Allied Digital Services Ltd (ADSL) is a leading IT Infrastructure management and Technical Support Services outsourcing Company. It enables global, large and medium enterprises and service providers to reduce their total cost of ownership using a combination of onsite and remote services. It primarily acts as a support-partner for IT infrastructure products like desktops, laptops, servers, network software, routers etc.

Key Highlights

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Future Outlook

At Current market price of Rs218, the stock is available at a P/E of 6.89x of its FY11E earnings, and 5.43x of its FY12E earnings. We recommend a BUY with target price of Rs 320, given that
company’s future shows potential.

COMPANY PROFILE

ADSL is an IT Infrastructure Management and Technical Support Services Outsourcing Company. It has over two decades of experience in enterprise IT Infrastructure, management and implementation & consulting on complex IT Solutions for different business verticals. Company has about 2,265 Committed Professionals from different managerial and engineering backgrounds operating across 132 location in India and across locations in USA and Australia

ABOUT MANAGEMENT:

Mr. Nitin Shah, aged 55 years, is a Promoter, Chairman and Managing Director of the Company. He holds a Bachelors Degree in Electrical Engineering from University of Mumbai and a Post Graduate diploma in Computer Management from Jamnalal Bajaj Institute of Management Studies, Mumbai. He is a member of Manufacturer’s Association of Information Technology and Traders Association of Information Technology. He is also a member in the Business Expert’s Panel in Indian Express publication. He has an experience of thirty two (32) years in the IT industry. Prior to this, he had worked with Crompton Greaves Limited and Nelco Limited. He has also worked in CMC Limited for five years as a Customer Support Engineer and Hinditron Computers Private Limited for two (2) years as a System Engineer.

INFRASTRUCTURE MANAGEMENT SERVICES:

Allied Digital's proven Infrastructure Management Services OPTIMIZES customer's IT Infrastructure and help slash IT costs across the organization while significantly increasing efficiency, minimizing security risks, data theft and loss of productivity.

Managed Services:

Company’s Services are specially designed to effectively manage, optimize and secure the customer's distributed IT infrastructure across the country and across the globe. Its hybrid Managed Services model offers flexible IT solutions to meet the day to day operational needs of the clients, providing them both onsite and remote support - 24 X 7 X 365. It is the trusted provider of real-time Infrastructure Management Services, powered by the most advanced Remote Infrastructure Management
Services (RIMS) tools available in the market.

Remote Infrastructure Management Services:

Its state of the art Global Command Center remotely deploys both network and security infrastructure services for enterprises across the globe.

NETWORK OPERATIONS CENTER (NOC):

Company provides Remote Services through its state of the art Network Operations Centre (NOC) located at Mahape, Navi Mumbai. It provides value-added professional services to help companies deal comprehensively with multi-vendor technologies relating to IT management. The company uses an extremely robust Enterprise System Management (ESM) software platform with technology and services designed for vendor independence and they can inter-operate with any IT systems. It has developed specialized managed services and solutions to address customized needs for clients like Microsoft and Cisco.

SECURITY OPERATIONS CENTER (SOC):

Through SOC in Mahape, Navi Mumbai: it provides remote monitoring of security solutions deployed at customer’s site. This includes Firewalls, IDS, Gateway routers & VPN appliances. This service will include remote log analysis of security devices,
monitoring critical alerts and external vulnerability scanning of customer’s network.

INTEGRATED SOLUTIONS:

Allied Digital integrates technologies from across platforms providing safety, security and device control networking solutions with its dual offerings of:

Intelligent Building Management Solutions:

Allied Digital offers Intelligent Building Management Solutions (IBMS) using open systems and providing a single web based console for managing the entire building resources from a single location - local or remote. It integrates different crucial
subsystems in a building such as HVAC, lighting, elevators, etc.

Integrated Physical Security Solutions:

Allied Digital provides comprehensive and seamlessly integrated security solutions that bring together Surveillance, Video Analytics, Access Control Systems, Biometric Solutions, Perimeter Detection Systems, and Intrusion Detection Systems etc.
It also provides Mobile Command and Control Systems that can interpret video and data in real time to create Actionable Intelligence for a proactive response to avert potential threats.

NETWORKING & COMMUNICATION SOLUTION:

Allied Digital's Networking and Communications solutions enables anytime, anywhere, secure communications throughout the company and across the world by bringing together core networking and communications functions. It offers scalable solutions
and allows technical staff to manage the network centrally.

ENTERPRISE COMPUTING SOLUTIONS:

Allied Digital helps customers to set up IT infrastructure with solutions designed to reduce complexity and built around scalability. With server management technology, customers can see what IT assets they have, how they are used and how they perform.

For the quarter ended March 2010, on y-o-y basis, ADSL reported 31.29% rise in revenues at Rs 133.18 crore with operating margins improving 300bps at 29.49%. Other income was at Rs 1.96 crore, interest cost was down 27% at Rs 0.75 crore on the back of repayment of some debt and depreciation charge was up 88.35% at Rs 1.94 crore. Tax provision for the quarter was up 113.75% at Rs 6.22 crore with effective tax rate at 17% up 517bps and the resultant net profit was up 39.97% at Rs 30.36 crore.

On Consolidated Basis, company reported revenues of Rs 193 crore, up by 21% y-o-y and 8% q-o-q. Operating Margin stands at 21.3% for the quarter, reflecting growth of 360 bps y-o-y. Its operating margins had increased consistently on quarterly basis i.e. OPM in Q1 are 18.8%, Q2 20.3%, Q3 20.8%. The margins are improved due to increase in share of services business in the total revenues which operates at higher operating margins.

Net profit for the quarter stands at Rs 31 crore, up by 41% y-o-y and 14% q-o-q.

During FY10, the Net Sales of the company witnessed an increment of 20.25% to Rs 470.98 cr as against Rs 391.64 cr during the corresponding period last year. Correspondingly, the PBIDT of the company worked out to be Rs 133.61 cr increased 34.7% as against Rs 99.16 cr over last year, as on standalone basis, share of services business in revenues increased by 7% to 35% in
FY10 from 28% in FY09 which have OPM of 73% where solutions business have OPM of 27%. This results in the increment of operating profit margin by 305 bps to 28.37% over last year.

However, Net profit after tax registered a growth of 30.45% to Rs103.76 cr as against Rs79.54 cr over the corresponding period last year. The interest cost of the company witnessed an increment of over 27.7% to Rs 3.32 cr as against Rs 2.6 cr in the previous year. The effective tax rate for the FY10 stood out at 16.19%.

KEY CONCERNS

General Economic Conditions: General economic slowdown may compel the company’s clients to postpone their decisions to acquire newer technology and reduce their IT operations cost. In turn, such a scenario may affect the revenue and profitability of the company.

Foreign Currency Fluctuation: Company’s foreign revenue is primarily earned in US Dollars. The exchange rate between Indian rupee and US dollar has fluctuated significantly in the recent past and the same may continue fluctuating in future. Currency fluctuation some time may turn out highly unfavorable and may adversely affect the revenue and gross margins.

Not a Technology Originator: Company’s Enterprise Computing Team gives various technology solutions to customer. These solutions are usually conceived using building blocks of different range of IT products namely computing, storage, networking, security and software products. Very often this range of IT products belongs to different OEMs and functioning of final solutions
highly depends on integration of all products.

Pricing Pressure: The Indian IT market (domestic) has been viewed as a highly emerging market compared to other markets, hence it has become a focused market for several large Indian IT firms & various global IT giants. Though the Company is comfortably placed because of its rich experience and vast geographical presence in the market place, but highly competitive scenario can create pricing pressure and may affect its gross margin in the long run.

Human Resources: Services business is a highly Human Resource intensive. An increased demand of IT professionals may result in increased attrition which may affect business in the short term.

ANALYSIS & REPORT

Why to invest in shares of Allied Digital Services Ltd.?

SECTOR:

Earlier Application Development and Maintenance (ADM) and Business Process Offshoring (BPO) industries have dominated offshoring business. Now, Infrastructure Management Services (IMS) that manage an enterprise’s core IT systems (hardware, software, connectivity and people) becomes equally important.

The Infrastructure Management Services (IMS) industry is moving towards a remote delivery model where services are increasingly delivered by vendors from low-cost locations. This phenomenon is a by-product of three factors – the continuous effort by enterprises to enhance service and performance levels and reduce costs, advancements in technologies that have improved infrastructure efficiency and management, and evolution in offshore capabilities. The addressable market for RIMS is estimated to be worth US$96 billion to US$104 billion. Remarkably, this emerging segment is comparable to the offshore ADM opportunity of US$77 billion to US$93 billion and offshore BPO opportunity of US$120 billion to US$150 billion. It is expected that the majority of growth will come from off-shoring midrange services, which would likely to account for approximately 70 percent of the overall opportunity by 2013. So far, India
accounts for US$3 billion to US$4 billion of the total US$6 billion to US$7 billion worth of services off-shored. RIMS, as an independent industry, could unleash the next largest wave of opportunity in off-shoring. This provides a considerably large opportunity for Indian players to grab a larger part of the global market share.

COMPANY:

It has around 2000+ committed professionals operating across 132 direct locations across India. The Company has laid down quality processes within the organization and is conferred with ISO 9001:2000. In additions, the Company has adapted to the ITIL best practices aligning its service delivery mechanism to BS 15000 Standards.

Company has received the prestigious CRN Excellence award as Best Managed Services Provider (2009) and it was awarded as "Best under a Billion Dollar"by Forbes. Recently, it bagged 4 Awards at the Channel Excellence Awards function held by Data Quest Channel (DQC) in Bangkok.

It has conducted massive infrastructure expansion with a state of the art Repairs centre in Bangalore rated as the Best of its kind in India. Digicomp has been rated as the leader in mother board and PCBA repairs and has currently acquired contracts with several top companies including the Global # 1 and #2 notebook manufacturing companies and among the top American PC brands in India. Digicomp also conducts large scale IT Asset Recovery management working with almost every single PC brand in India.

Company has a strong client rationale in its portfolio where major contracts are from bigger MNC’s which boosts the revenue of the company. Recently, it got sizable contracts from Lenovo, IBM, and Fleetwood etc.

The IT Industry is moving towards the utility model with the advancement of technology. This gives rise to huge opportunities in the form of Infrastructure-as-a-Service (laaS), PC-as-a-Service (PCaaS) and Cloud computing which has already been launched by the Company.

FUNDAMENTALS:

In present scenario, companies have a pressure to reduce cost and improve efficiency. Therefore, most of the organizations are shifting towards the option of outsourcing IMS abroad to cost effective geographies like India. This benefits the company as they are the pioneers in providing RIMS and to leverage on a state of the art, centralized, Global Services Delivery Centre or Global Command Centre (NOC/SOC).

Company has a technical expertise in implementing complex solutions which include RFID implementations, Energy management solutions, Cheque truncation solutions, Videoconferencing solutions etc. It has also taken the lead in Cloud computing arena this fiscal with the launch of Cloud computing management and security services for enterprises. These services would help large enterprise and hosting service provider to easily deploy and manage business critical application on the Cloud with a new level of automation, control, profitability and security.

Allied Digital Services has made a healthy change in its business-mix towards services. It is getting synergies in the form of facilities, better expertise etc. from acquisition of En Pointe Global Services and Digicomp. Further, it will help them to add new clients and cross-sell & up-sell their services to their existing clients. Company is also eyeing for more acquisitions with the motive to expand geographically.

Company is focusing entirely on the remote infrastructure management space to improve the operating profit margins. They are doing transformation in the existing business model of EPGS in to remote management model, where the customers are availing traditional infrastructure management services. Further, they are increasing from current seat capacity of 250 to 650 seats in the NOC/SOC for which they have raised funds of Rs. 231.2 cr via QIP.This would be operational by June, 2010.

IT companies generally operates on the linear business model where they earn revenues on people-billing basis which increases the employees cost. Where ADSL has the advantage of the non-linear business which significantly improves their operating profit margins.

ADSL has a healthy order book of Rs544 crores where Solutions consists of Rs.110 crores to be executed in 90-120 days and Services accounts for Rs.434 crores which is to be executed in the next 12-15 months. This reflects their earnings in the coming period.