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Newgen Software Technologies IPO

Apurva Joshi
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3.8

IPO Rating – 43 (Risky)*

About the Issue

Newgen Software Technologies is floating an IPO which opens for subscription from January 16 to 18, 2018. Through this issue company will raise Rs. 424 crore consisting of fresh issue of Rs. 95 crores and Offer for Sale (OFS) of 1,34,53,932 shares. The face value is Rs. 10 per equity share. The lot size is of 61 shares and the price band for the same is Rs. 240-245 per equity share. The company will get listed on both BSE and NSE.

Purpose of the issue

The Net Proceeds of the Fresh Issue will be utilised towards –

- Purchase and furnishing of office premises near Noida-Greater Noida Expressway, Uttar Pradesh

- General corporate purposes.

In OFS, the Company will not receive any proceeds from the offer as all the proceeds will be received by the selling shareholders.

Promoters and Promoter Group’s shareholding constitute 70.27 per cent of the company’s pre-offer paid-up equity share capital. None of the promoters are selling their stake through the issue. 

Company Background

Newgen Software Technologies is a software products company that offers a platform enabling organisations to rapidly develop powerful applications addressing their strategic business needs. Its platform comprises of Enterprise Content Management (ECM), Business Process Management (BPM) and Customer Communication Management (CCM).

The company has multiple revenue streams that include Sale of software products: one-time upfront license fees in relation to the platform deployed on-premise (27% of total revenue in FY17), Annuity based revenue from: 1) SaaS: subscription fees for licenses in relation to platform deployed on cloud, 2) ATS/AMC: charges for annual technical support and maintenance (including updates) of licences and installation, 3) Support: charges for support and development services (40% of total revenue in FY17) and Sale of services: milestone-based charges for implementation and development, and charges for scanning services (33% of total revenue in FY17).

The direct sales are made by the company in India and its subsidiaries located in the US, UK, Singapore and Canada, through the sales and marketing teams. As of September 30, 2017, it had more than 300 channel partners, globally. It sells the software through licenses and subscriptions and intends to grow the revenue both by adding new customers and by increasing the number of users at existing customer organisations. As of September 30, 2017, it had over 450 active customers (invoiced in the last 12 months) in over 60 countries and applications were built in 17 different verticals.

Some of the key active customers include Trust Company of America, Mercantile Bank, ICICI Bank, Trafigura, Bajaj Electricals, United Arab Bank, National Commercial Bank Jamaica, Axis Bank, Yes Bank, Kotak Mahindra Bank, Bank Islam Brunei Darussalam, Philippines Resource Saving Bank, ICICI Prudential Life Insurance, Reliance General Insurance, Max Life Insurance, Strides Shasun and Shriram Transport Finance. Repeat customers accounted for 81.5% of its H1FY18 revenues. 

Financial Performance

 

Company’s revenue, EBITDA and PAT have grown at a CAGR of 20.5, 11.5 and 9.1 per cent respectively over FY13-17. Although revenue is growing in double digits, profits are declining, and margins have come down to ~12 per cent in FY17 from 18 per cent in FY13. Growth and profitability in FY16 was impacted due to oil crisis in Middle East and some operational investments in US. 

Valuation

On the upper price band of Rs. 245 with EPS of 10.11 as of FY17, company’s P/E works out at 24.2x. Some of the listed ace software companies have P/E in the range of 17x to 21x. The industry’s average P/E is around 19.1x. Considering this, it can be seen that the company is over-valued. 

Our View

Company is focusing on expanding its business base on the geographical front. Its spending on R&D is increasing to bring in advanced technology. But, on financial front, the company’s profitability is declining, and margins are also low. Valuation is also not so attractive. The shareholders which are selling their stake under OFS are selling full stake which shows that they do not see further growth in business. Considering these factors, issue seems to be risky and investors may not gain much from this issue. Thus, investors can avoid this IPO.


*40 or lower – Avoid Investment, 41 to 45 – Risky, 46 to 50 – Invest with limited exposure, 51 to 55 – Investment recommended, 56 & above – Excellent Investment

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