Target: ₹440

CMP: ₹343.85

We initiate coverage on Newgen Software Technologies with a Buy rating and a target price of ₹440 (PE of 12 on FY25 EPS). Newgen has an integrated software business of content and process which distinguishes it from peers.

We have conservatively built 16 per cent CAGR revenue growth over FY22-25. Further, longer-term focus on developed markets and subscription revenue will result in lower DSO leading to better cash flow.

The company derives about 60 per cent revenue from annuity contracts and exposure to BFSI (70 per cent), which is relatively less marred by macros, providing revenue visibility. This places Newgen in a position to defend macro challenges and growth headwinds.

It has partnered with a few of the leading GSIs in order to drive revenue growth. The company aims to derive 20 per cent to 40 per cent of its overall revenues from this channel in the next five years. The focus on generating sustainable revenues will enable the company reduce the seasonality of business, ensure higher predictability of business and also help in dealing with uncertain macro environment.

Newgen’s focus on increasing subscription revenue and leveraging GSI network to drive growth are key long-term margin drivers. Hence we expect 16 per cent CAGR in profits over FY22-25.