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Strengthening partnerships remains the key catalyst

With better momentum in key markets such as USA (now the largest geography), Newgen Software plans to expand further in mature markets by deepening its relationship with global system integrators (GSI). With 40+ deals under consideration and a potential Yr1 revenue of Rs1.4bn, pipeline remains healthy. Newgen continues to invest aggressively across R&D, S&M and senior leadership personnel with these expenses aggregating to ~25% of revenues in FY21. However, we believe mid-teen growth for FY22E is contingent upon business situation improving in India and healthy deal conversions in H1FY22E. Further, we see a risk of potential EBITDA margin contraction by ~350bps in FY22E as some pre-covid costs return (e.g. wage hikes, lower utilisations, travel, etc.). Execution on deal conversions with GSIs is the re-rating catalyst in our view.

In-line performance

Overall revenue grew 5% YoY in Q4FY21. USA is now the key market for Newgen (31% of revenues). India and EMEA continue to remain weak and reported a YoY decline of 10% and 5%, respectively. Management expects demand uptick in India in H2FY22. The company signed 17 new logos in Q4 primarily on annuity-based model. SaaS-based revenues grew 30% with management expecting it to contribute 50% of revenues within the next three years (currently at 7%).

Maintain ADD:

: Increased focus of the company to gain new logos and a foothold in Fortune 2000 accounts with the help of GSIs should help Newgen in getting better visibly and acceptably within client ecosystem. Conversion of the same remains the key. We estimate a growth of 18% in FY22 (vs guidance of 15%). Key underpinnings of same include increased traction with GSIs and uptick in demand in key markets. Further, we expect margin to contract ~350bps as some pre-covid costs return (e.g. wage hikes, lower utilisations, travel, etc.). Considering the aforementioned, we estimate revenue and EPS at a CAGR of 18% and 10%, respectively over FY21-23E. We revise our EPS and TP estimates by ~18% as we rebase our revenue and expect a lower margin contraction than expected earlier. Maintain ADD with a revised target price of Rs400 (implying 17xFY23E EPS).

Valuation methodology and key risks

We maintain our ADD rating on Newgen with a revised DCF-based target price of Rs400/share (earlier: Rs335).

Key risks to our call:

i) Structural weakness in balance sheet metrics,

ii) inability to expand presence in developed markets,

iii) faster transition to cloud/SaaS from onpremise in emerging markets and

iv) material deterioration in DSO.

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