Allied Digital Services Ltd

nvestors with a two-year horizon can buy the shares of Allied Digital Services (Allied Digital), given a healthy change in its business-mix towards services and synergies from acquisition of En Pointe Global Services.

At Rs 423, the stock trades at eight times its likely 2009-10 per share earnings, leaving reasonable scope for capital appreciation.

Allied Digital provides IT infrastructure management and technical support outsourcing services. It primarily acts as a support-partner for IT infrastructure products — desktops, laptops, servers, network software, routers and the like.

Allied delivers its services through its own facilities and centres spread across 132 cities and follows a ‘direct’ model rather than a franchisee model. Through the inorganic route, the company has also made a significant entry into the US market.

Domestically too, the company has a list of clients across verticals such as BFSI, telecom and manufacturing, which increasingly and constantly require considerable hardware maintenance and technical support services, providing further opportunities for Allied Digital.

This is supported by the fact that PC and laptop shipments have increased in India even as the growth, worldwide, continues to be sluggish. Government, Education and Banking verticals have helped sustain growth, according to a recent report from IDC.

The domestic hardware industry is set to grow at a compounded annual rate of 11.4 per cent to Rs 98,816 crore by 2013. IT and IT-enabled services are expected to grow at a compounded annual rate of 22.5 per cent to Rs 86,517 crore by 2013.

Growth in IT infrastructure will entail delivery of technical support and services as well as IT infrastructure management, a good portion of it remotely, thus benefiting players such as Allied Digital.
Changing business-mix

The company has witnessed a rapid change in its business-mix over the last couple of years.

From having 70 per cent of its revenues coming from hardware-intensive deals, Allied Digital now derives 55 per cent of its revenues from services and the rest from delivering solutions that have huge hardware components.

This is reflective of the fact that the company has been able to go up the value chain in terms of its offering.

There are multiple benefits from this shift that could accrue for Allied Digital. One, this component of revenues enjoys better margins through better billing rates.

Two, most of the services for clients abroad are being delivered remotely, through its network operation centre, security operation centre, help desk and technical BPO. This optimises costs for the company.

Finally, most of the services revenues turn out to be annuity revenues by virtue of long-term annual maintenance contracts signed with clients, lending revenue visibility over the long-term.
Inorganic growth

In 2008, Allied Digital acquired an 80.5 per cent stake in En Pointe Global Solutions, a US-based IT infrastructure management and remote management services provider for $30 million.

Apart from strengthening its remote services offering, the acquisition allows Allied Digital to cross-sell to En Pointe’s many clients.

A strategic entry into the US, the biggest outsourcer, has also been made possible through this acquisition. This is evident from a couple of large deals that the company has managed in the US. En Pointe is expected to contribute $60-62 million in revenues to the company in the current fiscal.

Much of the work carried on by En Pointe is also being offshored to India. Over time, the entire operations are envisaged to be transitioned to India. This drastically optimises costs for Allied Digital.

The company has had a 30-32 per cent increase in call volumes to its BPO over the earlier quarter and its order book executable over the next two-three quarters indicates a higher services component. This suggests that the company is poised to maintain a fairly healthy margin profile.

Since its listing in 2007, Allied Digital has witnessed healthy growth rates in both revenues as well as profits. For the 2008-09, the company saw its revenues grow by 90 per cent to Rs 565 crore, while net profits grew by 83 per cent to Rs 79.6 crore.

In the recent June quarter, Allied Digital witnessed a 72 per cent growth in revenues to Rs 158.9 crore over the same period last year, while net profits grew 44 per cent to Rs 22.7 crore.

Competition from more integrated players such as CMC and HCL Infosystems may, however, pose pricing pressures.

via BL