Detailed Rationale

CRISIL Ratings has upgraded its rating on the short term bank facilities of Newgen Software Technologies Ltd (Newgen; part of the Newgen group) to ‘CRISIL A1’ from ‘CRISIL A2+’.

 

The rating upgrade reflects continuous improvement in the business and financial risk profiles of Newgen. Overall operating performance has augmented driven by continuous in-house research and development (R&D), new service offerings, penetration in new geographies and regular addition of customers. Operating income posted a healthy 16% compound annual growth rate over the three fiscals ended 2022 driven by long standing relationship with clients (about 75% of the revenue in fiscal 2022 was through existing customers while 25% was from new clients). Focus on larger customers with bigger deal size, continuous development and innovation in product, increasing overseas sales in new geographies would lead to further revenue growth over the medium term.

 

The earnings before interest, tax, depreciation and amortisation (Ebitda) margin remained healthy and stable at Rs 195 crore and profit after tax was up 30% year-on-year at Rs 164 crore in fiscal 2022 despite the increase in employee cost and marketing expenses. Ebitda margin is expected to remain healthy in the medium term.

 

The rating upgrade also factors in the constant improvement in the collection cycle of the company with net debtors reducing to 131 days as on March 31, 2022 from 149 days as on March 31, 2020, supported by increase in scale of operations from subscription and annuity business. The collection cycle is expected to improve further as payment in this model will be received in advance. Unencumbered cash, bank balance, investments in mutual funds and bank deposits stood healthy at Rs 462.2 crore as on March 31, 2022.

 

Networth stood strong at Rs 809 crore as on March 31, 2022, compared with Rs 666 crore a year earlier. The total outside liabilities to tangible networth (TOLTNW) ratio is expected to remain below 0.50 time over the medium term, in line with past trends. The company has not planned any major capital expenditure (capex) over the medium term, and thus, financial risk profile is expected to remain stable.

 

The rating continues to reflect the sound market position of the group, its well-established customer base, 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 the group’s large fixed cost base and susceptibility to employee attrition, working capital intensive operations with sizeable more than six months’ debtors and exposure to fluctuations in foreign exchange (forex) rates.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Newgen with 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), Number Theory Software Pvt. Ltd. and Newgen Computer Technologies Ltd (NCTL). This is because all these entities, collectively referred to as the Newgen group, operate in the same industry, 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 & Detailed Description

Strengths:

• Established market position: The group has an established market position and presence with long-standing 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 should continue to support the business. The healthy relationship with customers is reflected in repeat orders from clients in the US and European markets.

 

• Well-established customer base: The group has long-standing relations with more than 530 customers in over 69 countries across various sectors. Some of its customers include well-established players in various industries such as banks, insurance firms, business process outsourcing and healthcare organisations.

 

• Geographical diversification in revenue: The group has diversified geographical reach with strong presence in more than 69 countries in fiscal 2022. The top 10 customers generated revenue of 29% for fiscal 2022 and exports accounted for 72% of the topline. Diversity in geographic reach and clientele should continue to support the business.

 

• Improving operating efficiencies driven by constant 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 any particular segment. The group, in operation for over three decades, is an established player in the market. The scale of operation and profitability has continuously improved with operating income of Rs 779 crore and 21.10% for fiscal 2022. The return on capital employed levels remained heathy at 25% in fiscal 2022.

 

• Enhancement in the financial risk profile: The capital structure of the group has been continuously improving due to modest reliance on external funds yielding low TOLTNW ratio of less than 1 time for the four years ended March 31, 2022. The debt protection metrics have also been healthy with interest coverage and net cash accrual to total debt ratios of 52 and 25 times, respectively, for fiscal 2022. Liquidity is also marked with high reserves and balance of Rs 462 crore in fiscal 2022.

 

Weakness:

• High fixed cost base and susceptibility to employee attrition: The group has a high proportion of fixed overheads in its overall cost portfolio (employee costs and rentals), making it susceptible to the quantum of work received, and subsequently, the level of billing. Variation in operating margin to a large extent depends on the duration, ticket size and nature of contracts awarded. Operations are 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 for exceptional performers.

 

• Working capital intensive operations: Gross current assets (GCAs) were sizeable at 297 days as on March 31, 2022 driven by high receivables of 131 days, with considerable amount of debtors outstanding for more than six months. Large outstanding receivables are because of the long implementation phase and delayed payments from customers. However, there is continuous improvement in the collection cycle of the company with net debtors reducing from 149 days as on March 31, 2020 to 131 days as on March 31, 2022, supported by increase in scale of operations from the subscription and annuity business. The collection cycle is expected to improve further as payment in this model is received in advance.

 

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

Liquidity: Strong:

Liquidity should remain supported by the ample surplus available in cash accrual, bank lines and liquid reserve parked by the group. In the absence of debt obligation, expected cash accrual of Rs 150 crore per annum over the medium term will support liquidity. Bank limit utilisation averaged a low 11% for the 12 months ended March 2022. Current ratio was healthy at 2.94 times on March 31, 2022 and cash and bank balance moderate at Rs 462 crore. Low gearing and moderate networth support financial flexibility.

Rating Sensitivity factors

Upward Factors

• Steady revenue growth of over 20% per fiscal and stable operating margin of 21-24%, leading to cash accrual of over Rs 160 crore.
• Net debtor days remain below 110.
• Maintenance of unencumbered liquidity of Rs 300-400 crore and low dividend pay-out or no diversion of surplus funds into any organic or inorganic business expansion.

 

Downward Factors

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

About the Company

Incorporated in 1992 and promoted 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. These platforms help clients digitise and manage content and document flow process. The major customers of the company are organisations belonging to sectors such as banking, telecom and insurance.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
NA	Bank guarantee&	NA	NA	NA	20.0	NA	CRISIL A1
NA	Export packing credit & export bills negotiation/foreign bill discounting^	NA	NA	NA	75.0	NA	CRISIL A1

& - Limits are interchangeable with export packing credit & export bills negotiation/foreign bill discounting

^ - Limit is completely interchangeable with bank guarantee