Published on 12/01/2018 5:45:04 PM | Source: Choice Broking Pvt Ltd
IPO Update Newgen Software Technologies Ltd - Choice Broking
Salient features of the IPO:
• Newgen Software Technologies Ltd. (NSTL), headquarter in Noida, is a software product company providing a platform that enables organisations to rapidly develop powerful applications and to drive digital transformation and competitive differentiation.
• Customers use NSTL’s platform to rapidly design, build and implement enterprise-grade custom applications through the company’s intuitive, visual interface with minimal coding.
Valuation : At the higher price band of Rs245, NSTL’s share is available at P/E multiple of 32.4x (to its restated FY17 EPS of Rs7.6). There is no listed company in India having a similar business model.
Below are few key observations of the issue:
• NSTL is a software product company serving clients spread across sectors including banking, government/PSUs, BPO/IT, insurance and healthcare through three products platform such as 1) Enterprise Content Management (ECM), 2) Business Process Management (BPM) and 3) Customer Communication Management (CCM). By the end of H1FY18, the company has 450 active customers in over 60 countries, however it garners ~40% of business from India, 27% from US and 26% from Europe, Middle East and Africa.
• The company has diversified revenue streams as it generates ~25% of revenue from sale of software products, while annuity based revenue and sale of services accounts for 40% and ~35 of income. Around 50% of business comes from the banking sector followed by Govt/PSUs at 18% and BPO/IT at 12% by FY17.
• IPO represents OFS of Rs4,246.2 mn providing an exit to 4 PE players namely Ascent Capital, IDGVI, Pandara Trust and SAP V holding 20.6% stake which invested in the company four years ago. At the demanding valuation of Rs16,962.7, these player have made profit of over 150%.
• Operating revenue during FY13-FY17 grew at a CAGR of 20.7% while EBIDTA at much lower pace at 11.5% indicating falling margins due to the above 20% growth in employee and other operating expenses during the same period. NPM of the company reduced to 12.3% in FY17 v/s 18.4% in FY13. Further, the business is very sensitive to global macro event as in FY16, revenue growth reduced to 12.4% and NPM squeezed to 8% due to Middle East crises. Prevailing Middle East tension also impacted the business as during the first half of current fiscal, the company reported PAT at Rs58.4 mn which is only 11% of the FY17 PAT.
• Receivable days of company has been hovering over 6 months during the past five fiscals which is very high compared to 2-3 months of domestic software companies, this was despite the low business form Govt (~11% of revenue). Sluggish receivable collection ability impacted operating cash flow (OCF) margin which remained at average 6.6% during FY13-FY17 v/s double digit of domestic software players.
• Issue is aggressively priced as the company is demanding valuation of Rs16,962.7 mn valued at P/E at 32.4 (x) to FY17 restated EPS. As per the management, there is no listed peer in domestic market with the similar business model. However if we consider IBM, which the management mentioned a peer on global level, is trading at P/E multiple of 14(x). Considering domestic software companies as proxy peer, NSTL’s valuation at P/E at 32.4 (x) is premium to peer average P/E of 20(x). During H1FY18, NSTL’s PAT at Rs58.4 mn is only 11% of the FY17 PAT with post issue EPS of Rs1.7. As per the management, the company generates 60% of the business in second half as clients decide IT investment based on year end budget. Considering this we estimate FY18E EPS at 3.6 and thereby demanding valuation soars to P/E of 68 (x).
• Given the high sensitivity of business to global macro events, repellent receivable policy, completely exits of PE players and high demanding valuation, we are of the view that the issue is aggressively priced leaving no space for further upside. Thus we assign ‘Avoid’ rating to the issue.
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