Newgen Software Technologies - Incremental growth hinges on travel - ICICI Securities

As anticipated, Newgen reported flat revenues in 9MFY21 with significant margin improvement (from 8.1% in 9MFY20 to 23.4% in 9MFY21). US/APAC quarterly revenues grew 26%/15% YoY with the company reporting 11 new logo wins. Newgen continues to invest aggressively across R&D, S&M and senior leadership personnel with expenses aggregating to ~23% of revenues in Q3. Company hinted at improving demand environment across key industry segments. However, we believe mid-teen growth expectation for FY22E is contingent upon travel opening up and deal conversions happening in Q4FY21E and Q1FY22E. Further, we see a risk of potential margin contraction by ~550bps in FY22E as some of the reined-in costs return (e.g. wage hikes, lower utilisations, S&M investments, travel, etc.). Post a ~40% rally over the previous three months (vs 23% on Nifty IT), we downgrade the stock to ADD (from Buy) given: 1) volatility in deal closures, and 2) dependence on travel to acquire new logos.

- Revenues in line with a meaningful margin surprise. Overall revenues remained flat at 0.7% YoY in Q3FY21 with annuity-based revenues declining 3% due to change in mix of support revenues from onsite to offshore. Margins surprised on the positive side with margins expanding to 23.4% in 9MFY21 from 8.1% in 9MFY20 primarily due to savings in employee costs, lower travel expenses and lower provisioning in Q3. As management alluded to improved deal wins and continuation of cost-saving measures in Q4, we now expect FY21E revenue growth to be at ~1.5% with margins at 25.5% (earlier 20%).

- Downgrade to ADD: Newgen's strong presence and positioning (rated well by industry advisors) in the high-growth markets of BPM and low-code application development should boost earnings going forward. In addition to client mining, a meaningful part of growth comes from acquiring new customers (~15% of revenues came from new clients in FY18-FY20). Typically, new logo acquisitions require sales and delivery to travel to client location for deal conversion. As the Covid-induced lockdown remains a key risk, deal closures might get delayed if freeze in travel continues. New deal wins will be key for further rerating in our opinion. Considering the aforementioned risks and ~40% return in past three months, we downgrade the stock to ADD.

Shares of Newgen Software Technologies Ltd was last trading in BSE at Rs.316.9 as compared to the previous close of Rs. 307.9. The total number of shares traded during the day was 125117 in over 4823 trades.

The stock hit an intraday high of Rs. 332.85 and intraday low of 305.9. The net turnover during the day was Rs. 40148354.

Source : Equity Bulls

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