Allied Digital Services
Company Background:
Allied Digital Services Ltd, founded in 1995 operates in the IT Infrastructure management and support services space. ADSL primarily caters to the BFSI, telecom and manufacturing sectors and have recently entered the technical BPO space.
Shareholding Pattern:
| As on 30th Sep 2007 | Holding % | No of Shares (in lacs) |
| Promoters | 65.1 | 112.5 |
| Non promoter corporate holding | 8.4 | 14.5 |
| FII & MF | 17.1 | 29.6 |
| Public & Others | 9.5 | 16.4 |
Transforming into a niche services provider:
From a system/network integrator (solution business), ADSL has been successfully transforming into a managed services and tech support services provider by incubating new offerings like infrastructure management (including remote), network security management and technical BPO services. Newer services are mainly delivered to the domestic clients supported by the strong geographical presence at 92 locations over 25 states across the country.
Niche services offerings to drive revenue growth:
Revenue mix has been fast shifting towards services aided by management’s focus and high growth potential of the newly incubated services, especially IMS/RMS. The company expects services business to drive growth with its revenue share increasing from current 22% to 35% in FY08 and 50% by 2012. the recent set-up of network operations center (NOC) and security operations center (SOC) would provide a major boost to services revenues. Further, the company is looking at expanding its SOC by another 200 seats taking the total to 225 seats.
High visibility of revenues and ample scope for profitability improvement:
Presently, the order book stands near Rs 150 crore, about >2x Q2 FY08 revenues, and is executable within next 12 months. Break-up of order book between solutions/services is 40:60 approximately. For the RMS part of the business, ADSL has a visibility of Rs 15 crore for H2FY08. Revenues would be split approximately evenly across NOC & SOC. Further, increasing revenue share of services would improve operating margin in H2 FY08 and FY09. ADSL earns high 50-55% operating margin in services segment as compared to 15-20% in solutions segment.
Financials:
| March (Rs Cr) | FY06 | FY07 | FY08E | FY09E |
| Revenues | 89 | 156 | 304 | 548 |
| YoY growth (%) | 71.2 | 76.4 | 95 | 80 |
| Operating profit | 17 | 33 | 67 | 126 |
| OPM (%) | 19.1 | 21.2 | 22 | 23 |
| Pre-exceptional PAT | 12 | 23 | 47 | 88 |
| YoY growth (%) | 737.5 | 90.1 | 105.7 | 85.8 |
| EPS (Rs) | 7 | 13.3 | 27.3 | 50.7 |
| P/E (x) | 107.5 | 56.6 | 27.5 | 14.8 |
| Mcap/Sales (x) | 14.7 | 8.3 | 4.3 | 2.4 |
Aggressively pursuing acquisitions:
ADSL is looking at acquiring companies of the order Rs 20-40 crore. It is in talks with a few players in the same line of business. This would provide a boost to their revenues and earnings going forward. The inorganic initiatives would be funded from the IPO proceeds of Rs 86 crore and through additional fund raising.
Valuations attractive at 14.8x FY09E EPS:
Though the stock has run up sharply in the recent past, there is still ample upside scope based on the expected robust growth earnings (including boost from inorganic growth). We assign an earnings multiple of 20x to FY09E EPS to arrive at a 12-month target price of Rs 1014 implying 35% upside.
Disclaimer:
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