Allied Digital Services – K. R. Choksey Research Report

K. R. Choksey are bullish on Allied Digital Services and have recommended a BUY with the following investment rationale:

Allied Digital Services reported a good set of number for 1QFY11; which were in line with our expectations. The consolidated revenues grew sequentially by 5.8% to Rs 204.6 crore. Net profit for 1QFY11 stood at Rs 33.40 crore, clocking a sequential growth of 6%. The solutions segment contributed 43% to the revenues while the higher margin Infrastructure management services (IMS) segment contributed 57% to the revenues.

Focus on high end services business to drive EBIDTA margins: Allied Digital Services reported EBIDTA margins of 21.6% in 1QFY11 as compared to the EBIDTA margins of 20.6% for 4QFY10. We expect this margin expansion to continue as Allied Digital Services will be focusing more on higher margin IMS segment. Also the adoption of non-linear business model in Enpointe Global will help margins to climb up going forward.

Strong order book ensures revenue visibility: Allied Digital Services has order book of Rs 440 crore in the IMS segment. This IMS order book is declared on annuity recurring basis where the average contract tenure is of 3 to 5 years. The solutions order book which is executable in 90 to 110 days stood at Rs 125 crore. We expect that the order book would remain strong in IMS segment as much of the revenues are recurring in nature, whereas Solutions order book can be a little volatile going forward.

Strong guidance for FY11 as per our expectations: Allied Digital Services has guided FY11 revenues at Rs 900 crore and a PAT growth of 30% y-o-y. Allied Digital Services has planned capex of Rs 85 crore over the year to increase the seating capacity in its data centers. The guidance shows strong growth as per our expectations. Going forward we see similar top line growth with improving margins.

High debtor days remain a concern: The debtor days stood at 140 days which is pretty high. However we expect the debtor day to remain in the same range going forward due to the nature of the solutions business which involves hardware component. Allied Digital Services has however indicated restructuring its solution contracts to minimize the hardware component by encouraging its clients to buy hardware directly from vendors. This would help to improve the scenario on debtor day but till that time high debtor days remains as a concern.

Our View & Valuations: At CMP of Rs 241 Allied Digital Services trades at a forward P/E of 7.3x and a TTM P/E of 10x, whereas its peers like Omnitech and Glodyne trade at a TTM P/E of 10x and 20x respectively. We believe that with the expected margin expansion going forward, the stock is due for a re-rating. Valuing Allied Digital Services at P/E of 10x FY11E EPS of Rs 32.7, we recommend a BUY on Allied Digital Services with a 12M target of Rs 327.