Stock Idea: Allied Digital Services Ltd

Allied Digital Services Ltd (Rs 225)

(BSE Code- 532875 NSE Code- ADSL)

(P/E- 9, FY10 Sales- Rs698 cr, Market Cap- Rs1045 cr)

As businesses around the world grow, so do their IT spend and the complexity in managing IT infrastructures. With companies having their offices at multiple locations, it has become very important that their IT infrastructure is secure and running all the time. For this, outsourcing IT infrastructure to experts is the viable solution for any organisation, so that it can spend resources on its core activities and thereby save time and money. This trend favours IT infrastructure management company - Allied Digital Services (ADS), which has to its credit, the first Security Operation Center (SOC) that provides proactive protection and risk management for enterprise security round the clock. ADS is riding on high-growth domestic markets of system integration (SI); IT infrastructure management services (IMS) and remote infrastructure management (RIM). RIM is expected to be $13-15bn opportunity for the Indian IT industry by 2013 from the current $3.6 bn, as per the latest Nasscom and McKinsey report. Recent acquisition of EnPointe Global Services (EGS), the US-based IMS provider, marks ADS’s foray into international markets

ADS is into IT infrastructure management, security management and technical support services. The company, which has long been present in the domestic market, is now also looking at global markets. The company has started venturing into overseas territory, mainly the US and Australia. It acquired a US company called EnPointe Global Services, a carved-out subsidiary of Nasdaq-listed EnPointe Technologies in July this year. On the domestic front, the company sees ITenabled services, pharma outsourcing, knowledge process outsourcing and contract manufacturing as some of the demand growth areas for its network and security operations.

System integration, which involves designing and setting up of IT infrastructure for enterprises, accounts for 70% of ADS’s revenue and enjoys EBIDTA margins of about 18%. The balance 30% of the revenue is generated from ‘services’ comprising of Infrastructure Management Services (IMS), annual maintenance contracts and technical support. The company is working towards increasing the contribution from services to about 50% by FY10 as it enjoys a much higher EBIDTA margin of 50-60%. The company enjoys 13% market share in the domestic IMS segment and caters to a diverse customer base across the banking, manufacturing, retail, telecom and BPO industries. As per McKinsey, the global IMS industry size is estimated at $524 billion in 2008. Out of this, the addressable market for remote IT infrastructure management services (RMS) is estimated at $104 billion. RMS is a major thrust area for ADS. Through a global development centre, which comprises Network Operation Center (NOC) and Security Operation Center (SOC), ADS provides remote management services

ADS delivers services through its own facilities and centres, spread across 92 cities and follows a ‘direct’ model rather than a franchisee model, as adopted by its peers. This gives the company a direct control on the quality of service and helps it maintain the desired level of efficiency due to uniformity in training. Also worth noting is the fact that, ADSL has a vendor neutral approach and does integration based on the customer’s requirement. This has led ADSL to be a solution partner for some of the big names in the industry and develop technical expertise over a vast range of products. Since security compliance would be a subject of meeting regulatory requirement, US economic slowdown will pose minimal risk to ADSL’s prospects, while the currency risk is limited as more than 90% of ADSL’s revenue come from domestic operations.

ADS’s revenues and profits have grown at a CAGR of 45% and 70%, respectively in the last three years. For the year ended March 2010, ADSL posted 26% growth in consolidated revenues at Rs 698 cr. Solutions accounted for Rs 305 cr. (44%) and services accounted for Rs 392 cr.(56%) of the revenues. EBIDTA margins increased 210 bps y-o-y to 20.4%. Net profit increased 38% to Rs 106 cr.. On a equity of 23.24 cr.(Promoters’stake- 43.43% FII / MF stake-30.48%), the EPS on a Rs 5 paid up share stood at Rs 22.8. ADSL has a strong order book of Rs 540 cr. (approx 59% of FY11E revenues) which increases the revenue visibility going forward. ADS is expected to post a growth 40%-50% CAGR in EPS over next 3 years. At the current market price of Rs 225, stock trades at 9.8x and 7.5x of FY10 (Rs 22.8) and FY11E earnings(Rs 30), respectively. Strong revenue visibility, changing business mix, improving margins and higher return ratio make it a good investment bet. Investors can start accumulating the stock at current levels and add more on declines for decent returns of 50%-60% over the next 8-10 months. Accumulate

Source: Internet (Valuenotes by Sanjay Chhabria)