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Equitymaster Agora Research Private Limited

Independent Investment Research

Welcome to the Tenth issue of Smart Money Secrets!

Turn on the television anytime, you will see a host of so called 'experts' giving their views on the stock markets
and their outlook on stocks and sectors. Now, all of them have an opinion. But do they really understand the
process of investing and picking the right stocks? Probably not.

Now, there is one super investor who is nothing at all like these television experts. This man is truly the wizard of
Dalal Street.

This man is none other than Sumeet Nagar.

Sumeet Nagar is the co-founder of Malabar Investments LLC. Malabar is an India-focused foreign portfolio
investor (FPI). It collectively manages more than US$15 billion. Malabar specialises in value investing in small and
mid-sized Indian stocks.

Many of his top small-cap picks have been multibaggers. These have been La Opala, Page Industries, eClerx
Services, Eicher Motors, Mayur Uniquoters, Avanti Feeds to name a few.

But what we really like is his investing philosophy.

First, and what's interesting is that he likes to have a concentrated portfolio of small cap stocks.

But these are not just any small cap stocks. Sumeet Nagar likes quality.

Second, small caps do have an element of risk attached to them. But Sumeet Nagar mitigates these risks by
focusing on companies that...

Are leaders in niche industries.

Have a long history of excellent financials.

Are run by highly capable managers who have the best interests of shareholders in mind.

Have a sustainable competitive advantage, i.e. a moat.

Have demonstrated pricing power.

Have a long runway to grow profitably.

Third, Sumeet Nagar is a true proponent of value investing. He will buy only those stocks that trade below his

conservatively estimated intrinsic values.

Clearly, Sumeet Nagar's investing philosophy matches ours.

In fact, in an earlier edition of Smart Money Secrets, we had already recommended two of the stocks from Sumeet's
portolio - Mayur Uniquoters and Ador Fontech.

But clearly, we cannot get enough of this super investor. Because we have zeroed in on another stock which
Sumeet's Malabar Fund recently added in its portfolio.

The company recently came out with an IPO and Malabar India Fund picked up a stake by being one of the anchor

In fact, Malabar has also bought some big tranches post the IPO and that too via bulk deals. The total stake (IPO +
Bulk) has gone to 2.9% in the company.

Here's more on what makes it such a compelling case for this Niche IT company...

Have you heard of Catching Sam Walton Early?

Warren Buffett and Charlie Munger has always made a case of 'Finding great companies with stellar management
when they are just starting out'.

Well, they have quoted owner and manager of world's biggest retail chain, i.e. Sam Walton of Wal-Mart.

The basic idea is to find a great company when it is small and young. This gives you an opportunity ride along with
the success of the great entrepreneurs like Sam Walton.

This month's recommendation of Smart Money Secrets makes a cut to this novel idea.

Well, both I and my super investors don't like investing in IPOs. The basic reason behind it is they are in general

However, Newgen Software Technologies Limited (Newgen) appears to be an exception to the rule. The company
recently has recently gone public (January 2018).

And we believe, both the business and the management has got all the ingredients of being a future Sam Walton.

No denying, the business for Walmart and Newgen are entirely different, but there are some common patterns that
we see.

Why we call Newgen a Niche IT company?

Reason#1 - It is not an IT services company which is a commoditized business, with big players like Infosys and
TCS. The only advantage these companies have is the cost arbitrage. However, Newgen is one of the few Software
product companies in the world.

Reason#2 - One of the common characteristics of a typical IT company is its concentration with respect to -
clients, products, and geography.

Smart diversification in all these three parameters has been instrumental in Newgen building a highly resilient
business model. (Please read below segments to understand the diversification).

Reason#3 - The company has got multiple patents under its belt. To be specific it has got four patents in India.

In fact, it has also filed around twenty-eight patents in India and two in the US. In addition to filing a dozen of
copyrights and patents. Put together, we term these as 'Intellectual Property Rights'.

These Intellectual Property Rights provides an unsaid competitive advantage to the company.

Reason#4 - Newgen has a sticky business model. Newgen is one of the few companies in the world which
provides multiple products in the industries it caters (Banking, Insurance, Government, PSUs, Healthcare, Telecom

Once it acquires a client, it has a huge opportunity for client deepening and cross-selling its products.

Just to give you an example, in FY17, around 80% of total revenue was generated from repeat customers. This is in
the light of the fact that it has more than four fifty total clients.

Reason#5 - Newgen has got the ability to stay ahead of the curve. One of the key challenges in the IT companies
across spectrum is the innovation and disruption.

Newgen has always stayed ahead of the curve and spends around 7-8% of total revenues on the Research and

In fact, given its ability be ahead of the curve, it has been recognized by market research firms like Gartner and
Forrester (Read about the company section for details) as one of the leading player in innovations.

The Niche characteristics of Newgen are visible in the financials.

Financial Highlights: FY13-17

Return on Equity 24%

Sales (CAGR 4 Yrs) 21%

Bottomline (CAGR 4 Yrs) 9%

D/E 0.18

Source: RHP, Equitymaster

Mind you, Newgen is the only company from India competing with global giants like IBM, Microsoft, Oracle, Open
Text, Appian etc.

In fact, in the past players like IBM, Microsoft, and Oracle has tried acquiring Newgen.

We believe our Super Investor, Sumeet Nagar, and we have spotted a future Sam Walton in the Niche IT space.
Read on to find more about it...

About the Company - Newgen Software Technologies

Incorporated in 1992, Newgen Software Technologies (Newgen) is a software products company offering a
platform that enables organizations to rapidly develop powerful applications.

It is one of the few software product company in the world providing software products/solutions to Banks,
Insurance companies, Healthcare companies, Government/PSUs, Telecom companies etc.

As of 30 September 2017, the company had over 450 active customers (invoiced in the last 12 months) in over 60

Basically, Newgen is a provider of three core products:

1. Enterprise Content Management (ECM) - In layman terms, ECM is used for data management. In industries
like Banking, Insurance, Healthcare there is a lot of data to be managed and to be used for informed decision

However, one of the biggest challenge is the unstructured data and lack of infrastructure to store, archive,
retrieve the store data for informed decision making.

The ECM software provides a seamless platform to upload, store, archive and retrieve unstructured data.

Just to give you an example, the front office of any bank (opening of bank accounts, loan application etc) ask
its customers for documents like PAN card, Adhar card etc. Now, the ECM software helps the bank to scan all
these documents and upload to the banks central system.

It also automatically runs functions like CIBIL verification, Income Tax Verification, Property Valuations. These
functions usually take a lot of manual time.

This data can be used at latter stage across business functions for better decision making and cross-
selling/upselling to the customers.

In nutshell, ECM is a software to manage data in an efficient manner. (For technical explanation please refer

2. Business Process Management (BPM) - Again in layman terms, BPM is used for simplifying the business
processes. It helps the customers to reduce or re-design the business processes that are either redundant or
time consuming.

This helps the customers in efficiently designing the business process and re-allocating the resources. This
results in increased productivity and freeing up extra man power.

Generally, both ECM and BPM are sold together which makes the organization more efficient improves
decision making, and it also helps in cost rationalization.

In Nutshell, BPM is a software to rationalize the business processes (For technical explanation please refer

3. Customer Communication Management (CCM) - Again in the layman terms, CCM is a software which helps
banks/insurance companies to manage their customer communication effectively. The software in a way
automates the communications with the customers, vendors, suppliers and other related parties.

For instance, when a bank opts for all three software i.e. ECM, BPM and CCM... all these software work in
tandem and artificial intelligence identifies its customers preferences (based on customer data in ECM and
their social media activities) and automatically suggests the banks the financial products their customers
might be looking out for. (if a customer is looking out for a house on social media, the CCM will generate a
lead for housing loan).

Apart from these three, Newgen also provides case management solutions with large, mission-critical solutions

deployed across many verticals.

The customers use Newgen's platform to rapidly design, build and implement enterprise-grade custom
applications through its intuitive, visual interface with minimal coding.

The company has been recognized by distinguished analyst firms including, Gartner and Forrester.

It has been positioned in the Magic Quadrants (High Standing) for Intelligent Business Process Management
(iBPM), Enterprise Content Management (ECM), Customer Communication Management (CCM) and BPM-
Platform-Based Case Management frameworks.

Newgen has the following platform suites, each serving a specific business need.

Newgen's Product Profile

# Enterprise Content Management (ECM)

With a rapid growth of unstructured corporate content, organizations face increasing difficulties with managing
documents, electronic information and, related processes, unorganized sharing and copying data frequently.

This results in fragmented and unstructured data, and decline in productivity. It also leaves organization
vulnerable with regards to data protection and security.

Unauthorized access to confidential information like data and documents can increase the risk of information
leaks. Chaotic document processes have a big negative business impact.

This is where ECM comes into play. ECM structures data and documents and helps to organize and automate
business processes.

Instead of spending time searching for a document, with ECM, documents from all sources are properly indexed
and filed to find information quickly by keywords.

By establishing an ECM system, document handling is recorded and offers transparency about what has changed
on a document by when and whom.

This offers seamless collaboration on documents among colleague and even across different departments.

What is ECM (Enterprice Content Management)?

How ECM helps the organization?

ECM helps to reduce the time it takes to obtain the information

Efficient filing of documents in central location

Seamless collaboration on documents and content

Companies benefit from time and cost savings, secured data, increased efficiency and productivity.

Newgen's OmniDocs ECM software allows digitisation of enterprise content and information.

This provides smart tools for enterprises to capture and extract information from various sources, classify, store,
archive or retrieve as well as dispose of any content and documents required in day-to-day business operations.

It provides the flexibility to access or deliver content over mobile and cloud creating a highly connected and digital

Example of ECM
Newgen ECM based Loan Approval Solution

# Case Management
Case management is a subset of ECM technologies, which combines content, people, and process. Case
management refers to the technologies, features, and functions required to address a particular case or task.

These tasks are process-driven and generally require a combination of transactional data and content.

Case management offers the opportunity to provide vertical-specific solutions that address common tasks.
Popular case management solutions include invoice processing and insurance claims handling.

# Business Process Management (BPM)

At the core of BPM is a process or workflow. This is a series of steps or activities that system perform according
to the logical path to achieve the goal.

Every business each day executes hundreds or thousands of processes. However, not all the processes are
efficient. The BPM is focused mainly on enabling users to map out such processes in a visual manner and execute
them to achieve automation with the goal of improving efficiency.

BPM's capabilities are beyond just workflows. These include features such as end-user portals, integration,
analytics and mobility.

Why BPM is Required?

Newgen's OmniFlow Intelligent Business Process Suite (OmniFlow iBPS) is an integrated system which allows
enterprises to manage a complete range of business processes, including designing and modelling the flow of
work, executing the flow of work through the workflow engine and monitoring the flow of work for future

OmniFlow iBPS also offers dynamic case management capabilities which allow decision-makers to respond to
real time opportunities, challenges and other unanticipated situations while maintaining a high level of

Example of BPM
Newgen's BPM Based Insurance Solution

Case Study: How Newgen collaborated with IDFC Bank to build a solution based on its BPM and ECM


IDFC Bank required technology that would support them to:

Increase retail share in total advances across all customer segments, which would eventually lead
to a rise in its average asset yield;

Design and implement processes that could complement their lean operations strategy i.e. reduced
number of employees and branches per customer;

Do away with or minimize cumbersome paper based processes;

Pursue cost effective on-boarding processes that could scale for higher volumes across
geographies; and Diversify beyond large corporates to improve spread across mid-size

Products Deployed

Newgen's BPM and ECM Solutions


The focus areas of implementation include:

Automation of the account opening process across segments, which include personal banking,
wholesale banking, rural banking, staff banking, current non-individual, non-individual and Trusts,
Associations, Societies, Clubs

Automation of internal approval management system leading to standardization and reduction of

Turnaround Time

Automation of request tracking and service management for greater transparency and visibility, and
higher productivity of customer representatives

Mobile enablement of the account opening process with tablet-based straight through processing
and eKYC

Digitization of documents for integrated processes and improved storage and retrieval from
multiple processes and applications leading to lower costs and effort

Key Results

An integrated process-centric implementation of Newgen's BPM and ECM platforms helped the bank to
Increase sourcing of current account and savings account through the mobile "On the Go" app.

Similarly, IDFC Bank has been able to achieve a fast time to market and has been able to meet their retail
banking goals, including (as of September 15, 2017):

More than 100 accounts opened every day using Tab-Banking

More than 300,000 transactions processed

More than 60,000 total accounts opened and

More than 1,500 operational personnel leveraging these modern applications.

# Customer Communication Management (CCM)

CCM helps the organizations to analyze and manage data to create personal and relevant documents on demand
both in paper and in digital format enabling them to be delivered at the right time via any channel.

Most of the customer interactions are no longer face-to-face and some customers only ever interact with an
organization through online channels.

Therefore, enterprises must interact with customers through their preferred method of communication.

This requires an understanding of how customers want to be communicated with.

New opportunities are being created for CCM software to be used as the platform of choice for communicating
with customers through the channel of their choice.

The most common use case for CCM is the production of periodic (monthly, quarterly or annual) bills or
statements in a wide variety of formats for delivery through multiple channels.

Industries that use CCM for this purpose are financial institutions, insurance companies, utility companies, phone
companies and retailers with catalogue businesses.

A wide range of on-demand documents produced by CCM includes the following:

Online policy generation;

Instant issuance of ID cards, benefit statements etc.;

New account application acknowledgements; and

Self-service customer onboarding documents.

Newgen's OmniOMS CCM suite offers a unified communication platform that allows companies to improve
communication with their customers by delivering a personalized, targeted and consistent communication
through various channels.

Business Model of the Company

Revenue Model -

All the above products are built on same technology. They are well-integrated and offer Newgen's customers ease
of implementation and use.

These can be deployed on-premise as well as on a cloud. Increasingly, Newgen's customers are choosing to use

company's product suites on cloud on a subscription basis.

Newgen's business has multiple revenue streams which include:

Sale of Software Products:

It includes revenue from the sale of licenses for software products.

Newgen enters licensing agreements with its customers for each product whereby customers are
required to pay licensing fees to the company.

The licensing fee constitutes a one-time upfront fee on a per-user basis. Additional license fees are
payable for an increase in the number of users or for a purchase of additional products.

The revenue from this segment has grown at a CAGR of 29% in the last 5 years. As of FY17, the revenue
from this segment constitutes ~27% of the total revenue.

The increase was primarily driven by sale of softwares to new customers and new sales to existing
customers (due to increase in the number of users at such existing customers' organizations).

Going forward, the sale of new licenses and the revenue from existing customers (increase numbers of
additional users and increase coverage of the additional processes) will help Newgen to maintain the
historical growth from this segment.

Annuity based revenue:

In addition to the licensing agreements, the company also typically enters ATS/AMC (ATS - Annual
Technical Support; AMC - Annual Maintenance Contract) contracts with its customers, whereby
customers are required to pay support and maintenance fees annually.

The company earns recurring fees/charges from the following:

Software as a Service (SaaS): subscription fees for licenses in relation to platform deployed
on the cloud. The customers pay subscription fees on a Per User Per Month (PUPM) model on
a monthly, quarterly or an annual basis.

ATS/AMC: charges for annual technical support and maintenance (including updates) of
licences, and installation

Support: charges for support and development services

Annuity based revenue contributes ~40% of the topline. This has also grown at a CAGR of ~19% in the
last five years.

SaaS revenue has grown rapidly at a CAGR of 64%. The revenue from SaaS is expected to grow at a
staggering pace as the company will be adding new customers, especially from the US market.

Sale of services: This includes implementation and integration of the products at the customers

Here, Newgen charges an implementation fee based on fixed cost or man-month basis for this service.

Development refers to work done for customer based on its specific requirements. The company

charges a development fee based on fixed cost or man-month basis.

This segment contributes ~ 33% of the topline and has grown at a steady pace of 17% CAGR in the last
five years.

Customer Base and Verticals

Newgen possesses multi-vertical industry expertise and targets a broad spectrum of services in its business and
product offerings.

This has helped Newgen to build solution frameworks which are enriched with domain knowledge from the
relevant sector and subject matter experts across several industries.

Some of these solution frameworks include:

Newgen - Catering to Multiple Industries

Solution Frameworks

Banking Account Opening, Retail Lending, Commercial lending, Corporate Lending, FATCA compliance, Trade
Finance, Collections and Payment Systems

Government/PSUs0 Correspondence Management, Agenda Management, Citizen Centric Services, Office Automation and
Grants Management

BPO/IT Accounts Payable, Accounts Receivable, Invoice Processing and Vendor Portal

Healthcare Provider Contract Management, Complaints, Appeals and Grievances Management, Mobile Member
Enrolment and Claims Repair

Source: Company, RHP

The company has a diversified customer base and its customers have used Newgen's platform to build diverse
applications in many sectors including banking, government/PSUs, BPO/IT, insurance and healthcare.

Newgen Retail LOS for Core Banking System

Revenue from Several Verticals

Banking 46% 49% 47% 48% 49% 50% 51% 51%

Government/PSUs 9% 10% 18% 15% 15% 15% 14% 14%

BPO/IT 16% 17% 12% 12% 12% 10% 10% 10%

Insurance 4% 4% 5% 6% 6% 7% 7% 8%

Healthcare 4% 3% 4% 6% 6% 7% 7% 7%

Others 21% 17% 14% 12% 12% 11% 11% 10%

Source: RHP, Equitymaster

Going forward, we expect the banking vertical to contribute ~51% of the total revenue since Newgen will be
targeting mid-sized US Based banks in the coming years.

Newgen's Customers
Newgen has a diversified customer base and have served more than 1,300 customers globally over the years.
Some of the key customers in different markets include:

Newgen's Customer Profile

India ICICI Bank, Axis Bank, YES Bank, IDBI Bank, Kotak Mahindra Bank, Reliance General Insurance, ICICI
Prudential Life Insurance Company, Max Life Insurance, Bajaj Electricals, Shriram Transport Finance
Company, Strides Shasun

EMEA United Arab Bank, RAK Bank, Arab National Bank, Alawwal Bank, Ecobank, NIC Bank

USA Trust Company of America, Mercantil Bank, National Commercial Bank Jamaica

APAC (ex-India) Philippines Resource Saving Bank, Law Society Pro Bono Services, Bank Islam Brunei Darussalam,

Source: Company RHP

Sales and Distribution Strategy

Through subsidiaries and global offices, Newgen is present in India, USA, Dubai, Singapore, Canada and UK. These
offices enable the company to sell its products and service customers in more than 60 countries.

Similarly, channel partners play an important role in the development and marketing of the company's products.
Newgen has worked with more than 300 channel partners who sell and distribute its products.

Marketing Strategy
Newgen's marketing programs include campaigns focused on different industry verticals including banking,
government/PSUs, BPO/IT, insurance and healthcare to achieve sector domination.

The company has a unique marketing strategy i.e. it has two separate teams divided between acquiring new
clients (first time clients) and servicing and increasing wallet share within the existing clients.

The company employs around two hundred employees in acquiring new clients which needs a different set of
skills because it is the first-time sale of the company's product.

Now, once these new clients come on board and start using company's products, these clients are managed by a
different team which focuses on client service, client deepening and cross selling.

This has yielded great results for Newgen. In FY17, it has acquired around 150 new clients (50 in FY18 so far) and
revenue from repeat customer stood at ~80%.

This shows the how the company has been able command an edge both in terms of new customers and
deepening of existing clients.

How Newgen Differentiates Itself from the Competition?

#1 - Product Development + Implementation = Entry Barriers and Customer Stickiness

One of the important element in a software product company is the implementation and integration of
the product on the customer premises.

Implementation refers to the service of installing and integrating Newgen's products with the customer's
existing platform or system.

Now, this gives a unique advantage to players like Newgen when compared to global giants like IBM.

Just to give an example, if a customer buys a software from IBM it needs to hire companies like Infosys,
TCS to implement the software (generally the cost of implementation exceeds the cost of software).
This many a time becomes a very expensive and time consuming.

However, Newgen along for software helps its customers in implementation and integration which helps
the customers for a speedy implementation and smooth integration at a lower cost.

(Timeline for Newgen sales to implementation - 8-10 months, whereas average time for implementation
in case of IBM software goes upto 24-36 months in many cases)

"CIO purchases IBM, Business purchases Newgen"

At the top level, CIO/CEO prefers to buy IT products from big companies, but the problem starts at
the implementation level as integrating with its existing platform is a big task. For implementation
process, the business hires another IT Service firm. This leads to additional cost and time. Therefore
Newgen is preferred which offers a comprehensive solution of product development,
implementation, and integration.

Apart from this, Newgen helps its clients in product education, pre-purchase evaluation by its employees,
trial runs, strong customer support services etc.

Thus, these services make an integral part for customers while evaluating the vendors and Newgen
stands to win over other players.

#2 - Newgen's Sales Cycle

As discussed, Newgen is one of few players providing multiple products in multiple verticals. This gives
it an edge over one product or one vertical companies.

Further, given its implementation and integration capabilities it is able to make its sales cycle lengthy

and juicy in monetary terms.

This include 6-8 months of pre-sales and 4-6 months of product/process integration.

However, once the customer is on board, it creates customer stickiness and entry barriers for other

Recurring and Repeat Revenues - Milking from Long Standing Customer Relationship

Newgen has long-standing relationships with its customers, which include 17 Global Fortune 500
companies. This is due to the high criticality of Newgen's products to many of customer's business
needs. The company's broad range of product and services offerings helps to cross-sell to existing
customers as well as to acquire new customers.

For example, some of Newgen's customers who purchased one of its platform suites have placed
repeat orders as well as decided to buy one or more of its other platform suites or solution

The revenue stream based on repeat business received is classified as:

Non-recurring revenues from existing customers (additional license fees/subscription

charges and implementation charges)

Recurring revenues from existing customers for purchase of ATS/AMC and SaaS

New revenues in the case of purchase of a new product, suite or solution framework by
existing customers who had previously purchased its platform

Newgen earned ~77% the revenue from repeat customers in the last three years. This
indicates customer stickiness once the customer uses Newgen's services.

#3 - Robust R&D Capabilities

One of the critical element in a software product company is the rate of innovation and upgradation.
Since, the rate of change is very high, a company needs to be ahead of the curve in terms of new product
development and fine tuning the existing products.

In order to enhance existing products and develop new products Newgen incurs a lot on research and
development and that too on an on-going basis.

Over the years, this has helped the company to improve its existing offering and develop new products
ahead of the curve.

It has a very strong R&D team with experts in each of the verticals it operates. Out of the total 2600
employees around 300 employees (12-13% of the total employees) are dedicated to R&D department.

R&D cost represents around 7-8% of the total revenue which is way higher than other IT products
companies in India.

R &D Comparision

In the above chart, Indian IT software and product development companies spend less than 2% of the
topline on R&D, whereas, Newgen spends ~7-8% of net sales on R&D activities.

Although its global competitor-Appian spends more than 20% of the revenue of R&D, but it is yet to break
even and makes loss.

Newgen has kept perfect mix of spending for R&D and still maintaining the profitability.

As discussed, Newgen has four patents registered in India and 27 outstanding patent applications in
India and two outstanding patent applications in the USA. Patents registered in India include:

Method and system for document authentication,

System to instantly generate an online image of a document from multiple images captured
through a camera-equipped mobile device,

System and method for automatically verifying the authenticity of signatures, and

System and method for assessing document image viability.

Spending on R&D enables Newgen to:

Grow and retain its customer relationships

Successfully achieve process and productivity improvement for its customers

Continuously expand and diversify product and service offerings, as well as to maintain

Newgen's Sweet Spot - Operating Leverage to Kick in

Newgen has increased its R&D spend by 50% in the last two years. Similarly, the company has
already set up sales and marketing team (comprised 265 employees) primarily responsible for the
growth and brand building.

With this, we expect operating leverage to kick in as going forward, existing workforce will bring
incremental revenues from new geographies such as the USA. This will help the company to grow its
profit at a much faster pace compared to sales.

We believe, Newgen took the short-term pain for long-term gain.

R&D activities will continue to differentiate Newgen from its competitors and position the company for
winning complex projects.

#4 - Industry Recognition from Leading Influential Research and Advisory Firms

The company has been recognized by distinguished analyst firms, including Gartner and Forrester. In
fact, Newgen is the only player from India to feature in Gartner and Forrester.

Newgen - Only Indian Player to Achieve This Feat

Criteria - Magic Quadrant - Refers to a series published by IT consulting Forrester Wave -

firm Gartner that rely on proprietary qualitative data analysis Forrester's evaluation of
methods to demonstrate market trends, such as direction, vendors in a software,
maturity and participants. hardware, or services

Recognition - "A Visionary" in Magic Quadrant for Intelligent Business "A Leader" in the Forrester
Process Management Suites, 2017 (October 2017) WaveTM: Digital Process
Automation Software, Q3
"A Niche Player" in Magic Quadrant for Customer 2017
Communications Management Software 2017 (January 2017)
"A Leader" in the Forrester
"A Niche Player" in Magic Quadrant for Content Services WaveTM: Enterprise Content
Platforms, 2017 (October 2017) Management - Transactional
Content Services, Q2 2017

"A Challenger" in Magic Quadrant for BPM-Platform-Based
Case Management Frameworks, 2016 (October 2016) "A Strong Performer" in the
Forrester WaveTM: Dynamic
Case Management, Q1 2016

"A Strong Performer" in the

Forrester WaveTM:
Customer Communications
Management, Q2 2016

Newgen was the only vendor positioned in all four Magic

Quadrants of ECM, IBPMS, BPM-Platform Based Case
Management Framework and CCM.

Source: RHP, Forrester, Gartner

How the Future Growth Will Come?

Focusing on Mature Markets for the Next Leg of Growth

Newgen has a strong presence across regions in the banking and healthcare verticals. And now the
company is focusing on to expand its customer base in mature markets such as the USA and the UK.

As per the management, there are more than 2,000 mid/small sized banks in the US. And Newgen is
targeting this segment.

In last two years, it has aggressively forayed into the US banking segment. In fact, it has substantially
increased its marketing (2-3 times from FY16 levels) and R&D expenditure for the US market.

Currently, it has in discussion with around 150-200 customers (all mid-sized banks). Out of these it has
already acquired 15-20 banks in the US including Citi bank. Along with the banks the company is also in
approaching around 35-40 health insurance company.

The management expects this could be a huge opportunity and company could witness a J-shape
curve in the revenues. In fact, this can help the company to double its revenue in next two years.
However, for the sake of conservatism, we are not assuming this growth in our numbers which can
surprise our assumptions.

Expanding Product Portfolio and Focusing on New Verticals

Newgen's focus areas currently include business intelligence and analytics, Robotic Process Automation
("RPA"), digitalization, blockchain, dev-ops and user experience.

Recently, the company expanded its offering to include Newgen Enterprise Mobility Framework
("NEMF"), which enables rapid mobile application development with minimal coding.

Currently, Newgen is working on several projects including:

ECM NXT: content services available as microservices which are built on a true cloud
architecture to develop new content application.

Virtual Repository Services: virtual repository services to provide unified and transparent
access to content from multiple repositories and data sources, such as other ECM systems,
file servers and database.

Digital Sensing: a digital sensing platform to offer enhanced customer experience across
different communication channels such as social platforms, emails, call centre services and
web chats, through data sensing, analytics, context discovery, business rules, business
process management and unified communications management.

BPM NXT: the next generation BPM platform to enable complete no-code strategic application

Corrus: developing a no-code consumer financing app which is a zero training and feature-rich
case management tool that allows users to create and manage highly dynamic and adaptive
tasks, set goals and collaborate.

Newgen is planning to target new verticals such as education, telecommunications, oil & gas, retail,
manufacturing, infrastructure and logistics.

Focusing on Compliance Requirements

The banking and insurance industries are heavily regulated, with banks having to implement the "Know
Your Customers" (KYC) requirements by keeping detailed records of every interaction with customers.

In addition, the ability to function in a real-time manner and always-on environment will be a high priority,
as it has been in the retail banking sector for some time.

After the financial crisis in 2008, financial technology (FinTech) has become increasingly important in
the banking industry.

The growth of FinTech will increase the demand for records management as highly regulated financial
organizations need to retain large volumes of data and unstructured content and must be seen to be
transparent in their operations always.

Addressing compliance is the popular area under ECM (Enterprise Content Management). It offers a
certified Records Management System to ensure compliance with regulatory requirements in relation to
the management of records.

Industries such as BFSI, healthcare and life sciences industries where compliance is very important ECM
is a very important tool and provides opportunities to players like Newgen who is the leader is ECM

Just to give you an example (read the box below).

FATCA Readiness with Newgen

The Foreign Account Tax Compliance Act (FATCA) was enacted by the United States government in
2010, as part of the Hiring Incentives to Restore Employment Act (HIRE).

The Act is aimed at helping the US government combat offshore non-compliance. Compliance to

FATCA is complex.

Financial Institutions will need to make substantial changes in processes such as client on-
boarding, documentation, reporting and withholding. The act is intricating and evolving
continuously. This greatly impacts an organization's readiness to tackle it.

Newgen provides Financial Institutions with robust FATCA compliance software and help them
create step by step approach for a comprehensive compliance strategy. Newgen FATCA initiatives
are spearheaded by its FATCA Centre of Excellence (FATCA CoE).

Industry Overview

The share of global software spending as a percentage of global total information communication technology
(ICT) spending has been increasing and expected to grow at a CAGR of 8% over the next four years.

Digitization is driving major changes in the global business software market, with companies looking to adopt new
technologies and software platforms to meet critical business needs, including revenue growth driven via new
products and services, better customer experience and delivery mechanisms, and growth in top and bottom lines.

Key Priorities of Enterprises in IT Field

Digitization of back-office operations

Creation of new digital products and services

Exploiting data and analytics across the business

Adoption of agile methodologies and open application programming interfaces

While companies in India have traditionally lagged Western European and North American enterprises in terms of
responding to digital business requirements, it is now apparent that a significant share of Indian enterprises will
leapfrog and move ahead with their aggressive digital transformation agenda.

Total software spending in India is expected to grow at a CAGR of 12% in the next four years.

Similarly, Indian companies have a distinct advantage over enterprises in more developed regions such as Western
Europe and North America. These regions do not have such a legacy of electronically stored content, which needs
to be migrated from an existing to a new ECM system.

The importance of the Indian ECM market is reflected in the number of large global ECM vendors having offices in
India, including HPE, IBM, Microsoft, OpenText and Oracle.

Many tier-two vendors also have a direct presence. The largest Indian ECM vendor is Newgen, which also provides
BPM, Case Management and CCM solutions.

Estimated Market Size - ECM CCM and BPM Software Forecast in 2017-2021 (US$ million)

Global ECM 14,935 16,105 17,271 18,457 19,674 7.1%

India 299 342 389 438 492 13.3%

Global CCM 1,460 1,593 1,756 1,934 2,138 10.0%

India 29 34 40 46 53 16.3%

Global BPM 6,100 6,610 7,160 7,760 8,420 8.4%

India 183 200.9 224.1 247.6 271 10.3%

Source: Ovum, RHP

The BFSI industry in India is undergoing rapid transformation.

Many banks and financial services providers have invested in simplifying their core IT architecture from complex
monolithic systems towards a more componentized architecture.

Progressive banks are adopting cloud-based BPM platforms to realize the benefits of greater agility at a lower cost
of ownership.

There is also a growing need to extend traditional banking and financial services through digital channels to
provide a compelling user experience.

Banking 2020- Technology Disruption in Banking

Apart from above, the "Digital India" initiative continues to be a major driver for IT investments in the government
sector, with software spend to exceed USD 1bn in 2017.

The major investments are in the areas of easy access to government services on mobile devices (part of the
mobile government) and infrastructure modernization.

Comparison with Competitors

Newgen competes with a variety of software product and IT companies, as well as service providers. In fact, it also
faces competition from global and Indian enterprise solution companies.

Newgen's global competitors in enterprise software platforms providers primarily include, Alfresco, OpenText,

Hyland, IBM, Kofax, Appian, Pega, Microsoft, Oracle, Xerox, K2 and GMC Software.

One of its closest competitors- Appian Corp came out with an IPO in May 2017. Although, Appian's topline has
grown at a similar rate that of Newgen, however, Appian generates loss even at the EBITDA level.

This is what Appian's offer document mentions:

We generated net losses of $17.1 million, $7.0 million and $12.5 million in 2014, 2015 and 2016, respectively, and a
net loss of $3.4 million in the three months ended March 31, 2017.

As of March 31, 2017, we had an accumulated deficit of $68.4 million. We will need to generate and sustain increased
revenue levels in future periods to achieve or sustain profitability in the future.

We also expect our costs to increase in future periods, which could negatively affect our future operating results if
our revenue does not increase commensurately.

Whereas, Newgen has been profitable for the last 15 years. During this period, the company faced several
challenges including the financial crisis of 2008, middle-east oil crisis in 2016.

Not to mention, Newgen has made significant investments in R&D (~7% of the revenue) and sales team in its key
market such as USA. Despite this, Newgen has maintained a good balance of growth and profitability.

A Comparision with Best Global Players

EBITDA Margin -9% 16% 29%

PAT Margin -9% 12% 23%

Sales growth (Last 3 years) 22% 18% 11%

Source: RHP, Annual report, SEC

Thus, we believe Newgen has maintained a perfect balance between R&D expenditure and profitability unlike its
global peers.

Who Owns the Company?

Our love to find owner-operators is well known to our subscribers. What we mean by owner-operator setup is
owners who are involved in the operations of the business. This gives us the comfort on the incentives of the

The promoters hold 66.34% stake in Newgen Software. Of this, Mr Varadarajan (who is a whole-time Director of the
company) and his wife together hold stake of 28.2%, while Mr Diwakar Nigam (the Chairman and Managing
Director) and his wife together hold 38.1%.

Mr Nigam, with more than 35 years of experience in the IT industry, founded Newgen in 1992. Under his leadership,
Newgen has developed into a niche IT player focusing more on products than services and also building an
enviable bank of parents, copyrights and trademarks.

He along with Mr Varadarajan have put together a competent team of experts, propelling the company's growth in
the last couple of decades.

Owners Operators

Diwakar Nigam 28.2

Priyadarshini Nigam 12.2

TS Varadarajan 23.0

Usha Varadarajan 6.9

Total 70.3

Source: Stock Exchange, Equitymaster

Further, Newgen Software had come out with its IPO in January 2018 and super investor Sumeet Nagar's Malabar
India Fund was one of the anchor investors having picked up a stake of more than 1.2%.

In fact, Sumeet has increased his stake after the listing by entering two back to back bulk deals and the stake now
stands more than 2%.

Smart Money Invested

About the Owner

Mr Diwakar Nigam (IIT, Delhi and Madras) started Newgen in 1992 with the vision of 'One World, One Workplace'.

Mr Nigam is a founding member of NASSCOM (National Association of Software and Services Companies), India's
apex Information Technology industry association.

He is one of the members of NASSCOM's Anti-Piracy Task Group. He is also amongst the founder circle members
of the Indian Software Product Story Roundtable (iSPIRT), an industry association that primarily thrives to provide
a level playing field for Indian software companies in domestic government procurements.

Newgen started its journey by acquiring its first client-Canon Inc. Scanning through software was the starting
idea. For Canon, the company created a software product around scanning.

We recently met the management and this is what management said:

'We are not an IT Service Company because the owners of the company always wanted to create oracle and not

In 1996, Citi Bank became its first client from the banking space which gave the visibility on the global level. In
2001, ICICI Bank became a first Indian bank as its client. This provided access to the Indian banking sector. Slowly
and steadily, Newgen expanded into other geographies such as Middle East, African and the US market.

Newgen has been recognized by distinguished analyst firms including Gartner, Forrester, Frost and Sullivan, and

It is the only organization to feature in the four Magic Quadrants - Intelligent Business Process Management
(iBPM), Enterprise Content Management (ECM), Customer Communication Management (CCM) and BPM-
Platform-Based Case Management frameworks.

Closely Held by Owners

Diwakar Nigam 28.2

Priyadarshini Nigam 12.2

TS Varadarajan 23.0

Usha Varadarajan 6.9

Total 70.3

Source: RHP, Equitymaster

The company is closely held and run by promoters. In fact, promoters are not involved in any other business which
gives us an additional comfort.

Does the Company Qualify on Equitymaster's Smart Money ScoreTM?

We believe, any good business needs to pass our checklist i.e. smart money score. You can find a detailed
explanation of what the smart money score in our guide. Smart Money Secrets - A Quick Start Guide.

1. Smart Money Invested - One of the important catalysts we look for in a stock is the smart money. Based on
the holding (higher the better) and our comfort with super investor we assign a rating on a scale of 10.

We also like to see either the super investor or the promoters of the company increase their stake in the

In the case of Newgen Software Technology, Smart money has got interested at the time of IPO and funds like
HDFC, Goldman Sachs have participated as anchor investors.

However, what got our attention was our super investor Sumeet Nagar of Malabar India Fund also participated
in the IPO as an anchor investor and bought around 1.2% at the time of IPO.

In fact, he has continued buying into the company post the IPO and has bought twice via bulk deals. As of
writing this report Malabar India holds around 2.9%. HDFC mutual fund and Goldman Sachs holds 2.1% and
1.9% respectively.

Super Investor: Sumeet Nagar Bought in Bulk

Sumeet Nagar Malabar India Fund NSE - Bulk 1/29/2018 252 235

Sumeet Nagar Malabar India Fund NSE - Bulk 1/30/2018 245 235

Source: NSE, Ace Equity

Total Share Holding of Malabar India Fund

Sumeet Nagar 1.2 1.7 2.9

Source: NSE, BSE, Ace Equity

The owners of the company also hold a sizable stake in the company. Nigam and Varadarajan family owns
around 70% in the company and have not diluted their holding in the recent IPO.

Promoters Closely Holding the Company

Diwakar Nigam 28.2

Priyadarshini Nigam 12.2

TS Varadarajan 23.0

Usha Varadarajan 6.9

Total 70.3

Source: BSE, Ace Equity

We believe smart money is adequately invested in the company with promoters having their soul in the game.
Hence, we assign a rating of 10 to the company.

2. Business Quality - As many of you are aware both Smart Money Secrets Team and our super investors avoid
IPOs because IPOs are generally expensive. However, there are times when we find quality businesses with
huge run way ahead.

We believe one of the reasons that Newgen is a good bet for long term is the quality and strength of its
business and management. Over the years it has not only portrayed strong execution skills but has created a
very sticky business.

Newgen has a very niche business model and provides a wide range of software products to players like
Banks, PSUs/government, Healthcare, Insurance, Telecom etc.

In simple words Newgen provides software products that are used in different industries for content
management, process management and customer communication. (for detailed business review - read the
about the company section).

The company has an active client list of around 400 clients across 60 cities. Unlike other IT companies, it has
no concentration in terms of clients, products and geographies. Top 10 clients form less than 25% which is
very rare in IT companies.

Given, the multiple range of products for all the industries the company has immense potential for client
deepening and cross selling. This makes its business very sticky in terms of client retention. In fact, for FY17

around 80% of the total revenues were from repeat customers.

Newgen has been recognized by top two market research firms Forester and Gartner for its product innovation
and expertise in R&D.

As discussed above, the company owns around 4 patents and has filed 28 patents in India and two patents in
the US. It has also filed dozens of copyrights and trademarks. Together we call them 'Intellectual Property

Business Quality

ROEs (out of 1.5) 24% 24% 1.5

ROCES (out of 1.5) 27% 28% 1.5

Total     3


Topline Growth (out of 1) 21% 19% 1

Bottomline Growth (out of 1) 9% 25% 0.5

Operating Profits (out of 1) 14% 25% 1

Total     2.5


D/E 0.2 0.1 2


OCF/PAT 1.5 1.0 1

Source: Ace Equity, Equitymaster

As can be seen, the company has a lean balance sheet with a minimal working capital debt and strong return
ratios in the north of 20%. In fact, the company has grown at a robust pace in last five years by introducing
newer products and entering new geographies (top-line grew at a CAGR of 21% in last four years).

As discussed above the company in last two years has invested a lot in the R&D and marketing which has
resulted in lower profits. In last five years, profits have grown at a slower pace as compared to the sales.

Even though we believe, the current investments in the R&D and marketing will yield benefits in the future and
this is short term pain for long term gain, we still penalize the company for lower profit growth. We assign a
rating of 8.5 on business quality front.

3. Competitive Advantage: One of the important factors super investors look for is sustainable competitive
advantages aka economic moats. They love to invest in companies focusing on widening of moats.

In fact, Smart Money Secrets is also always on the look out for strong competitive advantages. Newgen has
over the years built a very strong and differentiated business model.

It has also managed to build a strong and sticky client base with more than 400 customers. (Food for thought
- around 80% of the revenue in FY17 was from repeat customers).

So, what makes Newgen Software Technologies ltd stand out?

# IT Product Company with Sticky Business:

Newgen is not a typical IT service company. IT services is a commodity business with labor cost arbitrage
being the biggest advantage (which is now narrowing). However, Newgen is into Software products for
industries like Banking, Healthcare, Insurance, Government/PSUs etc.

In simple language, it provides products for data management, process management and client

As many of you know all the industries that we discussed, are very data heavy with lot of data to be handled.
The data-intensity generally makes very difficult for companies to make informed decision, thus increasingly
they are moving towards software developed by players like Newgen.

As discussed above, Newgen is the only player from India providing software solutions to the above-
mentioned industries. Newgen provides a plethora of products and services to its clients which makes its
business model very sticky.

Just for your better understanding, let us think Newgen acquires a bank as its client... below are the potential
revenues from him:

Opportunity 1: Sells products like say ECM (Data management) and BPM (Process management); - Earns one
time license fee

Opportunity 2: Helps the organisation in Implementation and Integration of the products: - Earns
Implementation charges

Opportunity 3: Provides Annual Maintenance support: - Earns Annual Fees

Now, these three steps help it to increase the cart value of the customer at the time of the purchase of the
first product. And then starts the cross selling.

Once, the customer is acquainted with Newgen products it begins cross selling other products for other
domains and every sell has these three steps. Further, every product has early updates which in many cases
are to be paid by the customers.

Just to give you an example, when the company acquired ICICI Bank a decade back, it billed the bank below
one million. However, in FY17 it billed ICICI bank more than Rs 100 million.

This shows the stickiness of the business model and has helped the company in getting around 80% of its
total revenue from repeat customers.

# Strong Marketing Strategy:

As discussed above, the company has a unique marketing strategy with two marketing teams. It has divided
the sales into two parts i.e. Acquisition of new clients and Upselling the existing clients.

Given the stickiness of the business one would understand that both new and existing clients are very

important and to be dealt in a different manner. While, a new customer takes time to accept company's
product, it is easy to up-sale or cross sell to an existing customer.

Management understands this very well and has employed over 200 employees in acquiring new customers.
These employees have a very strong domain knowledge for the industries they are catering to. They have
requisite experience to get the customers on board by demonstrating the value Newgen provides to their

Once, they get the customers on board, the customers are then managed by second team which provides
service to the customers and upsells and cross sells. Since, the customers are already sold on one product it
is easier to sell them other products or increase the number of users in their organisation using Newgen's

This unique marketing strategy has helped the company in many ways like - low client and geographic
concentration. It has also helped the company to aggressively add new clients (have more than 400 active

In fact, one of the reason for high repeat customers (80% of the revenue from repeat customers) is the clear
bifurcation between two teams.

# Strong R&D Capabilities:

As we discussed earlier, one of the important elements in any IT company is innovation and rapid pace of
change. The IT software product space is no different. Newgen competes with global heavyweights like IBM,
Microsoft, Appian, Open Text etc.

Newgen has always been ahead of the curve in terms of innovation or product development and has been
recognised by market research firms like Gartner and Forester. The company spends around 7-8% of its total
revenue on R&D and employs around 12-13% of the total employees in the R&D department.

This gives the company an edge over its competitors in terms of product innovation and development. Even
though the high expenditure in the R&D has put pressure on the margins in the current fiscal (FY18) but we
like managements attitude for taking short term pain for the long-term gain.

As of writing this report company owns around 4 patents in India. It has filed around 28 patents in India and 2
in the US. Further, it has also applied for dozens of copyrights and trademarks. All these together are termed
as 'Intellectual Property' rights.

And needless to mention these intellectual properties are naturally a competitive advantage (moat) for the

# Industry Recognition from Leading Influential Research and Advisory Firms

The company has been recognized by distinguished analyst firms, including Gartner and Forrester. In fact,
Newgen is the only player from India to feature in Gartner and Forrester.

Even though Newgen competes with global giants, it has over the years developed robust R&D and innovation
capabilities which has helped it to get featured by Gartner and Forrester.

The recognition by these industry giants not only establishes credibility for Newgen, it also helps the company
to acquire new clients. Many of the customers have requirement that the supplier should be approved by
authorities like Gartner and Forrester.

Just to give you an example, while bidding for the government projects one of the criteria for qualification is
that the supplier should be approved by authorities like Gartner. This helps players like Newgen to business
over the players who are not approved by these industry giants.

# Only Profitable Company in the Niche Industry

As discussed above, the company faces competition from many global players including Oracle, IBM and
Microsoft. However, a pure play competition is from global players like Appian and Open Text.

These companies also incur a huge amount of expenditure towards R&D and marketing. Even though these
companies have grown faster than Newgen in last few years, they have not been able to break even.

In fact, Appian makes loss on EBIDTA level and expects same to continue for next two years. If we compare
Newgen with them it stands tall with a track record of being profitable in last fifteen years (for details please
refer about the company section).

This shows Newgen has maintained a perfect balance between the growth and profitability.

Even though company has a very niche differentiated model with quite a few competitive advantages over the
competitors, however, the company faces competition from global giants like Open Text, Appian and IBM etc,
thus we assign a rating of 8.

4. Soul in the Game - The idiom of soul in the game stands for the owner operated companies i.e. companies
where owners and operators of the business are same. We believe higher stake and active involvement in the
business puts the incentives perfectly aligned.

So, we look out for companies owned and operated by good managers.

As indicated earlier Newgen Software Technologies limited is owned and run by owner operators. The owners
own around 70% in the company and have not diluted their stake during the IPO. In fact, management does
not intent to dilute its stake going ahead.

Diwaker Nigam is the Managing Director and chairman of the company. He founded the company in 1992 and
had a vision to create Oracle of India i.e. to build an organization based on innovation and unique product

Consider this lines from the management:

'When we see our company being compared with Infosys and TCS we don't like it.

Not because Infosys and TCS are not good business, but because we are in altogether different business'

These lines show how much possessive the management is about their business and its uniqueness.

Further, in FY14-17, the total salary drawn stood at 3% of the total profits earned during the same period. In
FY17, salaries accounted for 3% of net profits which is very reasonable.

Also, we have gone through the auditor's report and Related Party Transactions; even though the company
has entered in some related party transactions, we do not find any material transactions which may raise
questions on the management integrity.

We believe, management has put its soul in the business. This is a kind of pattern our Super Investors look
out for. However, given the fact that management diluted some stake in FY15 we penalize the company by one
point and assign a rating of 10 on this parameter.

5. Capital allocation - One of the patterns our super investors and we seek for is the efficient capital allocation
by the management. The best way to evaluate this could be to look at both the sources and the application of
the funds by the management over a period.

Sources of Funds

By sources of funds we mean the money raised by the company to grow its business. Typically, there are three
big sources i.e. Equity Dilution, Raising Debt and Internal Accruals (cash generated by the business).

We love the companies with capabilities of funding their growth using cash generated by the business itself.
Further, if these companies are present in the industries with big market opportunity, sky is the limit for them.

In case of Newgen, in the period FY13-17, of the total funds raised by the company, around 23% of the total
funds were generated by the business.

One of the reason this number looks low is the elongated debtor days. The cash generated in a year many a
times is carry forwarded to another year. Further, the company has generated around 58% of the total cash
generated by sale of investments.

Sources of Funds over FY12-17

Application of Funds

After sourcing the capital, the next and most important aspect is the allocation of the raised money. We
believe generating cash from the business is not enough, it is very important for the company to deploy the
same in profitable ventures.

In the case of Newgen, around 54% has gone towards purchasing investments and given the asset light nature
of the business the company has just incurred a capex of 12% from the total cash generated.

Application of Funds over FY13-17

Even though the numbers look a bit subdued due to high working capital and investment in the investments
over the core business. But one should note that these numbers do not show the fact that company has been
investing heavily in R&D which has helped it over the years to grow at a robust rate of more than 20% in
topline. In fact, one of the yardstick to see the capital allocation for any company is the return on equities.
Newgen has over the years been able to generate RoEs in the north of 20% while its competitors have been
making losses on the operating levels.

Even though the business has been able to generate good return ratios we have penalized it for low cash
generation and assigned a rating of 7 for capital allocation.

6. Earnings Quality - One of the key challenges while evaluating small and mid-cap companies is the quality of
their earnings.

The growth in the sales and profits should translate into cash flows for the company. There should be a good
comparison between the accounting and cash profits to understand the quality of the earnings.

One crucial tool to check the earnings quality is the proper analysis of the Cash Flow Statements (which many
people miss to look at).

Over the years, we have found a similar pattern in companies that were fraudulent or bankrupt or both in India
and abroad. The usual culprit in both the cases involved money stuck in their working capital which meant
accounting profits weren't converted into cash profits.

We have devised a simple way to inspect earnings quality of any company. We begin with cash flow from
operations. Divide it in two parts i.e. Gross Cash Flow from Operations (GCFO) and Net Cash Flow from
Operations (NCFO). The difference being the 'changes in working capital'.

As a thumb rule, for a manufacturing company NCFO as a percentage of GCFO should not be significantly
below sixty percent. This simply means ideally not more than forty percent of the money should be stuck in
working capital.

However, the company in question is not a typical manufacturing company. It is a IT software company
catering to government/PSUs, banks etc.

Given the stickiness in the business the company has elongated debtor days. With no inventory and minimal
creditor days it has made the business working capital heavy. This has put pressure on the cash flows.

In spite of business specific issue, we have applied our rule on Newgen and over FY13-17 this number on

average stood at 32% which is below our sixty percent rule.

However, the company has been able to maintain positive cash flow from operations and earnings to cash
conversion ratio of around 100% in last five years. We have penalized the company big way on the subdued
cash flows and high working capital requirements and assign a rating of 5 on earnings quality.

7. Scalability of the Business - Identifying a good business is one thing, identifying a good business with
potential to grow at decent rates for years to come is another. One crucial factor for a business is the size of
the market it caters to.

While the IT services segment has always dominated the information technology segment over the years due
to outsourcing of the non-crucial activities to KPOs and BPOs across the world. One of the major beneficiaries
of the same has been Indian IT companies due to the technical know-how and labor arbitrage.

However, IT service industry has now become a commoditized business. The emergence of software products
to increase the efficiency and minimize the employee cost (automating the core functions) is gaining traction

If we look at the global software spend as a percentage of the total IT spend across the world it stands at 15%
in FY17 and it is expected to reach 18.9% in FY21 (as per the Ovum Report).

The current software market (ECM, BPM and CCM) stands at US$ 376.7 billion in FY17 and is expected to
grow at a CAGR of 7.8% and reach US$ 510 billion by FY21.

It is also expected that one of the fastest growing countries in terms of software products would be India due
to low penetration of software products as compared to its global peers.

For Newgen, the growth looks stronger because of its presence in multiple geographies and the consolidation
happening in the segment. The software industry in recent years has seen industry consolidation i.e. one
product companies being acquired by multiple product companies.

This gives opportunity to the multiple product companies (like Newgen) to grow faster than the industry.

Further, as mentioned earlier, Newgen has recently forayed in the US market and is in negotiation with around
150 mid-sized banks which are in final stages. This could bring a J-shape curve for Newgen and may result in
doubling of revenue in couple of years.

However, in our numbers we have not accounted for the explosive growth from the US market and expects
revenues to grow at a CAGR of 19% over FY17-FY22.

We expect company to enjoy an operating leverage in coming years (with majority of R&D and marketing
expenditure already done) with profits growing faster than the revenues at a CAGR of 25% over FY17-22.

Thus, given all these factors, we assign a rating 10 based on scalability of business parameter.

8. Market Leadership - The software product segment is a smaller market as compared to the commoditized IT
service market. Historically, there has been a consolidation in the market with smaller and single product
companies being acquired by global giant with multiple product companies.

In fact, global giants like IBM, Microsoft and Oracle in the past tried to acquire Newgen which shows the
capability they foresaw in the business of Newgen.

In fact, now with multiple products, multiple geographies and a strong client base Newgen stands tall in the
global software product industry. As indicated in the report it is the only company from India to be recognized
by Gartner and Forrester in the magic quadrant.

Even though it faces sound competition from the global giants like Appian, Open Text etc, Newgen has created
a strong footing for itself in the global arena. In fact, in terms of technology, innovation it has been rated above
or in par with these global giants.

Further, it is one of the few companies with multiple products as most of the global giants are either single
products or are involved in other businesses apart from the software product business.

So, even though the company has got all the right ingredients to be the market leader but given the
competition form the global giants in the industry we assign a rating of 8 on market leadership.

Considering the above analysis, the total ranking assigned to the company is 66.5 (out of 80). On a weighted
basis, it stands at 8.3. This indicates that fundamentals of the business are robust.

Equitymaster Smart Money ScoreTM

Smart Money Invested 10.0                     15.0% 1.5

Business Quality 8.5                     15.0% 1.3

Competitive Advantage 8.0                     10.0% 0.8

Soul in the Game 10.0                     10.0% 1.0

Capital Allocation 7.0                     10.0% 0.7

Earnings Quality 5.0                     15.0% 0.8

Scalablilty in the Business 10.0                     15.0% 1.5

Market Leadership 8.0                     10.0% 0.8

What are the Risks to be looked out for?

Higher Debtor Days Put Pressure on Working Capital: Newgen's receivable days are higher than a
typical IT company. This is because Newgen derives some of its revenues from contracts with the
Government of India and other foreign governments and their respective agencies and Public-Sector
Undertakings (PSU).

Typically, government/PSU contracts are subject to several approvals to fund the expenditures under
these contracts. Due to this, it involves a longer payment cycle, which increases its trade receivables
and debtor days.

Debtor Days 178 168 181 201 190

Source: RHP, Equitymaster

This puts pressure on its working capital cycle. Working capital is ~49% of the revenue.

However, going forward, the company is planning to bring its receivable to around 120 days. For this,
Newgen is planning to enter government contract through channel partner.

The payment terms with channel partners will be either advance payment or credit period up to 1-2

The company has already implemented this approach while dealing with Maharashtra state government
for implementing DBT (direct benefit transfer) project.

Further, the company has also revised its employee incentives i.e. if the collection exceeds a threshold
the sales employees are not eligible for the incentives.

Foreign Currency Risk: Newgen derives ~60% of its revenue from international operations. The
exchange rate between the Indian Rupee and the US dollar as well as other currencies have been very
volatile in recent years and may continue similarly in future.

Depreciation in any of currencies could impact the earnings of the company. Currently, Newgen hedges
~80%-85% of forex exposure though export packing credit.

Weak Economic Conditions Could Impact Overall Performance: Newgen's overall performance
depends on the global economic conditions. Turmoil in the credit and financial markets, concerns
regarding the stability and viability of major financial institutions, volatility in commodity prices could
impact the company's performance.

For example, due to the fall in crude oil prices in 2016, IT budgets of Newgen's existing and prospective
customers in the Middle East have significantly reduced resulting in lower than anticipated revenues
from this region. Similarly, a recent referendum in support of leaving the EU in the UK has raised
additional concerns regarding economic uncertainties.

During such time, many customers may delay or reduce technology purchases. Contract negotiations
may become more prolonged or conditions could result in reductions in the licensing of its software
products and the sale of cloud and other services, longer sales cycles, pressure on margins, difficulties
in the collection of accounts receivable or delayed payments, slower adoption of new technologies and
increased price competition.

Labour scarcity: According to the management, there has been a huge shortage of labour at project
sites over the last 2-3 years. Due to success of the government MGNREGA scheme and development of
Eastern India, there has been a big reduction in the migratory labour from states like Bihar, West Bengal
& Odisha. Because of this labour costs have risen and it has also led to cost overruns in several projects.

Updates On NEWGEN SOFTWARE Valuations

We have valued Newgen Software Technologies Ltd based on price to

Add: Alert | Portfolio
earnings. We have been very conservative
Market Data both in the growth assumption and assigning One could
of the exit multiple. The company has a very consider
Price On Reco. Date (Rs) 239 (BSE) solid track record and industry best financials. buying the
CMP - BSE / NSE (Rs) 239 / 239
stock of
Change Since Reco.  0.1%
Even though globally software product Newgen
companies are valued by price to sales Software
52-week High/Low (Rs) 266 / 215
because most of the global players make Technologies
losses even on operating level. One of the Ltd at current
BSE Code 540900
primary reason for such losses is huge price or lower.
No. Of Shares 69.2 m
expenditure in R&D and marketing (forms
Face value 10.0
around 30% of the revenue).
FY17 dividend/share (Rs) 1.5

Dividend yield (%) 0.6% Just to give you an example, Appian one of the best player in software
Stock Classification Small cap product business came out with its IPO in 2017, has been reporting losses
Free Float 29.7% from last two years and was valued at 8 times its sales.
Market Cap (Rs m) 16,539
But we have valued the company on price to earnings as Newgen has
Premium Search historically maintained a good balance between its sales growth,
investment in R&D and profitability.

As discussed, we have been very conservative about our numbers and

completely ignored the possible J-Shape curve in the US market.

We believe the company can surprise our conservative assumptions on

the positive side, so we have conducted a scenario analysis.

What we have essentially done is kept projected earnings (FY22) same

and has given a range of exit multiples that we are comfortable with.
Doing this we have tried to deduce target price based on different
combinations of the same.

The below permutations and combinations based on earnings and P/E

multiples gives a fair idea about the potential upside for the stock.
However, in addition to this we have derived a target price on basis of our


All Recommendation Reports | Latest Update | Latest Stock Quote

Expected Target Price (FY22) Under Different Assumptions of P/E Multiples

  18% 20% 22% 25% 30%

15 259 282 306 346 421

16 277 301 327 369 449

18 311 339 368 415 505

20 346 376 409 461 561

Source: Ace Equity, Equitymaster

Newgen Software Technologies Limited is a niche IT software company with a unique and sticky business model.
It has over the years diversified both in terms of geography, products and clients. Typically, an IT company faces a
lot of concentration risk which is not the case with Newgen.

Further, the company has a strong balance sheet with minimal debt and return ratios in north of 20%. Globally it
has been one of the few companies which has maintained a perfect balance between the investments in the R&D
and profitability.

Further, it has a long run way as far as the growth opportunities are concerned. The company has invested heavily
both in R&D and Marketing in last two years (increased by 50%).

This has resulted in lower profits in first half of FY18. As per the management the current expenditure in R&D and
marketing will suffice for next two to three years.

This effectively means that in coming years the sales will grow faster than the expenses which is called operating
leverage. Thus, we expect profits to grow faster than the sales over next five years.

We expect revenues to grow at a CAGR of 19% over FY17-FY22E and profits to grow at a faster pace of 25% over
the same period. Mind you, we are not accounting for an extraordinary growth that may come from the US markets
(J-shape Curve).

As discussed above, players like Appian command very premium valuations on their sales. They trade at 8-9 times
its sales. At Current price of Rs 239 the company trades at 3.9 its FY17 sales. And on a price to earnings basis the
company trades at 30 times its trailing 12 months earnings.

This looks expensive but one should note that earnings of last two quarters are not representative of the correct
earnings because company has heavily invested in R&D and marketing. The stock trades at 10 times its expected
FY22 earnings.

Given a huge run way in revenues, strong return profile and a possible operating leverage coming into play, we
have assigned an exit multiple of 18 times on expected earnings of FY22.

As such, we have arrived at a target price of Rs 416 for the company (from FY22 perspective). This implies a CAGR
of 15% and a point to point upside of 74%.

Please Note - We are completely ignoring a possible explosive growth in the US market. The company is in final
stage in negotiating with around 140-150 mid-sized banks. It has already acquired big names like Citi bank. This
may possibly lead to an explosive growth in revenues and surprise our assumption.

The maximum buy price for the stock is Rs 260.

Even though we have valued the company using Price to earnings ratio. We also have looked at the company from
Price to sales perspective.

Further we have also looked at the company by re-stating the profit and loss account. What we have essentially
done is amortised R&D and marketing over the period of five years rather than expensing it out. (This is on the
premise that the benefit of these R&D and marketing expense will come in next five years and not immediately. We
believe, expensing them out right away does not portray the true picture).

Price to Sales Basis

What we have essentially done is kept projected sales (FY22) same and has given a range of exit multiples that we
are comfortable with. Doing this we have tried to deduce target price based on different combinations of the

The below permutations and combinations based on sales and P/S multiples gives a fair idea about the potential
upside for the stock. However, in addition to this we have derived a target price on basis of our numbers.

Expected Target Price (FY22) Under Different Assumptions of P/S Multiples

  12% 15% 18% 20% 25%

2 335 364 395 446 543

2.5 418 455 494 558 679

2.8 468 509 553 625 760

3 502 546 593 669 814

Source: Ace Equity, Equitymaster

As discussed above, players like Appian command very premium valuations on their sales. They trade at 8-9 times
its sales. At Current price of Rs 239 the company trades at 3.9 its FY17 sales. The stock looks relatively cheap as
compared to its global peers and trades at 1.5 times expected FY22 sales.

Given a huge run way in revenues, strong return profile and a possible operating leverage coming into play, we
have assigned an exit multiple of 2.8 times on expected sales of FY22.

(As such, we have arrived at a target price of Rs 416 for the company (from FY22 perspective). This implies a
CAGR of 15% and a point to point upside of 74%.

Re-stated Profit and Loss Account:

Any profit and loss account is based on a matching principle i.e. it deals with income and expenses of a year.
However, there are times when there is a timing mismatch between the income and the expenses.

In the case of Newgen, the company incurs heavily on marketing and R&D. As discussed above, the R&D
expenditure constituted around 8% of the total revenue. In fact, employees in marketing and R&D are ~18-20% of
the total employees.

Both marketing and R&D are key drivers of revenue for the company and the benefit of current expenditure gets
carried forward to future years. So, effectively (ignoring the book keeping entries) these expenditures will give
benefits in years to come but the expenses are recognised today i.e. in advance.

So, we believe the best way to look at this company would be to treat both these expenses as capital and amortize
them over the period of five years. (Please note, this is a rough estimate to understand the true earnings if income
and expenses were to be matched over the period of five years)

Re-stated P&L Account

Sales 3,100 3,468 4,271 2,072.5


EBIDTA 588 397 700 97

% 19% 11% 16% 5%


Adjusted EBIDTA 772 615 924 227

% 25% 18% 22% 11%


PAT 653 505 747 191

PAT Margins 21% 15% 17% 9%

Normal ROE 24% 13% 21%  

Adjusted ROEs 31% 22% 27%  

Source: Equitymaster

What this essentially means is that the actual profits are way higher than reported profits as the income for the
current expenditure will yield over the period of next five years.

If we look at the adjusted profits the company is trading at 22 times its trailing twelve-month earnings which is
reasonable as compared to 30 times on a reported earnings basis.

Please Note - We have done this exercise of re-stated P&L just for understanding and we have valued the company
on price to earnings basis.

According to us, in a scenario of ideal allocation of funds, predominantly mid and small-cap stocks could be
considered to comprise of not more than 30-40% of your total equity portfolio. Further, we believe a single small
cap stock should not form more than 2-3% of the total portfolio. Please note that this allocation will vary from
person to person. For something that works best for you, we recommend you talk to your investment advisor.

Consolidated Financials

Sales 3,100 3,468 4,271 5,185 6,277 7,511 8,836 10,299

Sales growth (%) 25% 12% 23% 21% 21% 20% 18% 17%

Gross Profit 3,098 3,468 4,234 5,148 6,240 7,474 8,799 10,262

Gross Profit Margin (%) 100% 100% 99% 99% 99% 100% 100% 100%

Operating Profit 588 397 700 741 1,081 1,417 1,764 2,123

Operating Profit Margin (%) 19% 11% 16% 14% 17% 19% 20% 21%

Net Profit 469 287 524 533 777 1,036 1,322 1,618

Net Profit Margin (%) 15% 8% 12% 10% 12% 14% 15% 16%


Balance Sheet

Fixed Assets 232 569 549 1,019 1,385 1,232 1,078 924

Other Assets 197 278 359 273 306 343 383 426

Inventories 0 0 0 0 0 0 0 0

Receivables 1,761 2,055 2,394 2,699 3,095 3,498 3,873 4,232

Cash and Bank Balances 187 236 348 242 204 894 1,839 3,044

Current Assets 2,813 3,045 3,558 3,786 4,221 5,401 6,814 8,479

Total Assets 3,243 3,892 4,467 5,078 5,912 6,975 8,275 9,830


Net Worth 2,114 2,293 2,746 3,151 3,741 4,529 5,534 6,763

Long Term Debt 0 0 0 0 0 0 0 0

Short Term Debt 446 588 523 523 523 523 523 523

Other Non Current Liabilities 87 248 249 249 249 249 249 249

Current Liabilities 1,043 1,351 1,471 1,678 1,921 2,196 2,492 2,818

Total Liabilities 3,243 3,892 4,466 5,078 5,912 6,975 8,275 9,830

Key Financial Ratios

Operational & Financial Ratios

EPS (Rs.) 7 4 8 8 11 15 19 23

Book Value per share (Rs.) 31 33 40 46 54 65 80 98

Dividend Payout Ratio (%) 15% 15% 20% 20% 20% 20% 20% 20%

Margin ratios (%)

EBITDA Margins 19% 11% 16% 14% 17% 19% 20% 21%

EBIT Margins 20% 11% 17% 14% 17% 18% 20% 21%

PBT Margins 19% 10% 16% 13% 16% 18% 19% 20%

PAT Margins (adj) 15% 8% 12% 10% 12% 14% 15% 16%

Performance Ratios (%)

ROE 24% 13% 21% 18% 23% 25% 26% 26%

ROCE 27% 14% 23% 21% 26% 30% 31% 32%

ROIC 40% 19% 27% 22% 29% 37% 47% 57%

Turnover Ratios Days

Debtors 181 201 190 179 168 160 152 144

Inventory 0 0 0 0 0 0 0 0

Creditors 13 15 14 14 15 15 15 15

Cash Conversion Cycle (days) 168 185 176 165 154 146 137 129

Fixed Assets turnover (x) 7 5 5 5 4 4 5 5

Financial Stability Ratios (x)

Debt-equity 0.2 0.3 0.2 0.2 0.1 0.1 0.1 0.1

Current ratio 3 2 2 2 2 2 3 3

Growth Ratios

Net Sales growth (%) 25% 12% 23% 21% 21% 20% 18% 17%

PAT growth (%) 14% -39% 82% 2% 46% 33% 28% 22%

Valuation Ratios

Price to earnings (x) 34 55 30 30 21 15 12 10

Price to book value (x) 8 7 6 5 4 4 3 2

Price to sales (x) 5 5 4 3 3 2 2 2

Performance Review
This is as per the closing prices for the stocks as on 26th February 2018.

The stock of SP Apparels is trading below the price at which we had originally recommended the stock. Our
maximum Buy price for the stock is Rs 460. Thus, we maintain BUY view on the stock of SP Apparels.

Our view on the stock of TCPL Packaging Ltd remains a HOLD considering the steep run-up in its prices post our
recommendation. Please note the maximum Buy price for the company is Rs 600.

The stock of Ador Fontech Ltd has also gained since our recommendation. The maximum Buy price for the
company is Rs 100. Given that the current price is above the maximum Buy price, our view on the stock of Ador
Fontech remains HOLD.

Mayur Uniquoters has also gained considerably since we recommended the stock. The maximum Buy price for
this stock is Rs 400. Since the current price is above our maximum Buy price, our view on the stock of Mayur
Uniquoters remains a HOLD.

TVS Srichakra Ltd has also gained quite a bit since we recommended the stock. The maximum Buy price for this
stock is Rs 3,250. Thus, our view on the stock of TVS Srichakra Ltd remains a HOLD.

Honda Siel Power Products Ltd has moved upwards since we recommended the stock. The maximum Buy price
for this stock is Rs 1,400. Since the current price is above our maximum Buy price, we change our view on the
stock of Honda Siel Power Products Ltd from BUY to HOLD.

Jagran Prakashan Ltd has fallen since we recommended the stock. Thus, the current price is still below our
maximum Buy Price of Rs 185. Hence, we maintain our BUY view on the stock of Jagran Prakashan Ltd.

Ashiana Housing Ltd has fallen a bit since we recommended it last month. The maximum Buy price for this stock
is Rs 200. Hence, we maintain our BUY view on the stock of Ashiana Housing Ltd.

The performance review of our open positions table is mentioned below:

Summary of Open Positions for Smart Money Secrets as on 26th February 2018

SP Apparels Ltd 3-Jun-17 Buy 424 766 339 -21% Buy 130%

TCPL Packaging 23- Buy 515 1,100 620 23% Hold 73%
Ltd Jun-17

Ador Fontech Ltd 27- Buy 95 169 122 16% Hold 53%

Mayur Uniquoters 21- Buy 345 673 509 44% Hold 35%
Ltd Aug-17

TVS Srichakra Ltd 25- Buy 3,127 4,934 3,745 16% Hold 36%

Honda Siel Power 26- Buy 1,314 2,387 1,486 11% Hold 64%
Products Ltd Oct-17

Jagran Prakashan 22- Buy 171 312 168 -4% Buy 90%
Ltd Dec-17

Ashiana Housing 27- Buy 187 328 171 -8% Buy 91%
Ltd Jan-18

Newgen Software 2/26/2018 Buy 239 416 239 0% Buy 74%

Technologies Ltd

The Top Stocks To Consider Buying Now

As you are aware, the list of top stocks allows subscribers to choose a handful of Best buys from amongst our buy
recommendations. The 'must have' criteria for stocks to be eligible in the list of best buys are a high rating on the
Smart Money Score. The additional level of filter will be their return potential over a period of three to five years.
But as you understand, the list will not be static but will evolve over time.

Of the ten stocks we have recommended under Smart Money Secrets so far, seven have run up since we had
recommended them, while a couple of them are still attractive. Thus, the list for this month comprises Newgen
Software and Ashiana Housing Ltd. The potential upside allows subscribers to buy these stocks even at current

Please do pay attention to our latest views on the stocks mentioned in this list every month.

Here is our list of Top Stocks To Consider Buying

>> Newgen Software Technologies Ltd.

>> Ashiana Housing Ltd.

Kunal Thanvi (Research Analyst), Managing Editor,Smart Money Secrets, a member

of the Institute of Chartered Accountants and the Companies Secretaries of India. He
started his career with a PMS as a buy-side analyst. He is a balance sheet driven
analyst who loves niche businesses with competitive advantages.

He practices value investing based on Ben Graham's principles of 'Margin of Safety'

and 'Mr Market'. He is an avid reader who believes it's better to learn vicariously than
the hard way.

Where Smart Money Secrets Fits In...

Our team will focus primarily in the mid and small cap domain. Having said that, we will remain market-cap agnostic towards
mispriced opportunities that the markets may present to us.

Market participants must note that stock markets tend to be very volatile. Mid and Small cap stocks are inherently riskier
compared to large blue-chip stocks. On the brighter side, they present a huge growth potential. It is not unusual for a good small
and mid-cap stock to turn a multibagger in a short period of time. But on the flipside, there is a considerable risk attached. And
putting too much money in a single stock or sector can be very risky.

According to us, in a scenario of ideal allocation of funds, predominantly mid and small-cap stocks could be considered to
comprise of not more than 30-40% of your total equity portfolio. Further, we believe a single small cap stock should not form more
than 2-3% of the total portfolio. Please note that this allocation will vary from person to person. For something that works best for
you, we recommend you talk to your investment advisor.

Frequently Asked Questions
These are some of the Most Frequently Asked Questions on Smart Money Secrets. Please view the others here.

If the stock price runs up post the recommendation and trades at levels higher than the
buy price, should one still buy the stock?
Please note that small and midcap stocks, in general, have low market capitalisation and liquidity. There is always
the possibility that these stocks may shoot up in price in no time, even at the time of our recommendation.

Therefore, we would like to recommend to our subscribers not to chase prices and not to consider buying a stock
once it goes beyond our recommended maximum buy price. There will be enough recommendations in a year so
that the pain of missing out on a few recommendations is eased considerably.

Do note that we give maximum buy price range for every stock we recommend in Smart Money Secrets.

Can there be an overlap or contrary views on the stocks recommended under this service
and that of the other Equitymaster services?
We believe that earning good returns from stocks is all about following a well-defined process.

In line with this, each of our product teams, be it the Smart Money Secrets team or Hidden Treasure or The India
Letter, has its own unique screen and checklist for selecting and recommending stocks. In rare cases, where there
is a compelling proposition to recommend a stock in more than one service simultaneously, could there be an
overlap in stocks.

For example, the Smart Money team has unique smart money screener for any stock to pass i.e. 1) Greater than 1%
shareholding of Super Investors; 2) Bulk & Block Deals; and 3) Increasing Promoter Shareholding. On the other
hand, same stock could be recommended under another service irrespective of the smart money screener. In fact,
any service may have recommend a stock and now smart money has entered the stock, it becomes a candidate
for Smart Money Team.

Thus, there could be recommendations that overlap with those in our other services. This aspect also leaves the
stage open for sometimes contradictory recommendations.

What does 'Closed Position' mean?

StockSelect recommendations are meant to meet the target prices within a time frame of three years. So when the
stock meets target price or completes the time frame we 'close the recommendation'. However, since we keep
reviewing our assumptions and estimates for the stock even in the interim, the view or target price on the stock
may warrant a change. This could be a revision upwards or downwards. In such cases, if the previous
recommendation on the stock is no longer valid we close that recommendation. So we essentially close
recommendations either by giving a Sell view or putting out a changed view.

How to read the returns calculations?

For positions that are not closed returns are calculated from date of recommendation till date.

For closed positions, there can be two types of calculations.

Assuming we initially gave a Buy on a stock with no subsequent recommendations on the same stock.
In that case the calculation is fairly simple. The returns shown in this case is simply the change in stock

price from the date of recommendation till the date on which the position was closed.

Now let us take a case where we initiated with a Buy (1st position) and subsequently came with another
recommendation (2nd position) on the same stock. Let us assume that the subsequent
recommendation was also a buy. In such cases, the return calculation depends on whether the 1st
position is closed or not. If the first position is closed before we reiterate buy then the return on the first
position will be calculated as shown previously. However, if 1st position was not closed before we
reiterated buy, then the return calculation is from the earlier buy recommendation till the date on which
the position was closed. Basically where we have reiterated view on a stock we try to show cumulative
returns. The same logic applies with Hold recommendations as well.

Now let us look at Sell recommendations. There can be two situations here.

If there is no recommendation subsequent to the Sell recommendation we show maximum drop in stock
price from date of sell recommendation till date.

If the Sell recommendation is followed up by another recommendation, we show maximum drop in stock
price between the two recommendation dates.

Basically we have tried to cover all hypothetical instances in this note that may help you better understand the
return calculations and closed positions of our recommendations. If you have any query pertaining to it please do
write in to us for further clarifications.

Definitions of Terms Used

Buy recommendation: This means that the subscribers could consider buying the concerned stock at
current market price keeping in mind the tenure and objective of the recommendation service.

Hold recommendation: This means that the subscribers could consider holding on to the shares of the
company until further update and not buy more of the stock at current market price.

Buy at lower price: This means that the subscribers should wait for some correction in the market price
so that the stock can be bought at more attractive valuations keeping in mind the tenure and the
objective of the service.

Sell recommendation: This means that the subscribers could consider selling the stock at current
market price keeping in mind the objective of the recommendation service.

To enhance your experience of using Smart Money Secrets and to ensure that this journey is smooth for you we have compiled a list
of Frequently Asked Questions.


Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint
venture between Quantum Information Services Private Limited (QIS) and Agora group. Equitymaster is a SEBI registered Research Analyst under the SEBI (Research
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An independent research initiative, Equitymaster is committed to providing honest and unbiased views, opinions and recommendations on various investment
opportunities across asset classes.

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For the terms and conditions for research reports click here.

Details of Associates are available here.


a. 'subject company' is a company on which a buy/sell/hold view or target price is given/changed in this Research Report.
b. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any financial interest in the subject company.
c. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one percent or more securities of the subject
company at the end of the month immediately preceding the date of publication of the research report.
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a. Neither Equitymaster nor it's Associates have received any compensation from the subject company in the past twelve months.
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brokerage services from the subject company in the past twelve months.
e. Neither Equitymaster nor it's Associates have received any compensation or other benefits from the subject company or third party in connection with the
research report.


a. The Research Analyst has not served as an officer, director or employee of the subject company.
b. Equitymaster or the Research Analyst has not been engaged in market making activity for the subject company.

Definitions of Terms Used:

a. Buy recommendation: This means that the subscriber could consider buying the concerned stock at current market price keeping in mind the tenure and objective
of the recommendation service.
b. Hold recommendation: This means that the subscriber could consider holding on to the shares of the company until further update and not buy more of the stock
at current market price.
c. Buy at lower price: This means that the subscriber should wait for some correction in the market price so that the stock can be bought at more attractive
valuations keeping in mind the tenure and the objective of the service.
d. Sell recommendation: This means that the subscriber could consider selling the stock at current market price keeping in mind the objective of the
recommendation service.


If you have any feedback or query or wish to report a matter, please do not hesitate to write to us.


Sorry! There are no related views on news for this Ashiana Housing Ltd.
(Smart Money Secrets)
Jan 27, 2018

Smart Money Secrets recommendation report for

the month of January 2018.

Jagran Prakashan Limited

(Smart Money Secrets)
Dec 22, 2017

Smart Money Secrets recommendation report for

the month of December 2017.

Honda Siel Power Products: Still Awaiting a

Rural Recovery
(Quarterly Results Update - Detailed)
Dec 11, 2017

Good monsoons and a strong product portfolio are
expected to improve Honda Siel's growth prospects
in the coming quarters.

TVS Srichakra: Rise in Depreciation Hits Profit

(Quarterly Results Update - Detailed)
Dec 8, 2017

TVS Srichakra is gearing up to cater to the

replacement demand in the export markets in the
coming months.

AIA Engineering Limited

(Smart Money Secrets)
Nov 27, 2017

Smart Money Secrets recommendation report for

the month of November 2017.

More Views on News     Recommended Reading


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