Rating Rationale
March 18, 2021 | Mumbai
Newgen Software Technologies Limited
Rating reaffirmed at 'CRISIL A2+'
 
Rating Action
Total Bank Loan Facilities RatedRs.95 Crore
Short Term RatingCRISIL A2+ (Reaffirmed)
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL A2+’ rating on the short term bank facilities of Newgen Software Technologies Limited (Newgen; part of the Newgen group).

 

The rating continues to reflect the group's established market position, well-established customer base, geographical diversification in revenues and healthy product diversity with constant investment in research and development, and a comfortable 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 high 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) 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’s moderate scale strengthens the company’s operating flexibility in an intensely competitive industry. Further, the promoters' experience of over four decades, their strong understanding of market dynamics, and healthy relations with customers and suppliers will continue to support the business.

 

  • Well-established customer base: The group has long-standing relations with more than 560 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 caters to a large number of clients, both in India and overseas. The top 10 customers generated revenue of 25% for fiscal 2020. Exports accounted for 70% of the topline in fiscal 2020. Diversity in geographic reach and clientele should continue to support the business.

 

  • Healthy product diversity with constant investment in research and development, supporting the scale and sustainability: The group, in operation for over 27 years, is an established player in the market. The scale of operation remains moderate with operating income of Rs 660.76 crore for fiscal 2020.  The group has a diversified product basket with a dedicated team for research and development of new products. Thus mitigating the risk of technological obsolescence.

 

  • Comfortable financial profile: The group’s capital structure has been comfortable due to modest reliance on external funds yielding low total outside liabilities to tangible net worth ratio of below 1 time for the four years ended March 31, 2020. The debt protection metrics have also been healthy with interest coverage and net cash accrual to total debt ratios of 10.29 and 0.91 times, respectively, for fiscal 2020. Liquidity is also marked with high reserves of Rs 76 crore parked under bonds and mutual funds and high cash and bank balances of Rs 165 crore as on March 31, 2020.

 

Weakness:

  • High fixed cost base and susceptibility to employee attrition: Most of the expenses are fixed in nature (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 nature of contracts awarded. Operations are susceptible to employee attrition, although the group has maintained a low rate over the past few years. To manage employee attrition, it rewards employees with yearly increment, and performance incentives for exceptional performers.

 

  • Working capital intensive operations: Working capital requirements are large as reflected in gross current assets (GCAs) of 279 days as on March 31, 2020 driven by high receivables of 149 days, with considerable amount of debtors outstanding for more than 6 months. High outstanding debtors are because of the long implementation phase and delayed payments from customers. 

 

  • Vulnerability of operating margin to fluctuations in forex rates: Since majority of 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

Bank limit utilisation is moderate at 57 percent for the past twelve months ended January 2020. Liquidity is also marked with high reserves of Rs 76 crore as on March 31, 2020 parked under bonds and mutual funds. Cash balance was also healthy at Rs 165 crore which is reflected in healthy current ratio of 2.17 times on March 31, 2020. Low gearing and moderate net worth support its financial flexibility, and provides  the financial cushion available in case of any adverse conditions or downturn in the business.

Rating Sensitivity factors

Upward Factors

  • Net debtor days continue to remain below 120 days
    Maintenance of unencumbered liquidity of over Rs 300 crore

Downward Factors

  • Net debtor days remaining above 140 days
  • Large unanticipated debt-funded capex or acquisition
  • Sharp reduction in business performance

About the Company

Incorporated in 1992, Newgen is promoted by Mr Diwakar Nigam and Mr T. S. Varadarajan. The Company is an Information Technology (IT) product company, which provide solutions in Enterprise Content Management (ECM), Business Process Management (BPM) and Customer Communications Management (CCM) platforms. These platforms help clients to digitise and manage content and document flow process. The Company’s major customer base are organisations belonging to sectors such as banking, telecom and insurance which uses Newgen’s product to improve their document management process.

Key Financial Indicators

As on/for the period ended March 31

Unit

2020

2019

Operating income

Rs.Crore

660.76

620.64

Reported profit after tax

Rs.Crore

72.73

102.21

PAT margins

%

11.00

16.47

Adjusted Debt/Adjusted Networth

Times

0.14

0.16

Interest coverage

Times

10.29

13.02

 

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.

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

Export Packing Credit & Export Bills Negotiation/Foreign Bill discounting

NA

NA

NA

75.0

NA

CRISIL A2+

NA

Bank Guarantee

NA

NA

NA

20.0

NA

CRISIL A2+

 

Annexure – List of entities consolidated

Names of Entities Consolidated

Extent of Consolidation

Rationale for Consolidation

Newgen Software Technologies Limited

Full consolidation

Holding company

 Newgen Software Inc (NSI)

Full consolidation

Subsidiary company

Newgen Software Technologies Canada Ltd (NSTCL)

Full consolidation

Subsidiary company

Newgen Software Technologies UK Ltd (Newgen UK)

Full consolidation

Subsidiary company

Newgen Software Technologies Pty. Ltd (Newgen Australia)

Full consolidation

Subsidiary company

Newgen Computer Technologies Ltd (NCTL)

Full consolidation

Subsidiary company

Newgen Software technologies Pte. Ltd (NSTPL)

Full consolidation

Subsidiary company

 

Annexure - Rating History for last 3 Years
  Current 2021 (History) 2020  2019  2018  Start of 2018
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities ST 75.0 CRISIL A2+   --   -- 05-12-19 CRISIL A2+   -- --
Non-Fund Based Facilities ST 20.0 CRISIL A2+   --   -- 05-12-19 CRISIL A2+   -- --
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Name of Lender Amount (Rs.Crore) Rating
Bank Guarantee Citibank N. A. 20 CRISIL A2+
Export Packing Credit & Export Bills Negotiation/Foreign Bill discounting Standard Chartered Bank Limited 75 CRISIL A2+

This Annexure has been updated on 25-Sep-2021 in line with the lender-wise facility details as on 12-Aug-2021 received from the rated entity.

Criteria Details
Links to related criteria
The Rating Process
Understanding CRISILs Ratings and Rating Scales
CRISILs Bank Loan Ratings
Rating Criteria for Software Industry
CRISILs Criteria for rating short term debt
CRISILs Bank Loan Ratings

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