Allied Digital Services

Investors with a two-year horizon can buy the shares of Allied Digital Services, a provider of IT infrastructure management and technical support outsourcing services.

Strong growth in its high-margin services business, a healthy domestic presence in the solutions segment and deal-wins from the US that continue to accrue from its acquisition of En Pointe Global, are key positives.



At Rs 228, the share trades at just eight times its likely FY11 per-share earnings. Though not strictly comparable, this is at a discount to most mid-Tier IT software and hardware players.

In FY-10, Allied Digital saw its revenues increase by 21.8 per cent over the previous fiscal to Rs 672.4 crore, while net profits expanded by 25.6 per cent to Rs 96.6 crore.

In the June quarter of this fiscal, revenues rose 27.6 per cent over the same period last year, while profits were enhanced by 45.5 per cent to Rs 33.1 crore.

From an industry perspective, the segment in which Allied Digital operates is set to witness considerable growth. According to Gartner, Worldwide PC shipments are projected to total 367.8 million units in 2010, a 19.2 per cent increase from 308.3 million units shipped in 2009. A report by the same firm also states that worldwide server shipments grew 27.1 per cent year over year in the second quarter of 2010.

This increase in the shipment of IT infrastructure and key components of data centres means that technical support requirements would be robust.

A Nasscom-Mckinsey report on remote infrastructure management indicates that India is well-positioned to capture $13-15 billion of the global opportunity by 2013, a growth of over 30 per cent annually.

Allied Digital with significant clientele in the US and who are able to manage this IT infrastructure remotely (from India) appears well-placed to capture a slice of this pie.

Favourable business-mix

Over the last couple of years, the company has consciously managed to increase contribution from its high-margin services business. Allied Digital now derives 57 per cent of its revenues from delivering IT services, while the hardware-intensive solutions business contributes the rest. The solutions business used to contribute over 70 per cent of the revenues earlier.

The services business operates at a margin of 27 per cent, while the margin derived from its solutions segment is about 16 per cent, thus propping margins for the company. The solutions business is largely India-centric.

Allied Digital has an order-book of Rs 440 crore in the services segment, executable over the next one year. In the solutions segment, it has an order-book of Rs 125 crore. Much of the services revenues are of the nature of annuity deals, with the company typically signing up clients for three-five year timeframes, thus providing revenue visibility.

Interestingly, even within the services segment, the remote infrastructure services (with operating margin of 40-45 percent) has steadily increased contribution and now accounts for over 50 per cent of service revenues.

Acquisition pays off

The company has also had deal wins from the US through the acquisition of En Pointe Global (in 2008) in the US with increasing ticket sizes. In the services segment, over 60 per cent of the order-book is from overseas (largely the US). While most of them are in the $1-1.5 million range, Allied Digital has also managed a $6 million deal during the last quarter. En Pointe is expected to contribute $54 million in revenues this fiscal.

The company is also shifting a good potion of the operations of En Pointe from the US to be executed from India. This would clearly optimise costs for Allied Digital.

The key threat to this recommendation comes from pricing pressure from competitors such as CMC, which are fully integrated and are increasingly focussing on IT services-oriented business, rather than purely hardware-intensive ones.

via BL