Edelweiss Broking Ltd, a brokerage firm, has issued a buy call on Newgen Software Technologies Ltd's stock. The brokerage has set a target price of Rs. 900, implying that the stock would rise by 49% from its current market price of Rs. 604.50 as of 3:30 p.m. IST on January 20. The stock, however, was trading at a market price of Rs. 626 at the time of the brokerage's buy call. The stock price of this IT company has risen from Rs 299.30 to Rs 604.50 as of now in the last year. That indicates that in the past year, this stock has returned 101.97 percent to its shareholders.
Investment rationale for Newgen Software Technologies Ltd according to Edelweiss
- Revenue was INR 2,025 mn , up 9%/9% QoQ/YoY, vs edelweiss est of USD 2,170 mn, 7% below est. EBITDA (earnings before interest, taxes, depreciation, and amortization) margin came at 29% up 350 bps Quarter on quarter (QoQ) and but below our est of 32%. Profit After Tax (PAT) came at INR 478 mn, up 28% QoQ, with PAT margins at 24%. Days Sales Outstanding (DSO) days rose marginally QoQ from 87 days inQ2FY22 to 90 days in Q3FY22. - We expect it to record a 22% compound annual growth rate (CAGR) in revenues and 24% in earnings over FY21- 24E.
- India (30% of topline) has recorded second consecutive quarter of double digit growth, growing 13% QoQ to INR 608 mn. However new deal wins were muted from the geography due to lower government spending and slow economic recovery. However, sales from existing accounts remained robust, driving growth in Q3FY22.
- Newgen has won 17 new logos in Q3FY22 and 37 in 9MFY22. Substantial portion of these new deal wins have come from mature markets, in line with the management's strategy of higher exposure to US, Europe, Australia etc. This shall lead to a higher contribution to revenue from these geographies in the next 2-3 quarters.
- There is a cost pressure on the industry due to supply side shortage and we shall see increased costs in Q4FY22 owing to wage hikes and increments. Having said that, EBITDA margins are expected to remain within the guidance range of 23.5- 25%.
Buy With A Target Price of INR 900
Edelweiss Broking has said in a report that "At CMP of INR626, the stock is valued at 28x FY22E EPS and 22x FY23E EPS. Based on the strong demand for digital transformation and the company's transition-related initiatives - diversifying the sales channel and pricing model (towards Saas/subscription), and foraying into developed markets (the US, the UK and Australia) - we expect it to record 22% CAGR in revenues and 24% in earnings over FY21-24E. We, therefore, maintain our 'BUY' rating with a target price of INR900."
The above stock has been picked from the brokerage report of Edelweiss Broking. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.