Newgen Software Technologies

At the heart of digital transformation lies content management, and thanks to Newgen Software Technologies’ robust product line-up and investments in content management, process automation and customer communication with artificial intelligence in the cloud, it is strategically positioned to capitalise on this market opportunity[EasyDNNnews:PaidContentStart]

Newgen Software Technologies (NST) stands as the foremost provider of a comprehensive digital transformation platform, offering built-in features for process automation, content services and communication management. Across the world, prominent enterprises place their trust in the company’s industry-acclaimed low code application platform to create and launch intricate, content-focused and customer-engaging business applications in the cloud. Whether it’s streamlining on-boarding processes, handling service requests, managing lending and underwriting procedures, or addressing various use cases across several industries, NST empowers simplicity with swiftness and flexibility.

Their revenue model is characterised by recurring income streams, which include the following 

■ Subscription Revenue - This comprises subscription fees for licenses used on cloud-based platforms and on-premises subscriptions.

■ Annual Technical Support and Maintenance Revenue - This category involves charges for annual technical support and maintenance services, which encompass updates for licenses and installation.

■ Support Revenue - This segment encompasses charges for support services and development assistance.

■ Software Product Sales - This involves one-time upfront license fees for platform deployment onpremises.

Service Sales - Revenue is generated through milestonebased charges for implementation and development services, as well as charges for scanning services.

Sector Overview
The company’s primary target market can broadly be categorised into process-agnostic software, facilitating hyper automation, which includes low code application development, robotic process automation, business process automation, and the content services platform market. Newgen Software Technologies has further broadened its market scope by developing solution frameworks for specific verticals such as banking, government, PSU, BPO, IT, healthcare, and insurance, collectively referred to as the ‘Application PaaS’ market. The demand for digital transformation initiatives worldwide has steadily been increasing, aiming to establish resilient and future-ready organisations.

Based on estimates provided by Gartner, the global content services’ platform market was valued at approximately USD 7.6 billion in 2022, while the business process automation market was estimated at around USD 2.6 billion in the same year. The comprehensive market for process-agnostic software enabling hyper automation was estimated to be approximately USD 38.5 billion in 2022. Projections indicate that the content services’ platform market is expected to reach around USD 9.3 billion by 2026, while the business process automation market is forecasted to grow to approximately USD 3.3 billion by 2026. The all-encompassing hyper automation market is estimated to reach a substantial USD 65.4 billion by 2026.

Considering the swift embrace of digital transformation endeavours by the company’s existing and potential customer base, NST is poised to reap the rewards of the evolving trend and the associated business prospects. At the heart of digital transformation lies content management, and thanks to their robust product line-up and investments in content management, process automation and customer communication with artificial intelligence in the cloud, the company is strategically positioned to capitalise on this market opportunity. Furthermore, the importance of digital transformation initiatives has prompted the company to craft new offerings in this realm of opportunities.

Financial Overview
Looking at the consolidated Q2FY24 financial results of Newgen Software Technologies, the company has reported revenue of ₹293 crore which grew by 29.63 per cent from ₹226 crore in Q2FY23, while operating profit of the company surged by 50 per cent and stood at ₹57 crore as compared to ₹38 crore in Q2FY23. Similarly, the net profit of the company jumped by 60 per cent and reached ₹48 crore as against ₹30 crore in Q2FY23. On an annual consolidated basis, in FY23 the company reported revenue of ₹974 crore which grew by 25 per cent from ₹779 crore in FY22.

Meanwhile, the operating profit of the company surged by 8.7 per cent and stood at ₹212 crore as compared to ₹195 crore in FY22. Similarly, the net profit of the company jumped by 7.3 per cent and reached ₹176 crore as against ₹164 crore in FY22. The company has been able to grow its sales by 14 per cent (CAGR) over the past three years and its net profit has grown by 34 per cent (CAGR) for the same period. This certainly reflects the company’s ability to operate with a sound revenue model in return for the services and expertise it offers.

The annuity revenues comprise annual technical support, annual maintenance contracts, cloud, subscription license and support streams. The subscription revenues comprise annual technical and maintenance support along with cloud and subscription license revenue streams. The SaaS revenues comprise cloud and subscription license revenues. An examination of the key financial metrics of Newgen Software Technologies reveals that the company currently holds a market capitalisation of ₹8,058 crore. 

An assessment of liquidity and solvency ratios illustrates the company’s strong financial position with a current ratio of 3.56, an interest coverage ratio of 56.2 times and a debt-to-equity ratio of 0.04. In addition to this, NST demonstrates robust financial performance with a ROCE of 23.7 per cent and an ROE of 19.6 per cent. However, in terms of valuation metrics, the company’s PE ratio stands at 39.4 times, significantly higher than its median PE of 20.5 times. The company also exhibits an EV/EBITDA ratio of 27.3 and a PEG ratio of 2.04.

Risks and Concerns
The company confronts a range of challenges, which encompass uncertain global economic circumstances, shifts in fiscal, economic or political conditions within India, currencyrelated risks, heightened competition, evolving technologies, and regulatory changes within the industry it operates. Approximately 70 per cent of the company’s revenue originates from international markets, making it susceptible to unexpected exchange rate fluctuations that could potentially affect its revenue and profitability. To manage this potential risk, the company adheres to a clearly defined hedging policy.

The success of the company relies heavily on its team of highly skilled technology professionals and its capacity to recruit, engage, inspire, retain and educate these individuals. Any shortcomings in maintaining a skilled and motivated workforce or disruptions in the supply chain could have an impact on the business. As an organisation, there is a significant emphasis on nurturing the current workforce and attracting new talent through various HR policies and initiatives offered by NST. Additionally, the company has established a structured employee stock option and restricted stock units programme.

Outlook
Newgen Software Technologies has intensified efforts to expand their presence in the banking sector through the digital lending platform. They have secured substantial orders during the quarter, reflecting increased market activity in this segment across various geographic regions. Additionally, the trade finance sector is gaining momentum. The company’s growth was primarily driven by India (with a 38 per cent YoY increase), EMEA (up 34 per cent YoY) and the USA (with a 30 per cent YoY rise). Among verticals, the banking sector led the growth curve (54.8 per cent YoY), followed by healthcare (which increased by 29.7 per cent YoY).

The EBITDA margin expanded with 290 basis points on a YoYbasis, propelled by robust top-line growth. The management also highlighted that the order book is growing at a faster rate than revenue (higher than 30 per cent), driven by substantial wins in licensing deals and a healthy sales pipeline. NST is optimistic about the order book for the upcoming quarters, particularly in Q3 and Q4. The demand trend is positive, with expanding opportunities in the banking industry, especially in the emerging markets. Banking in these markets remains resilient, with strong growth in lending and client on-boarding sub-segments. 

The insurance sector is also experiencing high demand due to clients’ focus on digital transformation, resulting in larger deal sizes. Regionally, mid-size banks in the US are showing increased interest in the banking sector. The company has plans to target the eastern region of the US to drive growth. Healthy demand for digital lending is observed in the US, India, the Middle East and APAC, and both private and public sector banks are contributing to growth in India. The company’s days sales outstanding (DSO) stood at 105 days, with the company aiming to reduce it to 90 days within the next 1 – 1.5 years. 

Additionally, the partnership with Coforge is expected to boost growth in the insurance sector in mature markets, with the company securing two deals from GSI (Global System Integrators). Coforge is a global digital services and solutions provider that leverages emerging technologies and deep domain expertise to deliver real-world business impact for its clients. The firm has a presence in 21 countries with 26 delivery centres across nine countries. Looking ahead, the management outlook of Newgen Software Technologies for the second half (H2) is stronger than the first half (H1), and the company anticipates maintaining this momentum throughout H2. Hence, we recommend HOLD.

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