Whalesbook
Jefferies' Nuanced Call
Newgen Software Technologies shares gained on Wednesday, staging a recovery after a sharp 15% decline the previous day. The upward movement followed a significant double upgrade from brokerage firm Jefferies, which moved its rating to "buy" from "underperform."
Despite the upgrade, Jefferies concurrently reduced its price target on Newgen Software to ₹760 from ₹835. This adjusted target still suggests a potential upside of approximately 21% from Tuesday's closing levels, indicating a cautious optimism from the brokerage.
December Quarter Performance
Jefferies noted that while Newgen's third-quarter revenues fell short of expectations, the company's profits exceeded projections. Key negative surprises included slower growth in license sales and challenges in core markets.
The brokerage pointed out that license sales have seen a decline in the current fiscal year (FY26) due to a high comparative base. However, they anticipate a normalization in FY27, supported by a lower base in FY26.
Growth Outlook and Valuation
To account for the weaker growth trajectory, Jefferies has trimmed Newgen's Earnings Per Share (EPS) estimates by 3% to 8%. Nevertheless, the firm projects a compounded annual growth rate (CAGR) of 15% for EPS over the financial years 2026 to 2028.
At approximately 22 times its estimated price-to-earnings ratio for FY27, Jefferies views the risk-reward balance for Newgen Software as attractive, particularly when considering normalized growth expectations. This valuation suggests that the market may be overlooking the stock's long-term potential following the recent sell-off.
Financials and Analyst Consensus
Newgen Software reported a 23.2% sequential decline in net profit for the December quarter, falling to ₹63 crore from ₹82 crore in the prior period. This was partially attributed to a one-time impact of ₹35 crore from the new labor code. Adjusted for this, the sequential profit would have shown an increase.
Revenue remained largely stable, reported at ₹401 crore, a marginal increase from ₹400 crore in the previous quarter. Earnings Before Interest and Tax (EBIT) saw a sequential rise of 3.1% to ₹97 crore, with EBITDA margins expanding to 24.2% from 23.5%.
Among the nine analysts covering the stock, the sentiment remains predominantly positive, with six recommending a "buy," two advising a "hold," and only one suggesting a "sell."
Shares of Newgen Software closed Wednesday with a modest gain of 0.8% at ₹633.6. The stock has experienced significant depreciation, halving in value over the past 12 months.