Newgen Software

Good question on the sustainability of PE re-rating.

One of the ways to look at Newgen is to look at how a private software product company (a.k.a. a “product startup”) are valued, even when they are not making profits. I believe this comparison is valid because Newgen is still barely a ~$1.5 B value company, despite the run up – that is, it’s still a small company, with lot of growth potential.

A typical software product startup is valued ~20x their revenue – at least during good times. Based on the Q3’24 revenue, their revenue is around INR 1248 Cr. So, if another larger company were to acquire them, they might not see a valuation of ~INR 24960 Cr as out of norm. So, I do not believe it’s overvalued at the moment. Of course, this is just one of the ways to value, and also the value changes based on the economic cycle and desperation of the acquirer. Also, non-trivial part of their revenue is from “implementation”, and in that sense they cannot be valued like a true product / SaaS company yet. But since they are profitable, have close to zero customer/geo-concentration risk, and I would like to believe that as they expand in US, their margins may improve further and they may also win even larger deals. With all of this, I would think they would be even more valuable to any large company trying to expand their product portfolio and revenues, profitably.

Note that I am not speculating/suggesting that Newgen is open for being acquired. This is just an example to illustrate one common way to value small product companies.

Disc: Invested from lower levels, it has grown into my largest holding now, and views could be heavily biased. I could change my views fast too, with new information and learnings from the fellow members here. I am still a novice investor though I do have experience working at SaaS startups.