, Bank Islam Brunei

Darussalam, Trafigura

35%

33%

23%

9%

Geographical Revenue Breakup

India

EMEA

USA

APAC

40%

60% H1

H2

Company’s Go-To-Market Strategy

Companies go-to-market strategy consists of direct sales supplemented by sales through their channel partners. The direct sales are made by Company in India and company’s Subsidiaries located in USA, UK, Singapore and Canada, through sales and marketing teams, of 270+ employees & 300 Channel Partners

Key Investment Areas

1) Research and Development Expense:

R&D expense amount to 7% of the total sales. (In Cr.)

2) Sales and Marketing Expense: Sales and Marketing amount to 19% of the total sales.

Key Focus Areas

1) Company is now focusing on larger clients because some smaller client do not pay their complete license fees or some client close their business which directly impacts on the company’s financial performance.

2) Company is entering into high ticket size projects each amounting to more than 5 to 7 crores. 3) Company’s debtor days stood at 132 days as on FY2018 which was at 171 days in FY2017. And the company is aiming

to reach at 120 days by June FY2019. This can be achieve because of company’s new “Changing Collection Policy”.

25

31

37

FY16 FY17 FY18

Business Strategy

Low Code Platform: This model is a preferred by Newgen because it brings down the implementation cycle somewhere in between to 8 weeks to 12 weeks which is lower than the industry peers.

Low Client Concentration: Company is now reducing their client concentration to achieve adequate diversification among clients.

Active Customer: The company has over 520+ active customers in over 60 countries across various sectors. Newgen possess multi-vertical industry expertise and target a broad spectrum of services in the business and product offerings. Revenue recognize policy of the company is shown below.

Low Code Platform

Low Client Concentration

Active Customer

Revenue

Policy

When the client has been paid bills

Then Revenue Recognise on that

period

Some client revenue recognise in the next quarter

Because their bill take place in that

quarter

So this clients are not into in Active

Clients

Focus on attractive verticals in select mature markets:

Newgen has a strong presence across regions in the banking and healthcare verticals. It intends to continue to expand its customer base in these verticals in select mature markets, including US and UK. It believes there are several banks and credit unions having more than US$1 billion of assets in US where it plans to sell its platform and solution frameworks in the banking vertical. In addition, there are more than 35 Blue Cross BlueShield health insurance companies, which it sees as a key opportunity to expand its customer base. Its focus areas in the Caribbean include banking and government/PSUs in partnership with consulting firms. As part of its strategy to increase its customer base in US, it has made infrastructure and operational investments in US including hiring of senior-level professional in sales and marketing for the US market in FY16.

Expand product portfolio via investment in advanced features, technologies:

To deliver value and quickly implement market ready solution for its customers, Newgen intend to continue to enhance its R&D capabilities, particularly with a view to create solutions in emerging technologies. It has enhanced its ability to develop tools for enabling its entry into new areas and developing products to address customers in specific industries. Its focus areas currently include business intelligence and analytics, RPA, digitisation, blockchain, dev-ops and user experience. It has made and will continue to incur expenditure on R&D to strengthen its platform and expand the number of features available to its customers.

Expand, grow its strategic business applications to new vertical:

While Newgen platforms are industry-agnostic, it has recently made and plans to continue to make, investments to enhance the expertise of its sales and marketing for its key industry verticals including banking, government/ PSUs, BPO/ IT, insurance and healthcare. For H1FY18 and FY17, it generated 82.0% and 85.9% respectively, of its license/subscription revenue from customers in these verticals. It believes that focusing on the digital transformation needs of organisations within these industry verticals can help drive adoption of its platform. It also plans to target new verticals including education, telecommunications, oil & gas, retail, manufacturing, infrastructure and logistics.

Attract, develop and retain highly-skilled employees:

Newgen’s talent development strategy focusses on engaging, motivating and developing a high performing workforce. It aims to create and sustain a positive work culture for its employees and benchmark itself against its peers. It also has a competency training framework, seamlessly integrated into its business that has been designed for new employees to be “project-ready”.

Key Strengths

Software product company with industry analyst recognition:

Newgen is a software product company providing a platform that enables organizations to rapidly develop powerful applications addressing their strategic business needs. The applications created on its platform enable organizations to drive digital transformation and competitive differentiation. It has been recognized by Gartner, the world's leading information technology research and advisory company, in their Magic Quadrant research. According to Gartner researches, Newgen was the only vendor positioned in all fits Magic Quadrants of CSP (formerly known as ECM, changed the title from MQ for ECM to CSP), IBPMS, BPM-platform based case management framework and CCM. It has been recognized by Forrester, which is one of the most influential research and advisory firms in the world, in their WaveTM research.

Diversified business across several verticals:

Newgen customers have used its platform to build diverse applications in many sectors including banking, government/PSUs, BPO/IT, insurance and healthcare. As of September 30, 2017, applications were built on its platform in 17 different verticals. As of September 30, 2017, it had over 450 active customers (invoiced in the last 12 months) in over 60 countries across various sectors. It has multi-vertical industry expertise and targets a broad spectrum of services in its business and product offerings. Its revenues come from customers across various sectors in recent periods are as below:

Verticals (Rs. crore) FY15 FY16 FY17 H1FY18 FY15-FY17 CAGR(%)

Banking 141.5 170.3 201.9 99.7 19.5

Government/PSUs 28 34.8 75.4 25.7 64.1

BPO/IT 50.1 59.5 50.7 21.8 0.6

Insurance 12.1 12.7 21.7 8.5 33.7

Healthcare 11.2 11.2 17.1 14.2 23.3

Others 65.5 58.2 60.3 37.4 -4

Total Revenue 308.5 346.8 427.1 207.3 17.7 (Source : RHP of Newgen)

Focused on driving innovation through in-house R&D:

Newgen is focused on driving innovation and adopting solutions in line with rapidly evolving technological trends. As of the date of RHP, Newgen had four patents registered in India, 28 outstanding patent applications in India and two outstanding patent applications in the US. Its patents include: (i) method and system for document authentication, (ii) system to instantly generate an online image of a document from multiple images captured through a camera-equipped mobile device, (iii) system and method for automatically verifying the authenticity of signatures, and (iv) system and method for assessing document image viability. As on the date of red herring prospectus, it has registered a total of 12 trademarks in India under various classes and had five pending trademark applications for registration in India, and had registered a total of five copyrights under the Copyrights Act, in India.

In terms of headcount, it has increased its headcount in its R&D team from 197 in FY15 to 256 in FY17. As of September 30, 2017, its in-house R&D team comprised 260 employees, which was 10.1% of its total employees. The company spent 20.4 crore, 25.0 crore, 31.3 crore and 16.9 crore in FY15, FY16, FY17 and H1FY18, respectively.

Key Risks

Revenue dependents to a significant extent on sale of its new licences or subscriptions to new and existing customers:

Newgen derive a significant portion of its revenues from the sale of its software. For the six months ended September 30, 2017 and for FY17, FY16 and FY15, its revenue from sale of software was 24.5%, 27.3%, 19.5% and 24.4% of its revenue from operations, respectively. Additionally, it derives substantial annuity-based revenue as well as non-recurring repeat revenues from existing customers (for purchase of additional licenses/subscriptions for new users or new software for existing users and related implementation charges) in subsequent years. Accordingly, if company do not continue to make follow-on sales of licenses to existing customers for new users, or do not continue to acquire new customers, it may be unable to maintain or grow its revenue from sale of software that could have an adverse effect on its results of operations.

Product development, R&D may not provide a sufficient or timely return:

The company has made significant investments in software product research and development and related product opportunities. For FY17, FY16 and FY15, the company spent 8.5%, 7.9% and 7.9% (as a proportion of total expenditure), respectively, on research and development. Commercial success depends on many factors, including the degree of innovation of the software products and services developed through its research and development efforts, sufficient support from company’s channel partners, and effective distribution and marketing. Accelerated software product introductions and short product life cycles require high levels of expenditure on research and development. Owing to costly, complex and time-consuming process in development of products and expenditure in R&D, any uncertain process could adversely affect its operating results.

Company is facing intense competition:

The company may also face increasing competition from open source software initiatives in which competitors may provide software and intellectual property for free. Existing or new competitors could gain sales opportunities or customers at company’s expense. Certain of these competitors may also compete very aggressively on price. Further, some of company’s competitors may possess better resources than the company, including greater marketing resources, enhanced offshore service delivery capabilities, more experience with international operations or stronger brand recognition than the company. Additionally, company may be required to incur additional marketing and branding expenses to retain company’s competitive position. A loss in company’s competitive position could result in lower revenues or profitability, which could adversely impact of company’s ability to realise their revenue and profitability forecasts.

Industry Overview

Global software spends projected to grow at 7.9% CAGR in FY17-21:

According to Ovum forecasts, ECM, BPM and CCM are expected to grow at a CAGR of 7.1%, 8.4% and 9.9%, respectively, between 2017 and 2021. This reflects the fact that ECM is a very mature market and that there are fewer opportunities while CCM will enjoy new market opportunities.

As almost 30% of enterprises plan to make strategic investments in ECM in the next 18 months, with a further 40% planning minor investments, the management of content is of major importance. It demonstrates that it is all to play for in the ECM marketplace. With over 25% of enterprises planning strategic investment in BPM Suites (BPMS) over the next 18- months, it is quite clear that effective process management and automation is a key priority.

Global Technology Spending USD Mn. 2017 2018(F) 2019(F) 2020(F) 2021(F) CAGR

North America 817722.6 837776.6 859511.1 878555.4 897054.1 2.34%

Europe 659241.2 673485.4 690405.9 707133.7 723642.7 2.36%

Asia & Oceania 580934.3 612719.7 647941.7 684402.8 722827.6 5.62%

India 59963.1 650001.9 70435.2 76237.3 82484.1 8.3%

Latin America 134043.2 137700.9 142335.9 147060.6 151838.1 3.17%

Middle East & Africa

192995.9 199157 208060.1 217277.1 226814.2 4.12%

Total 2384937.3 2460839.6 2548254.7 2634429.7 2722176.6 3.36%

Ovum's key indicators of digitization reveal that the rapid pace of adoption of digital and enabling technologies is increasing across enterprises and end users globally. Global technology spending is estimated at ~US$2,385 billion in 2017. Spending is projected to grow at CAGR 3.36% from 2017 to 2021 and reach US$2,722 billion by 2021.

Global ECM, CCM and BPM Software Spend Forecast

USD Mn. 2017 2018(F) 2019(F) 2020(F) 2021(F) CAGR

ECM 14935 16105.1 17270.5 18456.5 19673.7 7.13%

CCM 1460.3 1593.2 1755.5 1934.4 2137.6 9.99%

BPM 6100 6610 7160 7760 8420 8.39%

Total 376768.4 406102.6 438045.6 472720.2 510281.3 7.88%

Management

Mr. Diwakar Nigam, (Chairman & Managing Director)

Mr. Nigam is 63 years old, he is the Chairman and Managing Director of the company. He holds a bachelor’s degree in science from the University of Allahabad; master’s degree in science (mathematics) from the Indian Institute of Technology, Delhi and a master’s degree in technology (computer science) from the Indian Institute of Technology, Madras. Mr. Diwakar Nigam was one of the founding members of National Association of Software and Services Company (“NASSCOM”). He was also a member of the anti-piracy task force of NASSCOM. Prior to joining the company, he promoted a company, Softek Private Limited and had been associated with the company for a period of 12 years. Diwakar Nigam has been on the company’s Board since April 1, 1993 and has more than 35 years of experience in the IT industry.

Mr. T.S. Varadarajan, (Whole Time Director)

Mr. Varadarajan is 65 years old, he is a whole-time Director of the Company. He holds a bachelor’s degree in science from the Bangalore University; a bachelor’s degree in engineering (electrical technology) from the Indian Institute of Science, Bengaluru and a master’s degree in technology (computer science) from the Indian Institute of Technology, Madras. Prior to promoting the company, he promoted a company, Softek Private Limited and had been associated with the company for a period of 12 years. T.S. Varadarajan has been on the company’s Board since its incorporation. He has more than 35 years of experience in the field of software designing and development.

66%

12%

7%

15%

Shareholding Pattern

Promoters

FII

MF/DII

Public

Investment Rationale

Diversified revenue streams from multiple geographies with low customer concentration:

The company has diversified revenue streams including from license fees or subscription fees (in case of cloud deployment), implementation and development charges, ATS/AMC and support charges. The revenue-split in recent fiscals is set out below:

FY15 FY16 FY17

Sale of products - Software 75.39 67.67 116.82

Annuity based revenue

ATS/AMC 46.56 58.7 73.69

Support 72.39 80.28 94.17

SaaS Revenue 0.22 1.49 2.84

Sale of services

Implementation 99.57 120.49 122.59

Scanning 14.04 18.14 16.98

Sale of hardware 0.26 0.01 0.00

Revenue from operations 308.46 346.8 427.09 (Source : Company RHP)

Focused on driving innovation through in-house R&D:

The company has four patents registered in India and 27 outstanding patent applications in India and one outstanding patent application in the USA in 2018. The patents includes:

Method and system for document authentication

System to instantly generate an online image of a document from multiple images captured through a camera-equipped mobile device

System and method for automatically verifying the authenticity of signatures

System and method for assessing document image viability. Newgen has registered a total of 10 trademarks in India under various classes and had seven pending trademark applications for registration in India and had registered a total of five copyrights under the Copyrights Act, in India.

Strong financial performance:

Company’s revenue stream “Annuity based revenue, Sale of product and Sale of services” growing on double digit growth from last five years. Company consistently growing on a double digit growth to 20% CAGR revenue growth from FY2013 to FY2019 and profit after tax growing at a CAGR of 18% in same period. Company is commanding strong EBITDA margin to 21% and management targeting to reach at 25% over the next two years along with company is generating Free Cash Flow from last two to three years.

Financials Consolidated Statement of Assets and Liabilities (in Cr.)

DESCRIPTION Mar-15 Mar-16 Mar-17 Mar-18

EQUITY AND LIABILITIES

Share Capital 63.06 63.09 62.31 67.88

Share Warrants & Outstanding 0.18 0.16 3.59 3.92

Total Reserves 137.75 160.48 184.04 333.42

Shareholder’s Funds 201.00 223.74 249.94 405.22

Secured Loans

16.18 13.17 Deferred Tax Assets / Liabilities -5.74 -8.31 -23.55 -18.82

Other Long Term Liabilities 0.19 13.36

Long Term Provisions 8.25 11.22 14.43 16.53

Total Non-Current Liabilities 2.70 16.27 7.06 10.88 Current Liabilities

Trade Payables 14.41 14.85 18.05 22.92

Other Current Liabilities 41.15 57.56 73.15 99.40 Short Term Borrowings 44.58 58.83 52.26 49.46

Short Term Provisions 26.72 24.59 3.29 2.21

Total Current Liabilities 126.86 155.84 146.75 173.99

Total Liabilities 330.56 395.85 403.75 590.09

ASSETS

Non-Current Assets

Gross Block 49.13 86.09 66.61 78.89 Less: Accumulated Depreciation 25.92 29.14 4.88 10.42 Net Block 23.21 56.95 61.74 68.47

Capital Work in Progress 4.76 6.05 11.08 16.59

Long Term Loans & Advances 7.55 12.43 11.52 20.49 Other Non Current Assets 1.40 1.60 2.66 4.39

Total Non-Current Assets 36.91 77.03 87.00 109.95 Current Assets

Currents Investments 59.78 45.02 48.66 50.22 Sundry Debtors 176.09 205.51 199.57 222.02 Cash and Bank 18.68 23.58 34.92 145.48 Other Current Assets 20.37 24.38 28.83 55.09 Short Term Loans and Advances 18.73 20.33 4.77 7.33

Total Current Assets 293.65 318.82 316.75 480.14

Net Current Assets 166.79 162.98 170.00 306.15

Total Current Assets 233.86 273.80 268.09 429.92 Total Assets 330.56 395.85 403.75 590.09

Consolidated Statement of Profit and Loss

(In Cr.)

DESCRIPTION Mar-15 Mar-16 Mar-17 Mar-18 TTM

Revenue from operation 308.5 346.8 427.1 512.4 600

Other Income 7.7 2.9 8.3 7.6 20.5

Total Revenue 316.2 349.7 435.4 520 620.5

Expenses

Employee benefits expense 143.2 183.2 210.1 248.9 278.9

Other expenses 107.8 123.9 146.8 166.0 196.6

Total Expense 251.2 307.1 356.9 414.9 475.5

EBITDA 73.0 42.9 78.6 105 144.9

Depreciation & amortization expenses

4.37

4.37

4.92

5.8

6.0

EBIT 68.5 38.5 73.7 99.2 138.9

Finance cost 1.82 3.49 5.26 5.2 8.7

Profit before tax 66.7 35.0 68.4 94.0 130.3

Tax expense 13.4 6.03 16.9 21.3 32.6

Profit after tax 53.3 29.0 51.4 72.7 97.7

EPS 10.0 5.24 8.07 10.74 14.39

Cash Flow Analysis (In Cr.)

DESCRIPTION Mar-15 Mar-16 Mar-17 Mar-18

Cash Flow from Operating Activities 9.01 11.13 35.91 60.24

Cash Flow from Investing Activities -8.93 -5.78 -3.57 -18.02

Cas Flow from Financing Activities -5.46 -0.48 -20.76 67.50

Free Cash Flow to Firm 2.54 -8.82 15.69 35.58

Financial Ratios

Particulars 2015

(Audited) 2016

(Audited) 2017

(Audited) 2018

(Audited)

(A) Growth Ratios (%)

Revenue 308.5 346.8 427.1 512.43

EBITDA 73.0 42.9 78.6 105

Net Profit 53.3 29.0 51.4 72.74

(B) Measures of Performance (%)

EBITDA Margin 21.47% 12.29% 18.38% 20.52%

Net Profit Margin 17.02% 8.28% 12.02% 14.22%

(C) As Percentage of Net Sales

Employee Expenses 46% 53% 49% 49%

Other Expenses 53% 36% 34% 32%

(D) Working Capital Ratios

Receivable Days 207 200 173 150

Payable Days 30 25 26 27

(E) Turnover Ratios (x)

Debtor Turnover 1.76 1.82 2.11 2.43

Sales/Working Capital 1.86 2.13 2.51 1.67

(F) Gearing Ratios

Current Ratio (x) 2.31 2.05 2.16 2.76

Debt/Equity (x) 0.22 0.26 0.29 0.16

(F) Return Ratios (%)

ROCE 27.7 14.5 24.3 25.0

ROE 27.6 14.2 22.3 22.5

ROA 15.9 7.91 12.8 14.7

(G) Per share Ratios

EPS (Rs.) 10.82 6.27 9.03 11.59

DPS (Rs.) 1.50 1.00 1.50 2.00

Dividend Payout (%) 15.01 19.07 18.59 18.63

(H) Valuation Ratios

P/E (x) 0.00 0.00 0.00 21.58

Global Peer Comparison

Newgen OpenText Appian

Revenue (5 Yr. CAGR) 19% 16% -

Operating Profit (5 Yr. CAGR) 17% 20% -

Net Profit (5 Yr. CAGR) 19% 10% -

Operating Margin (%) 19% 18% -20%

PAT Margin (%) 14% 8% -21%

ROA 21% 3% -

ROCE 25% 8% -44%

ROE 22% 7% -84%

Newgen has a no competitors in India, Appian and OpenText are its global peers.

View and Valuation

Newgen bottom line grew at a 5Y-CAGR of 19%, assuming the same will continue in the next year; PAT will be around Rs. 118cr. in FY2020. Assuming there is a moderate rerating in P/E from currently 22x to 23x, the projected Market Cap of the company would be Rs. 2714 crore. Thus, the price would be around Rs. 398, indicating a upside potential of 20%

Rationale behind the Target Price Valuation:-

Particulars (in Cr.)

Current Net Profit (TTM) A 99

5Y-CAGR B 19%

Projected Net Profit (A+B) C 118

Expected P/E D 23

Projected Market Cap (C*D) E 2714

Current Market Cap F 2268

Anticipated percentage increase (E/F) G 19.66%

We remain positive on the stock on the back of increasing Operating margins as guided by management at 25% over next 2 years which are currently at 21%.

Secondly, increasing share of revenue from Software as a Service (SaaS) business from 4.5% to 7-8%, which is high margin generating business.

Company has been increasing its focus on US markets which is the major market for Indian IT industry. The company has targeted 35-40% revenue from US market over the next 4-5 years.

Debtor days have been consistently reducing and management targets it to be at 120 days which is at par with industry debtor’s day.

Finally concluding with companies economic MOAT which is Low cost and short implementation cycle as compared to global peers would help it to increase its customer base and this will impact positively on top line and bottom line.

Source : Company’s Annual Reports, IP presentations, Proprietary Research, News, AceEquity, RHP & HDFC Securities Report

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