Low-Code Shifts And Rising Competition Will Compress Profit Margins

Key Takeaways

• Accelerated client adoption of competing automation and low-code platforms threatens Newgen's market relevance and future growth opportunities.
  
• Overreliance on narrow sectors, intensifying competition, and talent shortages risk eroding margins and destabilizing recurring revenues.
  
• Heavy investment in AI, R&D, and specialized verticals drives innovation, recurring revenues, and market positioning, supporting margin expansion despite competitive pressures.

Catalysts

A software company, engages in the business of software product development in India, Europe, the Middle East, Africa, the Asia Pacific, Australia, and the United States.

• The rapid adoption of low-code/no-code and integrated hyperscaler platforms could lead many clients to bypass Newgen's traditional enterprise content management solutions, directly undermining future revenue growth by shrinking the company's addressable market and compressing deal values.
  
• Intensifying competition from global platform players like Salesforce, ServiceNow, Mendix, and OutSystems in Newgen's core geographies risks eroding pricing power, heightening customer churn, and putting sustained pressure on operating margins over the long term.
  
• Delays in large deal closures-especially in the banking, government, and Middle East verticals-expose an overreliance on a narrow set of sectors and products, creating unpredictable revenue trajectories and threatening the company's ability to maintain consistent earnings growth or hit historical growth rates.
  
• Persistent and potentially worsening talent shortages in global IT and increasing wage requirements are likely to drive up personnel costs faster than automation can offset, ultimately compressing net margins even if topline revenues hold steady.
  
• Accelerated client adoption of AI-driven hyperautomation solutions from larger, fully-integrated players could render Newgen's current offerings less relevant, sharply curtailing recurring annuity streams and implementation revenues while stalling future product-driven growth.

Newgen Software Technologies Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Newgen Software Technologies compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Newgen Software Technologies's revenue will grow by 14.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 21.3% today to 20.0% in 3 years time.
• The bearish analysts expect earnings to reach ₹4.5 billion (and earnings per share of ₹32.05) by about July 2028, up from ₹3.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 40.0x on those 2028 earnings, up from 39.3x today. This future PE is greater than the current PE for the IN Software industry at 38.5x.
• Analysts expect the number of shares outstanding to grow by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.03%, as per the Simply Wall St company report.

Newgen Software Technologies Future Earnings Per Share Growth

Risks

• Newgen is making significant investments in AI-driven products and solutions, embedding AI and generative AI into its platforms, which is leading to new use cases and greater customer interest. This AI focus could boost long-term revenue growth and margin expansion as automation and productivity enhancements take effect.
  
• The company's SaaS, ATS, and AMC revenue streams grew 19% year-over-year, indicating strong momentum in annuity and subscription revenues. This transition to recurring, cloud-based income could improve revenue visibility and support stable or rising operating margins over time.
  
• Newgen's healthy sales pipeline, especially for large deals, remains robust according to management, and decision-making delays are seen as temporary. A recovery in deal closures in the second half of the year could drive higher revenues and net income growth.
  
• The company continues to invest heavily in R&D (9% of revenue) and sales and marketing (26% of revenue), supporting product innovation and global expansion. Sustained investment in these areas enhances its competitive positioning and can lead to higher future revenue and improved margins.
  
• Despite increasing competition from global and local players, Newgen maintains strong vertical expertise in banking, insurance, and government. This specialization, combined with its track record and recent patent grants, positions Newgen to maintain or gain market share, preserving or increasing long-term profitability.

Valuation

• The assumed bearish price target for Newgen Software Technologies is ₹835.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Newgen Software Technologies's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1300.0, and the most bearish reporting a price target of just ₹835.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹22.4 billion, earnings will come to ₹4.5 billion, and it would be trading on a PE ratio of 40.0x, assuming you use a discount rate of 15.0%.
  
• Given the current share price of ₹883.2, the bearish analyst price target of ₹835.0 is 5.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.