Buy Newgen Software Technologies; target of Rs 225: ICICI Securities

ICICI Securities research report on Newgen Software Technologies

Business model of Newgen Software lends itself to higher volatility given 1) greater reliance on license sales (and especially new logo acquisition within that) which are transactional in nature, and 2) second half heavy revenue recognition which drives a bigger hit to EBITDA if revenue falls short of expectations since cost increases and investments are set at the start of the year (less time available to calibrate cost). However, costs do get calibrated eventually in-line with lower revenue levels driving profitability back to normalised levels. We would expect a similar template to manifest in FY21 with absolute EBIT expected to increase by >30% even as we expect revenues to decline (conservatively) by 5% (which will be in-line with rest of our IT Services coverage). Q1 is the smallest quarter for Newgen, which limits the impact of Covid-19 on full year FY21 financials.

Outlook

Newgen is trading at 9.2x FY22E EPS (on conservative estimates) for medium-term topline growth potential of mid to high teens. Maintain high conviction BUY with a target price of Rs225.

Newgen Software Technologies 01062020

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