Allied Digital Services IPO Analysis

Allied Digital appears expensive compared to its peers, based on various factors.

The Indian information technology (IT) and IT enabled services (ITES) industry has definitely worked wonders, contributing about 5 per cent to the nation’s gross domestic product (GDP).

However, a vast majority of this was ploughed in from exports of IT-ITES services. Riding on this export boom, the domestic IT market too, is growing leaps and bounds.

International Data Corporation (IDC) has estimated the Indian domestic IT market to grow by over 22.4 per cent in 2006. NASSCOM pegged this market at over Rs 3,600 crore in FY06, and expects it to grow to Rs 8,000 crore by FY10.

To take advantage of this rising tide, India-focused companies like Allied Digital are on an expansion drive. Allied Digital is out in the market to aggregate about Rs 77-86 crore from the public via an IPO.

The issue comprises of 45.2 million shares of face value Rs 10 each. The price band is fixed at Rs 170-190 for the issue.

Allied Digital is an IT systems integrator, providing services and solutions in IT infrastructure management, technical business process outsourcing, remote management services for servers and networks, information security and enterprise computing.

The company boasts of a pan-India presence across 92 locations with more than 1,250 employees. Its clientele includes the who’s who of the banking, financial services and insurance (BFSI), telecommunications, retail, aviation, manufacturing, energy, e-governance and hospitality industries.

With the issue proceeds, Allied Digital intends to set up a global service delivery centre, setting up new strategic business units including a network and security operating centre each, a technical BPO outfit and to carry out strategic acquisitions.

“We have already identified the targets for the acquisitions. Two of them are domestic, and one is a Canada-based technical BPO company,” says Bimal Raj, chief executive officer, Allied Digital. “We aim to complete these acquisitions by September 2007,” he adds.

Allied Digital has grown its top line at a compounded annual rate of 58 per cent since 1995. The company has maintained its operating margins at around 21-22 per cent, which is slightly lower in the IT pack owing to its domestic focus and a project-based solutions approach.

It is now looking to increase the revenue contribution from its service offerings and outsourcing, which entail higher operating margins. On the flipside, the more than 90 per cent India-centric business saves the company from the vagaries of rupee appreciation.

From a valuation perspective, the issue pricing appears stretched in spite of better price-earnings ratios compared to its closest peers.

The segments that the company operates in, pose very few entry barriers to new entrants as well as unorganised competition.

Add to this, Allied Digital has been in this business for the past 12 years and still has not been able to scale the business to gain any critical mass. Investors may be better off, exploring other avenues