Detailed rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A1’ rating on the short-term bank facilities of Newgen Software Technologies Ltd (Newgen; part of the Newgen group). 

 

The rating continues to reflect the strong business and financial risk profiles of the group, with continued growth of 25-30% in the three fiscals through 2024 driven by continuous in-house research and development (R&D), new service offerings, penetration in new geographies and regular addition of customers. Operating income grew to Rs 1,244 crore in fiscal 2024 from Rs 974 crore in fiscal 2023 driven by longstanding relationships with clients (70-80% of revenue in fiscal 2024 came from existing customers while 20-30% was from new clients). In the first half of fiscal 2025, the company has achieved revenue of Rs 676 crore (Rs 545 crore in the first half of fiscal 2024) and is likely to grow at a healthy pace in the current fiscal. Focus on larger customers with bigger orders, continuous development and innovation in products and increasing overseas sales in new geographies will lead to revenue growth over the medium term. Earnings before interest, tax, depreciation and amortisation (Ebitda) remained healthy at Rs 292 crore due to improving revenue and addition of new customers. The Ebitda margin is expected to remain healthy at 22-24% over the medium term due to better absorption of fixed cost.

 

Networth was strong at Rs 1,220 crore as on March 31, 2024, compared with Rs 979 crore a year earlier. Total outside liabilities to tangible networth (TOLTNW) ratio is expected below 0.50 time over the medium term, in line with past trend. The group does not have any major capital expenditure (capex) plans over the medium term, and thus, the financial risk profile will likely remain stable.

 

The rating also reflects the group’s sound market position, well-established clientele, geographical diversification in revenue and healthy product diversity with regular investment in R&D, and an improvement in the financial risk profile. These strengths are partially offset by large fixed costs, susceptibility to employee attrition, working capital-intensive operations and exposure to fluctuations in foreign exchange (forex) rates.

Analytical approach

CRISIL Ratings has combined the business and financial risk profiles of Newgen and its 100% subsidiaries: Newgen Software Inc (NSI), Newgen Software Technologies Canada Ltd (NSTCL), Newgen Software technologies Pte Ltd (NSTPL), Newgen Software Technologies UK Ltd (Newgen UK), Newgen Software Technologies Pty Ltd (Newgen Australia), Newgen Computer Technologies Ltd (NCTL), Newgen Software Technologies LLC and Newgen Software Technologies Company Ltd. This is because all these entities, collectively referred to as the Newgen group, operate in the same industry and have operational and financial linkages.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key rating drivers and detailed description

Strengths:

• Established market position and well-established clientele: The group has a strong market position and longstanding relationship with customers. The promoters’ experience of over four decades in the internet software services industry and sound understanding of market dynamics, particularly in product and enterprise services, will continue to support the business. Healthy relationships with customers result in repeat orders from the US and Europe markets. The group has longstanding relationships with more than 540 customers in over 76 countries across various sectors. Its customers include established players in various industries such as banks, insurance firms, business process outsourcing and healthcare.

 

• Geographical diversification in revenue: The group has diversified geographical reach, with strong presence in more than 76 countries in fiscal 2024. The top 10 customers contributed 25-30% revenue in fiscal 2024 and export accounted for ~70%. Diversity in geographic reach and clientele should continue to support the business.

 

• Improving operating efficiency driven by investment in R&D and heathy product mix: The group has a diversified product basket with multiple services and product offerings mitigating the risk of technological obsolescence in a segment. The group, in operation for over three decades, is an established player in the market. Revenue and profitability improved to Rs 1,244 crore and 23.5% in fiscal 2024 and return on capital employed was heathy at 27.2%. With the continuous addition of new customers and increasing business from existing customers, the revenue and profitability are expected to grow at a healthy pace.

 

• Strengthening of the financial risk profile: Capital structure has been continuously improving due to modest reliance on external debt, yielding TOLTNW ratio of less than 0.5 time in the four fiscals ended March 31, 2024. Debt protection metrics were healthy, as reflected in interest coverage and net cash accrual to total debt ratios of 70 times and 111 times, respectively, in fiscal 2024.

 

Weaknesses:

• High fixed costs and susceptibility to employee attrition: The group has a high proportion of fixed overheads (employee cost and rentals), making it susceptible to the quantum of work received, and subsequently, the level of billing. Variation in operating margin depends on the duration, ticket size and nature of contracts awarded. Operations are also susceptible to employee attrition, although the group has maintained a low rate over the past few years by rewarding its employees with yearly increment and performance incentives. However, with increasing revenue, the absorption of employee cost has increased, leading to improved profitability.

 

• Working capital-intensive operations: Gross current assets (GCAs) were sizeable at 265 days as on March 31, 2024, driven by receivables of 130 days, with considerable receivables outstanding for more than six months. The large receivables are because of the long implementation phase and delayed payments from customers. The collection cycle is expected to improve as payments will be received in advance according to the current model. However, higher GCAs are also due to the cash and liquid funds maintained by the company.

 

• Vulnerability to fluctuations in forex rates: As majority of revenue comes from the international market, any sharp fluctuation in forex rates affects realisation and cash accrual. This exposes the operating margin to fluctuations in forex rates.

Liquidity: Strong

Liquidity will remain supported by the surplus in cash accrual, bank lines and liquid reserve. In the absence of debt obligation, expected cash accrual of Rs 240-280 crore per annum over the medium term will support liquidity. Bank limit utilisation averaged a low 28% for the 12 months through September 2024. Current ratio was healthy at 3.5 times as on March 31, 2024, and cash and bank balance as well as investments in liquid funds were Rs 727 crore as on Sep-24. Low gearing and moderate networth support financial flexibility.

Rating sensitivity factors

Upward factors:

• Revenue growth of over 20% and stable operating margin over 22% leading to higher cash accrual
• Maintenance of unencumbered liquidity of Rs 300 crore and low dividend pay-out even after diversion of surplus funds into organic or inorganic business expansion

 

Downward factors:

• Net receivables remaining above 140 days
• Revenue dropping by more than 25% or operating profitability declining by over 500 basis points resulting in lower cash accrual
• Large, debt-funded capex or acquisition or sizeable dividend pay-out weakening the liquidity

About the group

Incorporated in 1992 by Mr Diwakar Nigam and Mr T S Varadarajan, Newgen is an information technology (IT) product company, which provides solutions in enterprise content management, business process management and customer communications management platforms. Its customers are organisations belonging to sectors such as banking, telecommunication and insurance.

Key financial indicators (Consolidated)*

As on / for the period ended March 31		2024	2023
Operating income	Rs crore	1244	974.1
Reported profit after tax (PAT)	Rs crore	252	176.27
PAT margin	%	20.21	18.10
Adjusted debt / adjusted networth	Times	0.00	0.00
Interest coverage	Times	70.03	49.95

*CRISIL Ratings ADJUSTED FIGURES

Any other information: Not Applicable