Newgen Software share price gets hammered 15% after adverse brokerage coverage; here's what is going on

Shares of Newgen Software Technologies dropped almost 15% to ₹1,323 on the Bombay Stock Exchange (BSE) during intra-day trading on Tuesday, following a bout of profit booking after the company reported a modest 5.5% sequential revenue growth for the December 2024 quarter (Q3FY25). This is a marked slowdown compared to the 14.8% growth it saw in Q2FY25. The software and consulting firm’s stock has now declined for the fourth consecutive day, plunging 20% over this period. It has corrected 22% from its record high of ₹1,795.50, reached on January 15, 2025.

Despite this recent downturn, Newgen has shown some resilience, outperforming the broader market over the last six months, rising 45% compared to the 4.4% decline in the BSE Sensex. Over a one-year period, the stock has surged 82%, vastly outperforming the 9% gain of the benchmark index.

Newgen Software is a leading provider of an AI-enabled unified digital transformation platform, offering process automation, content services, and communication management solutions. The company serves a range of sectors, including banking, telecommunications, and insurance.

The company’s modest growth in Q3FY25 was attributed to lower-than-expected revenue from its India business, which faced execution challenges and prolonged implementation cycles for large, complex deals, some of which have extended beyond one year. However, management remains optimistic, maintaining a target of 20% or more revenue growth, driven by strong performance in licensing across India and the Asia-Pacific region and a reduction in deal cycles. Newgen has set an ambitious goal of reaching $500 million in revenue over the next 3-4 years, with growth expected to come from mature markets.

The company reported ₹381.1 crore in revenue for Q3FY25, reflecting a 6% quarter-on-quarter (QoQ) and 18% year-on-year (YoY) increase. This growth was fueled by strong deal wins, with license sales climbing 70% YoY. Newgen added 15 new customers during the quarter. Earnings before interest, tax, depreciation, and amortization (EBITDA) surged 41% YoY to Rs 108.3 crore, pushing margins up by 460 basis points to 28.4%. Profit after tax (PAT) rose by 26.5% QoQ and 30.2% YoY, reaching ₹89 crore.

Looking ahead, Newgen’s strategy of focusing on larger customers with bigger orders, continuous product development, and expanding its international sales into new markets is expected to drive medium-term revenue growth. The company’s top 10 customers contributed between 25% and 30% of revenue in FY24, with exports accounting for approximately 70%. This geographic and client diversification is expected to support continued growth, according to CRISIL Ratings.

However, Newgen remains vulnerable to fluctuations in foreign exchange rates, as a significant portion of its revenue comes from international markets. Changes in forex rates can affect revenue realisation and cash accrual, posing risks to its operating margins.

According to the brokerage firm, Jefferies, Newgen’s future growth has some strong concerns, with the firm noting that while the company has had strong success in securing new license wins, longer execution cycles have delayed growth in annuity and implementation revenues. The India market, in particular, showed signs of slowing down, with revenue growth of just 10% YoY in the region.

Jefferies, therefore, has downgraded the firm’s earnings outlook, revising its earnings per share (EPS) estimates downward by 4-6% for FY25-27 and projecting a 23% compound annual growth rate (CAGR) for that period. Given the moderation in growth expectations and the stock’s high valuation at 55x FY26 earnings, Jefferies has raised caution about the company's near-term prospects.