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Wait for growth from GSIs elongated

Newgen Software has reported robust growth of ~9% YoY in Q3FY22 backed by strong performance in the EMEA (+20% YoY) / APAC (+26% YoY) region. It reported an impressive 17 new logo wins during the quarter. Strong growth of +20% YoY in subscription revenue was a key positive while SaaS revenue posted muted growth due to client-related adjustments. Newgen continues to invest aggressively across R&D and S&M with expenses aggregating ~30% of revenues in Q3FY22. Management commentary hinted at robust demand environment and healthy pipeline, but some delay in generating revenues from its GSI partnerships. We believe mid-teen growth for FY22E is contingent upon continued performance in key markets and travel opening up. Revenues generated through GSI partnerships over the coming quarters is key to watch. Considering the aforementioned, our estimates remain largely unchanged with revenue and EPS CAGR of ~21% over FY22-24E. Maintain ADD with revised target price of Rs700 (based on 25x FY24E EPS).

* Robust revenue growth performance. Newgen reported robust growth of 9% YoY during the quarter. Growth was backed by strong traction in EMEA/ APAC. USA remained muted due to impact of one-offs present in Q3FY21. In terms of verticals, while BFSI, government/PSUs and BPO/IT grew YoY, insurance and healthcare declined.

Annuity-based revenues grew 11% YoY largely due to strong growth in subscription revenue (+20% YoY). SaaS revenue posted muted growth due to client-related adjustments.

* Acquisition of Number Theory Software Pvt. Ltd. Newgen acquired Number Theory, an AI/ML data science platform company for a consideration of approx. Rs70mn. The acquisition complements Newgen’s low code approach and extends the same to the areas of data sciences, thereby, offering new revenue opportunity along with larger wallet share from existing enterprise customers.

* 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 visibility and acceptably within client ecosystem. Conversion of the same remains the key. Considering the aforementioned, we estimate revenue and EPS CAGR of ~21% over FY22-24E. Maintain ADD with revised target price of Rs700 (based on 25x FY24E EPS).

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