Rating Rationale
December 05, 2019 | Mumbai
Newgen Software Technologies Limited
'CRISIL A2+' assigned to bank debt
 
Rating Action
Total Bank Loan Facilities Rated Rs.95 Crore
Short Term Rating CRISIL A2+ (Assigned)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has assigned its 'CRISIL A2+' rating to the short term bank facilities of Newgen Software Technologies Limited (Newgen; part of the Newgen group).

The rating reflects the group's established market position, healthy customer base, geographical diversification in revenues and moderate 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 has combined the business and financial risk profiles of Newgen with its 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 and have Newgen as the majority stakeholder.

Please refer Annexure - Details of Consolidation, 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 540 customers in over 66 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 generate revenue of 22-25% annually. Exports account for over 65% of the topline with exports contributing around 68% of total revenue in fiscal 2019. 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 healthy with operating income of Rs 620 crore for fiscal 2019.  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 networth ratio of below 1 time for the four years ended March 31, 2019. The debt protection metrics have also been at healthy with interest coverage and net cash accrual to total debt ratios of 16.5 and 1.13 times, respectively, for fiscal 2019. Liquidity is also marked with high reserves of Rs 51.6 crore as on March 31, 2019 parked under bonds and mutual funds and free cash and bank balance of Rs 135 crore.
 
Weaknesses
* High fixed cost base and susceptibility to employee attrition: Most of the expenses are fixed-cost 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 269 days as on March 31, 2019 (as against 195 days for peers) 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 70.5% for the 12 months through September 2019. Cash accrual, expected to be over Rs 95 crore for fiscals 2020 and 2021, should be sufficient against annual term debt obligation of Rs 1-2 crore over the medium term and support liquidity. Current ratio is healthy at 2.54 times as on March 31, 2019. Liquidity is also marked with high reserves of around Rs 51.6 crore as on March 31, 2019 parked under bonds and mutual funds and free cash and bank balance of around Rs 135 crore. The management does not have any major plan to deploy the free cash for particular usage over the medium term and hence cash and bank balances should remain at similar levels over the medium term.

Rating Sensitivity factors
Upward Factors
* Sustained improvement in scale of operations by 15% and stable operating margin, leading to higher cash accruals
* Enhancement in working capital cycle, with debtors more than 6 months coming down to 15% of total debtors outstanding

Downward Factors
* Increase in receivables with gross debtors of more than 150 days
* Decline in scale of operations by 20% and profitability by 200 basis points
* Large debt-funded capital expenditure weakens capital structure.
About the Company

Incorporated in 1992, Newgen is promoted by Mr Diwakar Nigam and Mr T. S. Varadarajan. The company is into development of electronic document management solutions, which enable various document intensive organisations such as banking, telecom and insurance to improve their document management process.

Key Financial Indicators
As on / for the period ended March 31  Units 2019 2018
Operating income Rs crore 620.64 512.43
Reported profit after tax Rs crore 102.20 72.88
PAT margin % 16.46 14.22
Adjusted debt/Adjusted networth Times 0.16 0.16
Interest coverage Times 13.02 14.1

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL 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)		 Rating assigned
With outlook
NA Export Packing Credit & Export Bills Negotiation/Foreign Bill discounting NA NA   NA 75.0 CRISIL A2+ 
NA Bank guarantee NA NA NA 20.0 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 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  75.00  CRISIL A2+    --    --    --    --  -- 
Non Fund-based Bank Facilities  LT/ST  20.00  CRISIL A2+    --    --    --    --  -- 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee 20 CRISIL A2+ -- 0 --
Export Packing Credit & Export Bills Negotiation/Foreign Bill discounting 75 CRISIL A2+ -- 0 --
Total 95 -- Total 0 --
Links to related criteria
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Rating Criteria for Software Industry
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

For further information contact:
Media Relations
 Analytical Contacts
 Customer Service Helpdesk
Saman Khan
Media Relations
CRISIL Limited
D: +91 22 3342 3895
B: +91 22 3342 3000
saman.khan@crisil.com

Naireen Ahmed
Media Relations
CRISIL Limited
D: +91 22 3342 1818
B: +91 22 3342 3000
naireen.ahmed@crisil.com

 Nitin Kansal
Director - CRISIL Ratings
CRISIL Limited
D:+91 124 672 2154
nitin.kansal@crisil.com

Himank Sharma
Associate Director - CRISIL Ratings
CRISIL Limited
D:+91 124 672 2152
Himank.Sharma@crisil.com

Nishita Patni
Rating Analyst - CRISIL Ratings
CRISIL Limited
D:+91 124 672 2136
Nishita.Patni@crisil.com 		Timings: 10.00 am to 7.00 pm
Toll free Number:1800 267 1301

For a copy of Rationales / Rating Reports:
CRISILratingdesk@crisil.com
 
For Analytical queries:
ratingsinvestordesk@crisil.com

 

Note for Media:
This rating rationale is transmitted to you for the sole purpose of dissemination through your newspaper / magazine / agency. The rating rationale may be used by you in full or in part without changing the meaning or context thereof but with due credit to CRISIL. However, CRISIL alone has the sole right of distribution (whether directly or indirectly) of its rationales for consideration or otherwise through any media including websites, portals etc.


About CRISIL Limited

CRISIL is a leading agile and innovative, global analytics company driven by its mission of making markets function better. We are India’s foremost provider of ratings, data, research, analytics and solutions. A strong track record of growth, culture of innovation and global footprint sets us apart. We have delivered independent opinions, actionable insights, and efficient solutions to over 1,00,000 customers.
 
We are majority owned by S&P Global Inc., a leading provider of transparent and independent ratings, benchmarks, analytics and data to the capital and commodity markets worldwide.
 
For more information, visit www.crisil.com 

Connect with us: TWITTER | LINKEDIN | YOUTUBE | FACEBOOK

About CRISIL Ratings
CRISIL Ratings is part of CRISIL Limited (“CRISIL”). We pioneered the concept of credit rating in India in 1987. CRISIL is registered in India as a credit rating agency with the Securities and Exchange Board of India (“SEBI”). With a tradition of independence, analytical rigour and innovation, CRISIL sets the standards in the credit rating business. We rate the entire range of debt instruments, such as, bank loans, certificates of deposit, commercial paper, non-convertible / convertible / partially convertible bonds and debentures, perpetual bonds, bank hybrid capital instruments, asset-backed and mortgage-backed securities, partial guarantees and other structured debt instruments. We have rated over 24,500 large and mid-scale corporates and financial institutions. CRISIL has also instituted several innovations in India in the rating business, including rating municipal bonds, partially guaranteed instruments and microfinance institutions. We also pioneered a globally unique rating service for Micro, Small and Medium Enterprises (MSMEs) and significantly extended the accessibility to rating services to a wider market. Over 1,10,000 MSMEs have been rated by us.

CRISIL PRIVACY
 
CRISIL respects your privacy. We may use your contact information, such as your name, address, and email id to fulfil your request and service your account and to provide you with additional information from CRISIL.For further information on CRISIL’s privacy policy please visit www.crisil.com.

DISCLAIMER

This disclaimer forms part of and applies to each credit rating report and/or credit rating rationale that we provide (each a “Report”). For the avoidance of doubt, the term “Report” includes the information, ratings and other content forming part of the Report. The Report is intended for the jurisdiction of India only. This Report does not constitute an offer of services. Without limiting the generality of the foregoing, nothing in the Report is to be construed as CRISIL providing or intending to provide any services in jurisdictions where CRISIL does not have the necessary licenses and/or registration to carry out its business activities referred to above. Access or use of this Report does not create a client relationship between CRISIL and the user.

We are not aware that any user intends to rely on the Report or of the manner in which a user intends to use the Report. In preparing our Report we have not taken into consideration the objectives or particular needs of any particular user. It is made abundantly clear that the Report is not intended to and does not constitute an investment advice. The Report is not an offer to sell or an offer to purchase or subscribe for any investment in any securities, instruments, facilities or solicitation of any kind or otherwise enter into any deal or transaction with the entity to which the Report pertains. The Report should not be the sole or primary basis for any investment decision within the meaning of any law or regulation (including the laws and regulations applicable in the US).

Ratings from CRISIL Rating are statements of opinion as of the date they are expressed and not statements of fact or recommendations to purchase, hold, or sell any securities / instruments or to make any investment decisions. Any opinions expressed here are in good faith, are subject to change without notice, and are only current as of the stated date of their issue. CRISIL assumes no obligation to update its opinions following publication in any form or format although CRISIL may disseminate its opinions and analysis. CRISIL rating contained in the Report is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment or other business decisions. The recipients of the Report should rely on their own judgment and take their own professional advice before acting on the Report in any way.CRISIL or its associates may have other commercial transactions with the company/entity.

Neither CRISIL nor its affiliates, third party providers, as well as their directors, officers, shareholders, employees or agents (collectively, “CRISIL Parties”) guarantee the accuracy, completeness or adequacy of the Report, and no CRISIL Party shall have any liability for any errors, omissions, or interruptions therein, regardless of the cause, or for the results obtained from the use of any part of the Report. EACH CRISIL PARTY DISCLAIMS ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. In no event shall any CRISIL Party be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs) in connection with any use of any part of the Report even if advised of the possibility of such damages.

CRISIL Ratings may receive compensation for its ratings and certain credit-related analyses, normally from issuers or underwriters of the instruments, facilities, securities or from obligors. CRISIL’s public ratings and analysis as are required to be disclosed under the regulations of the Securities and Exchange Board of India (and other applicable regulations, if any) are made available on its web sites, www.crisil.com (free of charge). Reports with more detail and additional information may be available for subscription at a fee – more details about CRISIL ratings are available here: www.crisilratings.com.

CRISIL and its affiliates do not act as a fiduciary. While CRISIL has obtained information from sources it believes to be reliable, CRISIL does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives and / or relies in its Reports. CRISIL keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of the respective activity. As a result, certain business units of CRISIL may have information that is not available to other CRISIL business units. CRISIL has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process. CRISIL has in place a ratings code of conduct and policies for analytical firewalls and for managing conflict of interest. For details please refer to: https://www.crisil.com/en/home/our-businesses/ratings/regulatory-disclosures/highlighted-policies.html

CRISIL’s rating criteria are generally available without charge to the public on the CRISIL public web site, www.crisil.com. For latest rating information on any instrument of any company rated by CRISIL you may contact CRISIL RATING DESK at CRISILratingdesk@crisil.com, or at (0091) 1800 267 1301.

This Report should not be reproduced or redistributed to any other person or in any form without a prior written consent of CRISIL.

All rights reserved @ CRISIL