Edelweiss Research Recommends 'Buy' This Smallcap IT-Software Stock For 73% Potential Upside

Edelweiss Research in its report on Newgen Software Technologies limited published on June 21, 2022, has recommended 'buy' the stocks of the company for a target price of Rs 610/- apiece. According to the brokerage's estimated target price, the stock of the company has the potential to gain 73% in 12 months if the shares of the company are purchased at the Current Market Price.

Newgen Software Technologies is an IT-Software small-cap company with a market capitalization of Rs 2,470 crore. It has reported revenue of Rs 188 cr, -18.8%/+17.8% QoQ/YoY. The company recorded 6 new logos in Q1FY23 including 2 logos from the Americas region.

Stock Outlook

Newgen Software Technologies' current share price is Rs 353.15 apiece after closing on 21 July 2022. The 52-week low level was recorded on 21 June 2022 at Rs 323.75 apiece and the 52-week high level was recorded on 20 July 2021 at Rs 700 apiece. Currently, it is trading at Rs 29.4 below its 52 week low-level record last month.

Its ROE is 20.23. PE ratio is 15.05.PB ratio is 3.05. Its face value is Rs 10. TTM EPS is Rs 23.47. The dividend yield is 1.27.
Newgen Software Technologies shares in last 1 week fallen 1.81%, whereas in last 1 month it gained 2.81%. In the last 1 year, its share witnessed a massive fall of 46.86%. However, in the last 3 years, it has gained 21.99%. The stock was listed on the stock exchange on January 29, 2018, since its listing it has gained 39.92%.

Business Updates

Revenue came in at Rs 188 cr, -18.8%/+17.8% QoQ/YoY, vs edelweiss est of Rs 185 cr. EBIT margin came at 7.3% against our est of 6.8% vs 11.7% in Q1FY22. PAT came at Rs 19.2 cr, -11% YoY with PAT margins at 24.8%. The company recorded 6 new logos in Q1FY23 including 2 logos from Americas region. Subscription / annuity revenues grew 33%/25% YoY to Rs 714/1314 mn. "We expect the company to deliver 18%/19% revenues/PAT CAGR over FY21-24E," the brokerage said.

New Logos wins sluggish in Q1FY23, to gain momentum in subsequent quarters

Newgen signed six new logos in Q1FY23 with two of them coming from the Americas geography. While this seems to be a relatively softer quarter in terms of new logo signings given that the company signs ~50-60 new logos annually on an average, the management has clarified that they have consciously decided to step away from some channels which generated smaller ticket, non-repetitive sales in favour of other channels which generate larger annuity deals. This has led to the company losing out on a few deals, however it is in line with the management's attempt to focus on larger annuity deals.

Margins to normalise going forward, will expand once GSI sales kick in

EBIT margin came at 7.3% against our est of 6.8% vs 11.7% in Q1FY22. Structurally, once revenues from the GSI channel start flowing in, the management expects margins to improve as it will only be involved in selling its product which is a high margin business and not participate in its integration (to be taken up by the GSI partner) which is a lower margin business, thereby expanding the overall margins.

US revenues seem to have bottomed out as management pursues large annuity deals

Revenues from the US saw a 19% dip YoY in Q1FY23, the management remains confident of growth going forward. With the company undergoing client optimization in the US, the management remains confident of growth in the geography going forward as almost all the revenues currently in the geography are contributed by annuity customers and all the incremental revenue (from GSI or otherwise) will also be annuity based, leading to a more consistent and predictable topline. While momentum has been lacking on the GSI front, the management expects to sign ~15 deals and generate cashflow via the GSI channel in FY23 given that the funnel remains strong with ~79 deals in the pipeline.

Brokerage Suggests Buy for Target Price of Rs 610

The brokerage in its report said, "Newgen beat our growth and profitability est in 1QFY23 quarter with the management maintaining its guidance of 23-25% EBITDA margin and ~19% PAT margin for FY23 and 20% revenue growth ex of GSI channel."

They added, "We believe Newgen Software will record 18% CAGR in revenues and 19% in PAT over FY21-24E. While we remain positive on the stock as other geographies (especially India, EMEA) have compensated for the US drag, we have revised our target P/E multiple to 20x FY24E EPS on account of delay in the GSI channel and underperformance of US geography. We believe, client tail optimization is mostly done in the US, which is likely to lead to stability and some growth recovery going ahead. We maintain our 'BUY' rating with a target price of INR610 using 20x FY24 EPS estimate of Rs30.5."

Disclaimer

The stock has been picked from the brokerage report of Edelweiss Research. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.