Newgen Software

I’m in the software business so understand your point. It may not always be true but generally it’s usually the case with companies with unique advantage (e.g. network effect, monopoly etc). With NewGen there is no clear trend in their margin trajectory and their OMs have been ups and downs.

There are other factors one need to look into to assess how much operating leverage a software company can unlock with growing sales than making a broad-brush determination.

For example, what’s the software revenue component in a typical deal size and how much is services? Higher portion of the first is good while more of the latter is bad.

Second is how much of their product sales is on Cloud vs how much on-prem? The first is lower margin but better annuity business than the latter.

Finally how much of their business comes through single source vs tenders? In the latter, margins again tend to be lower.

As I mentioned, having seen their offering up close, I don’t think NewGen really has any moat. There are plenty of document management system providers in the market who offer similar software. And that’s reflected in their uneven and lower margins (20-24%) for a very long time although revenue growth has been in decent double digit.

But that doesn’t make things bad for NewGen per se. If I were to choose between a great company in a bad sector and a not so great company in a great sector, I’d always invest in the latter because I get the advantage of rising tide.

Newgen in my view falls in the second category. It has got tide under it with growing digitalization in the world. So I expect stock to do well in the near future and that’s reason I continue to hold it while being aware of its strengths and limitations.