Investments In AI Will Strengthen Future Offerings In Banking And Insurance

Key Takeaways

• Newgen Software's focus on AI and entry into new verticals drive revenue growth and enhance customer satisfaction.
  
• Strategic expansion in mature markets and R&D investments boost innovation, market share, and long-term earnings visibility.
  
• Delays in large projects, shift to smaller deals, and reliance on outdated models threaten revenue growth and margin stability.

Catalysts

A software company, provides software products and solutions in India, Europe, the Middle East, Africa, the Asia Pacific, Australia, and the United States.

• Newgen Software's strong focus on AI and machine learning capabilities, particularly through their AI-enabled products and solutions in key sectors like banking and insurance, is likely to drive future revenue growth by enhancing product offerings and customer satisfaction.
  
• The company's significant investments in R&D (9% of revenues) to build on their low-code platforms and expand into new technology areas positions them well to improve net margins over time as they streamline operations and innovate faster than competitors.
  
• Their strategic expansion in mature markets, particularly in the U.S., coupled with efforts to revamp sales teams and refine brand positioning, indicates potential for substantial future revenue growth and increased market share.
  
• The longer execution cycle for large-scale projects could lead to a more stable and predictable revenue stream in the future, improving earnings visibility and potentially strengthening net margins as these projects come to fruition.
  
• The addition of new client logos and entry into new verticals, such as insurance and government, combined with increased deal volume, suggests strong future earnings growth as these relationships stabilize and mature.

Newgen Software Technologies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Newgen Software Technologies's revenue will grow by 23.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 21.8% today to 20.4% in 3 years time.
• Analysts expect earnings to reach ₹5.5 billion (and earnings per share of ₹38.96) by about January 2028, up from ₹3.1 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 57.6x on those 2028 earnings, up from 48.9x today. This future PE is greater than the current PE for the IN Software industry at 35.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.86%, as per the Simply Wall St company report.

Newgen Software Technologies Future Earnings Per Share Growth

Risks

• The complexity and longer execution cycles of larger projects, particularly in certain markets like India, are delaying the realization of implementation revenues and impacting related downstream revenues such as annual technical support (ATS) and support revenues. This could impact future revenue growth and earnings.
  
• Variability in deal size, particularly a shift to smaller deals with new-generation non-banking financial companies (NBFCs), may not be sufficient to maintain the high growth seen in previous years from Tier 1 accounts, potentially affecting future revenues and net margins.
  
• Challenges in client transformation and integration for large projects could lead to implementation delays and project cost overruns, potentially impacting net margins and earnings due to increased resourcing requirements.
  
• Potential slowdown or moderation in core markets such as India and EMEA, alongside dependencies on mature markets for future growth, pose risks to maintaining a consistent revenue growth trajectory.
  
• Dependency on perpetual license models may pose risk due to market trends shifting towards subscription-based models, potentially affecting long-term revenue visibility and stability in earnings.

Valuation

• The analysts have a consensus price target of ₹1521.0 for Newgen Software Technologies based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1700.0, and the most bearish reporting a price target of just ₹1240.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹26.9 billion, earnings will come to ₹5.5 billion, and it would be trading on a PE ratio of 57.6x, assuming you use a discount rate of 13.9%.
• Given the current share price of ₹1081.75, the analyst's price target of ₹1521.0 is 28.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.