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ICICI Securities
Newgen Software (Buy)
CMP: ₹228.25
Target: ₹325
Newgen Software Technologies’ execution in 9MFY20 has been spot in-line with expectations as far as markets outside of India are concerned. Aggregate revenue (INR) from geographies excluding India has grown by 19 per cent in 9MFY20 with sluggishness in India Government and PSU banking ecosystems driving India revenues flattish in 9MFY20, which pulled overall companywide growth down to 12.7 per cent. Even in Q3FY20, geographies excluding India grew by 29.5 per cent y-o-y with a 13 per cent decline in India revenues pulling down overall growth to 15.2 per cent.
Though meaningful recovery in India seems unlikely in the near-term, pipeline for Q4 is still healthy at an aggregate level, which should enable mid-teens revenue growth in FY20. Business model continues to build better defensibility with annuity revenues being 58 per cent of total in 9MFY20 versus 52 per cent in 9MFY19.
We maintain ‘buy’ rating with an unchanged DCF based target price of ₹325.
The key risks to our call are: i) structural weakness in balance sheet metrics; ii) inability to expand presence in developed markets; and iii) faster transition to cloud/SaaS from on-prem in emerging markets.
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