by In this article, we are going to do a Fundamental Analysis of Newgen Software.
Introduction
One of the most prominent trends in the 21st century is digitization. The world around us is transforming into a digital world. India is a leader in IT services and what started in the 1970s and 80s by Infosys, TCS and, Wipro has now become one of the biggest industries in India.
Creating a huge talent pool with growth opportunity technology is the future and as an investor, it is a key sector for investment. Now TCS invoices and Wipro are already the big fishes they’ve already given multi-bagger returns so many of you requested me to write an article on IT companies that can be the next Infosys TCS and generate a multi-bagger return.
In this post, I am going to analyze a relatively newer name in the world of Indian IT and Technology services it is Newgen software while some of you would not be aware of Newgen Software.
let me give you an idea recently Gartner released its magic quadrant report for content service platform and Newgen was recognized as a visionary if you are from an i.t background you would probably understand the importance of this report but if you are from a non-id background then let me help you understand the importance of this report.
Gartner magic quadrant is the gold standard report in the id software industry majority of global companies take recommendations from Gartner report before shortlisting a software product or service it is extremely difficult to get shortlisted in the Gartner analysis and NEWGEN has managed to be a visionary in that report that’s simply exceptional.
let’s start with understanding the company and the business of news and software its leadership, competitive strength competitors, key risk, future growth respect, and financials.
To understand if NEWGEN software is a fundamentally strong company or not then we will cover the valuation analysis to understand if it is worth investing in Newgen software at current levels or not but before we proceed I want to clarify that this article is only for educational purposes.
I don’t just look at what has happened in the past look at what can happen in the future no matter if the stock has given a thousand percent return in the past the question is can it still give better returns in the future.
Try to learn more about the business of the company that I present and not just focus on the buy price this article is only for long-term investors and not for traders.
Fundamental Analysis of Newgen Software
Fundamental Analysis of Newgen Software are as follows:
NEWGEN Software Business Model
let’s get started with our analysis so NEWGEN software is a low code software product company offering enterprise content management, business process management, and customer communication management platform that enables organizations to rapidly develop powerful applications as per their business need.
This includes managing digital content managing complex processes and workflows and managing outbound communication the company provides a low code flexible and cloud-ready platform that helps in rapidly building powerful applications now.
Let us try to understand a bit more about the business of Newgen.
Enterprise Content Management Software
- Its first business segment is enterprise content management software with this software enterprises can manage their end-to-end digital content and access the content across devices and channels.
- It also modernizes their old content management software with digital workspace so there are still a lot of businesses that have a huge amount of data in paper format or in old legacy software so NEWGEN helped them to transform and manage their entire content in digital form with easy access.
Business Process Management
- The second business segment is business process management.
- NEWGEN BPM platform help in optimization of business process using machine learning and data-driven insight generation model.
Customer Communication Management
- The third segment is customer communication management one of the ultimate goals of digitization is streamlining customer communication.
- This means delivering the right message in the right context at right time and through the right channel.
- Newgen Software customer communication management allows companies to deliver personalized content-rich communication while tapping into the various cross and upselling opportunities across touchpoints such as your email SMS web and print.
- It offers products and solutions across 17 industries and has been a preferred partner of some of the world-leading banks, insurance companies health care organization governments, telecom services shared services, and BPO’s.
Leadership
- If you look at the leadership Mr. Divakar Nikam is the co-founder-chairman and MD of Newgen.
- Mr. Nikam is also a founding member of Nasscom which is India’s I.T. industry association prior to joining NEWGEN.
- He founded soft tech and was associated with it for 12 years Mr. Divakar has more than 35 years of experience in the IT industry.
- He is an alumnus of the University of Allahabad, IIT Delhi, and IIT Madras Newton’s second co-founder is T.S. Vader Rajan prior to promoting Newgen.
- He promoted soft-tech private limited and was associated with it for 13 years.
- He is also has got more than 35 years of experience in the field of software designing and development.
- He did his engineering from in institute of science Bangalore and holds a master’s degree in computer science from IIT madras.
- The current market cap of newton software is around 3730 growth which makes it a small-cap company.
- Overall on the company, its business, and its leadership. I would rate new gen10 on 10.
Key Strength of the Company
Key Strengths of the Company are as follows:
Annuity Revenue Stream Company
- If you look at the key strength of the company.
- Its first point is an annuity revenue stream company.
- It has a large nut-based business where the company gets repeat business from existing customers.
- Around 56 Percent revenue of the company is based on the annuity model which provides predictable revenue.
Diversified Business
- The second strength is diversified business leveraging the latest technologies.
- NEWGEN products are built on the latest technologies of cloud platforms like AWS and AZURE.
- This provides flexibility scalability and security to the platform.
- Today Newgen has more than 550 active customers in 72 countries.
Innovation
- The third strength is innovation.
- NEWGEN’s strong focus on product innovation.
- This makes it one of the few software product organizations,
- Which has attracted multiple recognitions from leading advisory and research firms like your Gartner, Forester, etc.
- As of FY21 company has fired 44 patents out of which18 patents have been granted.
Domain Experience
- Its fourth strength is deep domain experience.
- The company has built a strong domain experience in 17 domains,
- With its pre-built accelerators for core domains like Banking,
- It has a digital account opening system retail and commercial lending system.
- In insurance, it has a customer acquisition system claim management system in government.
- It has an e-government office automation record management system etc.
Competitors of Newgen Software Technologies
- If you look at the competitors its competitors include foreign players like Microsoft, Halen, open texture group, IBM, Oracle, etc.
- We can’t compare NEWGEN with the traditional IT companies in India,
- Overall on competitive strength, I would rate it eight on ten.
Key Risk of Newgen Software
- If you look at the key risk company business depends largely upon the highly skilled technology professional.
- Its ability to hire and retain the employee any inability to maintain a skilled and motivated team of professionals can affect the business of the company.
Future Growth Prospect
- If you look at the future growth prospect the future is digital on top of that.
- The Covid Pandemic has reinforced the need for digitization of business including small and medium enterprises.
- As per the research report, the enterprise content management area has a market potential of 20 billion dollars by 2022.
- The business process management area has a market potential of 8 billion dollars by 2022.
- The customer communication management area has a market potential of 2 billion dollars by 2022.
- Since the companies product are built on a cloud platform it is highly scalable and the cloud-based platforms are growing significantly all over the world
- Newgen products are multilingual and hence it would help in expansion in other countries.
- Newgen is investing in the direct and indirect sales channels, professional services, customer support and, channel partners to expand its geographical footprints.
- Newgen is also planning to expand its product portfolio.
- It is constantly engaged in the enhancement of its R&D capability to include technologies like advanced analytics blockchain, robotic process automation, etc.
- Overall there is a bright growth prospect for Newgen and hence on future growth, I would rate it 10 on 10.
Revenue
- If you look at the revenue.
- NEWGEN revenue has consistently grown from 347 crores in FY16 to currently at 673 crores that’s a CAGR growth of 14.2 percent.
- Nutrient profits have grown from 28 crores in FY16 to currently at 126 crores that’s a cagr growth of 35 percent that’s a brilliant growth.
- Both Revenue and profit growth are looking great and on growth ratio, I would rate it 10 on 10.
Company Financials
Company Financials of Newgen are as follows:
Operating Margin
- If you look at the profitability its operating margin has significantly improved over the years the current.
- The operating margin is 29 percent although this high margin is also due to lower expenses due to lockdown.
ROE and ROCE
- If you look at the ROE and ROCE.
- The return on equity is 18.9.
- The latest ROCE is 27.3 which is very good.
- Hence on profitability, I would rate it nine on ten.
Debt to Equity Ratio
- The company is virtually debt-free.
- A recent debt to equity ratio of 0.03.
Reserves
- Its reserves have increased consistently from 166 crores to 596 crores in the last 5 years.
- It has a cash equivalent of around 242 crores.
Share Holding Pattern
- If you look at the shareholding pattern promoters hold 55.13 percent shareholding till August 31.
- FII’s have 20.5 percent shareholding.
- DII’s have 7.5 percent shareholding.
- FII’s has significantly increased the shareholding in the company.
- Recently there was an announcement that NEWGEN promoters have sold 10.57 stake in the company that even surges.
- The share price of the company as the shares were purchased by some top investment firms in the world.
- In fact, even MIT holds a shareholding in the company.
- MIT is the number one engineering institute in the world.
Valuations
- Newgen software recently had its IPO on January 18 at a price band of rupees 245.
- Since then it is made a high of 700+ and currently trading at a level of 550+.
- At the current price, it is trading at a PE ratio of 29 which looks like a little undervalued for a growth stock like Newgen.
- Its PEG ratio is 0.84 which suggests the share is undervalued.
- Although recently the share has rallied a lot in the long term, I think this IT stock has a great potential to generate a great return for shareholders.
Conclusion
- In this article, we discussed the fundamentals of Newgen software.
- Newgen Software is a small-cap software company with around a 3000 crores market cap.
- It is involved in the business of content management, business process management, and customer communication management.
- Its platform has been ranked into the visionary quadrant of gartner’s latest report on content management software.
- It has strong leadership with a focus on innovation and deep domain expertise, the future growth prospect of the companyare looking bright with more demand for digitization.
- The company productsare built on a cloud platform they are highly scalable.
- The financials of the company are looking solid with exceptional profit growth, very good profitability, and negligible debt levels.
- The valuation of the company is looking decent with a PE ratio of 29.
- It’s neither too high nor too low although the share has jumped recently in the long term.
- NEWGEN software is looking like a very good company for long-term wealth creation.
One should follow the Risk Management, Money Management, and Fear and Greed concept of the market to avoid big losses.
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