Newgen - Large Exposure To Digitalisation Of EM Banks Providing Strong Growth Visibility: ICICI Securities

ICICI Securities Report

We re-initiate coverage on Newgen Software Technologies Ltd. with a 'Buy' rating and 12-month target price of Rs 797, implying 19% potential upside.

Newgen, with annual revenue of $121 million in FY23, is a software product company with most of its revenue derived from low code business process automation, enterprise content management and customer communication management.

These three core products help digitise any content-driven process – such as account opening, loan origination, claims management, inward or outward remittances in trade finance or bank guarantees, etc.

India, Europe, the Middle East and Africa and Asia Pacific together account for 75% of Newgen’s annual revenue as FY23, almost same as the banking, finanical services and insurance vertical.

Valuation:

Newgen is currently trading at 18.4 times FY25E earnings per share, closer to its last five-year average of 16.2 times, despite having a stronger earnings per share growth outlook (EPS compound annual growth rate was at 18% over FY21-FY23 versus expected 23% over FY23-FY26E).

Due to strong 23% EPS CAGR expected by us for Newgen over FY23-FY26E, we are valuing the stock at 23 times Q5-Q8 EPS of Rs 35, implying one time price/earnings to growth ratio, much lower than that for the Indian IT services sector, currently trading at 1.6 times PEG with much lower EPS growth outlook. Our 12-month target price of Rs 797 implies 19% potential upside.

Key risks:

1. Rapid technological changes and need to constantly innovate,

2. high competition particularly with large consolidated players like IBM, Microsoft and Google in the ECM space and Microsoft, Salesforce, ServiceNow, Oracle in Low Code BPM space,

3. adverse macro,

4. declining oil prices leading to profitability challenges for firms based in the Middle East (contributing 32% of Newgen’s FY23 revenue),

5. high vertical concentration, particularly banking with ~65% of overall revenue,

6. inability to scale up GSI partnership and hence deeper penetration in mature markets.

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