Newgen Software Technologies - Performing well; continues to invest in R&D, S&M - ICICI Securities

We reiterate our BUY rating on Newgen Software with a revised DCF-based target price of Rs250. Revenues were flat on YoY basis with margins improving 520bps to 7.4% in Q1FY21. Revenues from US grew by 36% YoY with key impetus coming from deployment under the Paycheck Protection Program (PPP), which also helped the company win new logos. (Growth ex-PPP was 16-18% YoY in US). Annuity-based offerings gained traction and grew 11% YoY and comprise 66% of revenues (Q1FY20-60%). Newgen won 22 new logos in Q1 with the company targeting 20-25 new customers in US ex-PPP in FY21. Newgen continues to invest in business across R&D and S&M with expenses in aggregate forming 30% of Q1 revenues. Though net DSO increased by 10 days to 122 due to some challenges in collections, the company expects DSO days to gradually come down.

- Strength in annuity-based revenue helps in stabilising revenue profile. Overall revenue grew by 0.9% YoY in Q1FY21; however, annuity-based revenue increased 11% driven by increased traction in AMC and SaaS offerings. SaaS offerings grew 30% YoY primarily as the company was able to deploy cloud-based solution remotely.

- Banking and insurance key drivers of growth: Banking and insurance revenues grew by 12% YoY and 39% YoY in INR terms, respectively. BFSI now forms 63% of revenues (Q1FY20-56%). We expect banking to continue being a revenue driver in the rest of FY21 as well, helped by the company's PPP-based offering and winning of new logos in BFSI space. (Newgen won 15 new logos in American region in banking and credit union space in Q1FY21).

- We expect EBIT to grow >30% in FY21. Q1FY21 EBIT margin improved 520bps to 7.4% helped by multiple cost optimisation measures such as rationalisation of pay and lower travel cost (9.6% of revenues in FY20). We expect these measures to continue driving margin accretion in the rest of the year as well.

- Maintain BUY: Continued focus of the company to gain new logos, credence of PPP offerings and push to gain a foothold in Fortune 2000 accounts vide help of GSIs should help Newgen in getting better visibly and acceptably within client ecosystem, though initially direct monetisation of these measures will be limited. The company is seeing deferment in new business due to delay in closures; however, mining of existing client base is more resilient considering Newgen is already within the client ecosystem. Taking cognisance of above, we conservatively estimate a revenue decline of 5% in FY21. Our revenue estimate for FY21 of Rs6.28bn is only around Rs850mn higher than that with Rs850mn to be derived as new business from existing accounts as well as new logos. New logos have contributed revenue in the range of Rs1.1-1.4bn in the past three years. With cost optimisation measures in place, Newgen's EBIT should improve by >31%. We expect revenue growth to normalise to 15-20% level from FY22. Maintain BUY.

Shares of Newgen Software Technologies Ltd was last trading in BSE at Rs.194.05 as compared to the previous close of Rs. 181.25. The total number of shares traded during the day was 118743 in over 5545 trades.

The stock hit an intraday high of Rs. 215.95 and intraday low of 177.5. The net turnover during the day was Rs. 24098849.

Source : Equity Bulls

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