IPO watch: Newgen asking a bit too much, can be avoided

ET Intelligence Group: Delhi-based Newgen Software Technologies will raise funds from the primary equity market mainly to offer exit to private equity investors. It will also use Rs 84.3 crore from the IPO proceeds to purchase and furnish office premises. While the company has some of the marquee customers in India and abroad, the IPO looks aggressively priced considering the smaller size of operations, longer working capital cycle, and intense competition from large global companies. This may prompt investors to avoid it.

BUSINESS
Incorporated in 1992, Newgen offers three core product platforms: enterprise content management, business process management, and customer communication management. With 2,318 employees, it caters to over 450 clients in 60 countries. Of this, 98 were acquired in FY17.


India accounts for about 40 per cent of the revenue followed by Middle East (27 per cent share) and the US (26per cent). The rest comes from Asia Pacific. Over the past three years, the company has been investing in software platforms. In FY17, it spent 8per cent of revenue on research and development.

FINANCIALS
Revenue increased by 20.5 per cent annually since FY13 to Rs 433.8 crore while net profit rose by 9.1per cent to Rs 52.4 crore in FY17. According to the management, over 60per cent of a fiscal’s revenue is generated in the second half. Also, revenue collection is concentrated in the third and the fourth quarter. Due to this, the number of days for which sales are outstanding is on a higher side at nearly 150. The management is keen to reduce it to 120 days in the coming quarters.
VALUATION
The stock is valued at over 32 times FY17 net profit on the equity after the IPO and 3.9 times FY17 revenue. It does not have Indian peers. Among international peers, Canada-based OpenText Corporation trades at 3.9 times revenue and has trailing price-earnings (P/E) multiple of 59. Another peer, Pegasystems Inc from the US is valued at five times sales and has P/E of 90. While Newgen’s valuation appears to be lower, its peers are far bigger thereby justifying their premium valuations. OpenText earned $2.3 billion (around Rs 14,700 crore) while Pegasystems grossed $ 750 million (over Rs 4,800 crore) in revenues in their latest fiscals.

In addition, Newgen has a longer working capital cycle with lumpy revenue due to product-centric business model. This and a smaller scale of business make Newgen’s valuation look aggressive. Investors, therefore, may give it a miss.