Newgen Software Technologies Ltd Stock Analysis November

November 18, 2024

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Newgen Software Technologies Ltd – Digital transformation platform provider

Founded in 1992 and based in New Delhi, Newgen Software Technologies Ltd. provides a unified digital transformation platform, NewgenONE. Catering to global B2B clients, its services streamline operations and enhance customer experiences. Revenue primarily comes from software licensing, with additional income from services and support. Newgen serves diverse sectors, including banking, insurance, healthcare, government, telecom, and BPOs. As of FY24, it has 4,400 employees and 500 active customers across 76 countries, including marquee clients in India, the USA, Canada, UAE, Saudi Arabia, the UK, and more.

Products and Services

Newgen Software offers a robust platform with key solutions including:

Contextual Content Services (ECM)
Intelligent Process Automation (BPM)
Omnichannel Customer Engagement (CCM)
Low-code Application Development
Artificial Intelligence and Data Science

Subsidiaries: As of FY24, the company has 8 wholly owned subsidiaries.

Growth Strategies

Diverse Revenue Portfolio: The company’s revenue spans 17 key sectors, with major contributions from Banking & Financial Services (74%), Insurance (14%), Government (4%), and others (9%).
Insurance Segment Growth: Aiming to increase the insurance segment to 40% of total revenue by focusing on product diversification and expanding its customer base in India, the Middle East, APAC, and the US.
Geographic Expansion: In FY24, Newgen opened new offices in New York and Saudi Arabia to support its growth strategy, particularly in the US and Middle Eastern markets.
Redefined Sales Strategy: The company has redefined its sales approach for the US market to further drive growth in its key sectors.
Order Book Expansion: Newgen consistently expands its order book, securing significant deals like a Rs.25 crore project from an insurance company and a Rs.16.9 crore deal in the domestic infrastructure financing sector.
International Contracts: Newgen secured international contracts, including a US$ 1.5 million order from a US-based financial institution and a similar contract with a financial leasing company in Saudi Arabia, along with an agreement with a financial institution in Singapore.

Financial Performance

Q2FY25

Revenue Growth: Revenue increased 23% to Rs.361 crore, up from Rs.293 crore in Q2FY24.
EBITDA Growth: EBITDA improved 46% to Rs.83 crore, with the margin rising from 19% to 23%.
Net Profit Increase: Net profit surged 46% to Rs.70 crore, with the margin rising from 16% to 19%.
Regional Performance: Strong YoY growth in EMEA (21%), India (19%), APAC (53%), and the USA (17%).
License Sales: License sales grew 52% during the quarter.
Operational Strength: Continued strong performance across key metrics, driving profitability.

FY24

Revenue Growth: The company generated Rs.1,244 crore in revenue, a 28% increase compared to FY23.
Operating Profit: Operating profit reached Rs.288 crore, up 36% YoY.
Net Profit: Net profit stood at Rs.252 crore, a 42% YoY increase.

Financial Performance (FY21-24)

Revenue & PAT Growth: The company achieved a 3-year CAGR of 23% in revenue and 26% in PAT (FY21-24).
ROE & ROCE: Average 3-year Return on Equity (ROE) and Return on Capital Employed (ROCE) stand at 22% and 26%, respectively.
Capital Structure: The company maintains a strong capital structure with a debt-to-equity ratio of 0.03.

Industry outlook

India is enhancing digital capabilities through deep-tech innovations and adopting emerging technologies like AI, cybersecurity, and IoT.
The IT sector is a key driver of economic growth, projected to reach US$ 350 billion by 2026, contributing 10% to the country’s GDP.
The industry is well-diversified across sectors such as BFSI, telecom, and retail.
India remains the leading offshoring destination for global IT firms.
The tech sector is on track to double its revenue, targeting US$ 500 billion by 2030.
The public cloud services market is expected to grow from US$ 6.2 billion in 2022 to US$ 17.8 billion by 2027, with a CAGR of 23.4%.

Growth Drivers

Union Budget 2024-25: Allocation of Rs.1,16,342 crore (US$ 13.98 billion) for the IT and telecom sector.
PLI Scheme – 2.0: Cabinet approved a Rs.17,000 crore (US$ 2.06 billion) outlay for IT Hardware.
IndiaAI Mission: Cabinet approved over Rs.10,300 crore (US$ 1.2 billion) for the IndiaAI Mission in March 2024, strengthening India’s AI ecosystem.

Competitive Advantage

Newgen Software Technologies Ltd. is generating stable returns from its capital, driven by consistent sales growth. The company boasts higher operating profit margins of 24%, compared to its competitors like Coforge Ltd. (15%) and Firstsource Solutions Ltd. (15%). This indicates a greater potential for margin-accretive profitability, positioning Newgen as a more efficient player in the industry.

Outlook

Newgen aims to achieve $500 million in revenue by FY27.
The company places a strong focus on research and development, having filed 45 patents, with 24 already granted.
While maintaining a strong presence in the banking sector, Newgen anticipates expanding its footprint in the insurance sector.
With a robust market position, expanding order book, and a focus on diverse verticals and geographies, the company is consistently delivering margin-enhancing performance, a trend expected to continue.

Valuation

Newgen’s strong business model, focus on diverse verticals, and expansion into mature markets are expected to drive improved operational performance. We recommend a BUY rating for the stock with a target price (TP) of Rs. 1,453, based on a 39x FY26E EPS.

Risks

Forex Risk: With significant operations in foreign markets, Newgen is exposed to forex risk. Unforeseen fluctuations in the forex market could adversely affect the company’s financial performance.
Macroeconomic Challenges: Tighter monetary and fiscal policies, along with recessionary conditions in key markets, may slow down the company’s ability to secure new deals.

Note: Please note that this is not a recommendation and is intended only for educational purposes. So, kindly consult your financial advisor before investing.