STOCK IDEAS – Allied Digital Services Ltd.

Company Name- Allied Digital Services Ltd

 

BSE Code- 532875

 

NSE code- ADSL

 

Allied Digital Services Ltd (ADSL) is an IT infrastructure management and Technical support services outsourcing company. An Indian IT industry player provides wide spectrum of technology solutions & services to a diverse customer base from BFSI, Retail, Telecom, manufacturing and BPO verticals. ADSL provides both solutions and services, which helps it score over competitors. It provides a combination of onsite and remote services, which help organizations, reduce their total cost of ownership. Its emphasis on Remote Management services (RMS) will be key to its growth. For growth ADSL has been taking both organic and inorganic routes. Various alliances and acquisitions have been strengthening its services and growth. Its tie-up with Echelon has strengthened its infrastructure services whereas tie-up with e-cop helps it gain mileage in information security services. Acquisition of En-Pointe Global Services gives it a foothold in US and provides access to a large customer base. It opens huge opportunities for growth in US for its RMS and especially compliance solutions segment in the backdrop of ongoing global financial turmoil. Regulators across world will enhance compliance transparency and reporting from institutions. This will enhance compliance solution opportunities for ADSL across the world.

 

Business-

ADSL operates across a network of 132 locations across India.

Products and Services provided by ADSL can be classified into two areas

1. Solutions
   
2. Services
   

 

Solutions- The solutions business contributed about 70 percent to the revenues in FY08. The business involves setting up of Entire IT infrastructure right from supply of Hardware, to designing of networks and then implementation of the same. Post implementation management is a major strength of ADSL.

Solutions business can be further classified into

1. Information Technology Solutions
   
2. Networking and communication solutions.
   
3. Integrated solutions.
   
4. Software solutions.
   

 

While solutions business also sees immense competition, ADSL scores over competitors for its services segment. It offers combination of onsite and remote services, which not many peers have the ability to provide. Remote Infrastructure Management along with system Integration business provided through Services business makes ADSL a formidable player.

 

Services Business

This holds key to entire business model of ADSL. It helps ADSL score over competition besides offering higher operating margins close to 55 percent to 60 percent. Renewed emphasis of ADSL lies on this segment.

This business has two strategic business units

1. IT services
   
2. Remote Management Services (RMS).
   

 

ADSL thereby provides IT services helping customers align their business with IT. Processes are simplified and common language for ITIL within the organization followed. Process elements are modularized and thereby integrated efficiently.

 

Remote Management services (RMS) are a major thrust area for ADSL. Through a Global development center, which comprises of Network Operation Center (NOC) and Security operation center (SOC), ADSL provides remote management services to its clients.

 

NOC is innovative managed services Platform where combination of industry standards remote monitoring and management products with management tools are used. Thus customer's IT infrastructure is managed remotely and efficiently. These high valued services are provided to customer at fixed monthly cost.

 

SOC provides proactive protection and risk management for organizations round the clock. ADSL tied up with Singapore based ecop, which is a leader in information security services. E-cop maintains several Security operations Centers (SOC) across the globe. With e-cop's CYCLOP technology ADSL will be able to ensure protection of organization's network. E-cop enjoys 90 percent market share in the BFSI vertical and with this tie up ADSL is set to generate huge business opportunities in US as well as other markets.

 

Investment rationale-

 

With increased worldwide IT and IT enabled services usage, spending on them are growing robust. IT infrastructure management (both hardware and software) plays an important role. Organizations have multiple location operations, which require to be networked and remain functional 24X7 besides being secured and foolproof. Their Management requires experts for complexities. Organizations looking at reducing implementation costs, downtime costs and need for people go in for outsourcing IT infrastructure management. It becomes viable and demand for it would keep growing. IT infrastructure management services business is big and will grow at robust rates and would mean high growth avenues for players like ADSL having expertise in solutions as well as services.

 

IDC estimates suggest Spending on software to increase to around $327 billions by 2010 globally. Worldwide market for IT hardware is expected to touch $562 billion by 2010. Domestically IT services market is expected to be around $ 60 billion by 2010. This explains the market size for infrastructure management services and players in the space like ADSL.

 

ADSL moves forward strengthening its services and expanding in global markets through both organic and inorganic routes.

 

For strengthening its Infrastructure management it's tie-up with Echelon has been for intelligent building management and Energy management solutions. IT infrastructure management requires networking of devices as pumps, Thermostats and light etc. Integration of products from multiple manufacturers also becomes possible in single open system.

 

In April'08 ADSL acquired 51.05 percent in Digicom solutions, Bangalore. This further strengthens its RMS services as digicom is third partly RMS service provider. While additional leverage will be provided to ADSL's technical BPO business, it will also help in providing technical and RMS services to vendors. New Hardware testing and repair center is being set up at an investment of Rs 10 crores.

 

Its emphasis on Remote Management services as well as getting access to clients in US had led its tie-up with e-cop and recent acquisition of Enpointe Global services Llc (EPSL). This IT Infrastructure management / Remote management Services provider is a subsidiary of Enpointe Technologies Inc. a NASDAQ listed company. With this acquisition ADSL has not only strengthened its business needs but also gathered a foothold in IT infrastructure management domain in US Market and furthered avenues for its RMS offerings (both NOC and SOC). This deal has added $ 47 million to ADSL's order book, which now stands at $ 53 million from global market.

 

While ADSL has got good mileage in US, it is looking for some similar opportunity in Europe also as indicated by Mr Vimal Raj , CEO ADSL. An acquisition/tie-up in Europe would definitely give access to more clients and strengthen order book.

 

The world today faces a worst ever financial crisis where major financial institutions have collapsed. However this situation has made regulators around the world seek for compliance reporting and transparencies. Financial institutions and banks thereby look for appropriate compliance solutions and secured data remains their key concern. This opens huge opportunities for players like ADSL. Compliance market that was expected to be around $90 billions by 2010 is expected to reach this figure much faster now in changed scenario.

 

Concerns-

ADSL till now has been an India Centric player. Revenues have thereby been insulated from volatility in exchange rates. However with growing global revenues, fluctuation in exchange rates will have their own impacts. Further entry of cash rich global players in SOC may impact ADCL's growth plans

 

 

Valuations-

ADSL has shown an excellent growth in both Topline and bottomline during FY08 and repeated the performance in first quarter of current financial year. While this growth continues the tie-up with e-cop and take over of EPSL will add more to numbers. Global revenues will increase. Additional revenue of around Rs 150 crores is being looked forward by ADSL through Global operations. Also earlier takeover of Digicom will add further to revenues. Thus ADSL's guidance of doubling revenues in FY09E seems to be achievable.

On margins front, ADSL looks at expanding margins from the solutions business. It is encouraging clients to buy hardware directly from vendors. Hardware sales are low margin. Further this will also have positive impact on Working capital management and debtor days for ADSL. Besides services being high margin business and operating margins of 55-60 percent from global business are expected to improve overall margins. Thus operating margins are expected to improve by around 150 basis points while profit margins will be maintained.

Looking at growth numbers and future prospects for ADSL, it seems to be a good long-term bet with attractive valuations..

 

	Q1	Annual	Annual E
	FY09	FY08	FY09
Net sales	91.13	297.26	594.52
OP	20.69	66.62	141.30
PAT	15.76	42.94	83.23
Capital	17.37	17.29	17.37
EPS	9.08	24.83	47.91

 

Margin
OP	22.7	22.27	23.77
PAT	17.29	13.89	14
Price	300	Date	24/10/08
PE	10.31	P/BV	3.58
Book Value	83.62	EV	527.44
EV/EBIDTA	7.91	Mcap	518.69
		(rs.crore)

 

 

Shareholding	13-Oct-08
Promoter	63.66
FII	10.09
Public	5.95
Others	20.3
Total	100