One of my very good friends always praises about the tools called no code tools and how he build marketing pages on no code tool. This got me researching into no code and low code tools. A company called Newgen provides the enterprise version of low code tools. A thread:
- When we think about TCS or MPhasis, these companies are IT service providers. They do not own any platform. In fact, they cater to the client’s requirement based on their unique needs.
- Enter low code tools which say that just install my platform and install your custom workflows and apps in the matter of days. How does it help organisations?
- Lower TAT, high customisation without any added costs. Think of Shopify as a low code platform. You can modify the banners, change the user journeys on your website etc. without hiring a developer to do this work for you
- Coming to Newgen: Their products are primarily categorised as Enterprise Content Management (ECM), Business Process Management (BPM) and Customer Communication Management (CCM)
- BPM: These tools automate the standard business processes. Think of it like automation of customer onboarding, vendor onboarding, claims processing, loan disbursal, web portals and forms etc.
- For Newgen, this integrates seamlessly with ERP’s and also able to extract information from different documents automatically without writing code. In terms of customer experience, you just upload aadhar card and the portal will tell you the loan eligibility
- CCM: This is where the unified customer communication is leveraged by banks and insurance companies across web, app notifications and SMS based on the custom workflows. For eg., send the congratulatory SMS to the customer on successful loan approval
- ECM: Traditionally companies have to rely on manual workforce to vet the documents and maintain its backup and sanctity. Newgen, with its image processing algorithms, is able to vet the docs, extract the relevant information and pass it on to the relevant business process
- With the focus on its products clear, the different revenue streams of the company include sales of products (21%), ATS/AMC charges (25%), Implementation charges (16%), support charges (28%) and SAAS revenue (10%)
- India constitutes 28%, APAC 14%, Europe 31% and USA 27% of the total revenue of 770 cr. Among the sectors Banking and financial services constitute 62% of revenue, government services constitutes 15%, insurance and health constitutes 7% each
- Coming to the recurring part of the revenue, ATS/AMC, SAAS and support constitutes annuity plans. SAAS is a per user subscription charge whereas AMC is on annuity license basis. More the license more the ATS/AMC. These constitutes product profile margins of 90%+
- Support charges are the service charges and hence gross margins are 60%+. Regarding GTM, the company has 300+sales and marketing staff primarily focussed on Asia and APAC. They target the client using low value deals post which they increase the ticket size from the clients
- Regarding Europe and USA, there had been a lot of churn due to low paying propensity of mid level clients. Hence newgen is focussing on fortune 2000 clients who would be recommended newgen via GSI (global system integrators)
- Coming to R&D and marketing expenses, these constitute 10% and 24% of the revenues respectively. R&D is basically categorised under employee expenses and marketing expenses are also a part of P&L. Hence both of these are not amortized
- However, the benefits of these are accrued in the future customers and their annuity. Hence during the high growth phase, the bottomline tends to get deflated in such a business. But gone right, it would be a high free cash flow business since AMC does not incur much expenses
- Hence the standard metrics like ROCE, ROIC and ROE may look subdued now due to long term investments accrued in P&L
- The company has been able to grow its sales at 14% CAGR from 2013 to 2022 from 200 cr to ~800 cr while the profits grew by 16% CAGR from 36 cr to 164 cr
- Due to the partnerships with Global system integrators (like Accenture etc.) where the payments are done automatically through their systems based on GSI’s terms, this tends to get reflected in their cash conversion cycle
- But over-dependance on GSI could lead to loosening of pricing power by Newgen. This is something which is acknowledged by the management in the recent concall as well
- The company is led by Mr Diwakar Nigam who has been leading the solutions with banking and insurance since 1993. Currently the company is headed by Mr Virender Jeet who has been with the company since its inception
- The SAAS based tools require the very high innovative DNA otherwise someone else can come with deep pockets and dislodge you. Newgen is having 44 patents in terms of advanced ML capabilities
- They do not use open source image processing API’s. Rather they have built it on their own and integrated it with ECM. Newton has started making forays in Gartner and Forrester, the recommendations of which are heeded by the global CIO’s
- The no code enterprise market is valued at $40bn. The company, after championing banking an insurance, is making its foray in healthcare. It aims to grow its toppling at 4000 cr from the current 800 cr in the next 6 years
- One of the reason why the big tech or companies like Accenture, TCS won’t enter this field: Proprietary patented technologies is the big cost advantage. The moment you switch to big tech API’s, your costs balloons
- A low code platform primarily for banking and insurance needs the deep expertise for 25 years. Many companies will find it hard to compete with them on product use cases as well as costs. Recently they launched a trade finance platform for banking as well
- Regarding their competitors, IBM, Oracle are capable of business process management but the ease of integrations with newgen along with solving additional use cases leads to newgen beating the competitors. Reference: https://www.gartner.com/reviews/market/business-process-automation-tools/vendor/newgen-software/alternatives
- Coming to Free cash flows and ability of the company to convert their profits to FCF, the company generated a good cash and is able to convert most of its profits to cash. Here is what the graph looks like as attached
- The company does not have much related party transactions. However a red flag is presented in the form of the following: Why Mr Nigam is taking such a hefty salary even though he is in advisory role?
- Coming to valuations: Considering that sales and marketing expenses would be abated in the long run, with discount rate of 20%, 13% and terminal rate of 7%, the fair value comes at 377 at 25% Margin of safety
The thread can be found here: https://twitter.com/manujindal2803/status/1607254868791816192
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