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We recently attended the analyst meet of Allied Digital Services Ltd (ADSL). Nitin
Shah, chairman of the company, and Bimal Raj, CEO of the company, along with
the other members of the senior management team addressed the meet. At the
occasion, the management team discussed the next wave of growth in the Indian
information technology (IT) sector, and the capabilities and strategies of ADSL to
capture the resulting opportunities in the coming years.
Well poised to capture increasing penetration of RIMS
Over the years, ADSL has built strong domain expertise in the remote infrastructure
management services (RIMS) space in both the domestic and the overseas market
(through En Pointe Global Services). The RIMS market is poised to grow at 30%
compounded annual growth rate (CAGR) over 2008-13 to reach Rs133,400 crore in
2013. Currently, only 7% of the total RIMS opportunity of Rs480,000 crore is being
addressed, which leaves huge room for further growth. As per industry reports,
ADSL—with its impressive delivery mechanism (NOC), direct presence in 132
locations in India and 27 in the USA (through En Pointe Global Services) coupled
with strong strategic alliances with the likes of Lenovo, Intel, LANDesk and PRESIDIO
helps ADSL to garner incremental spending in the RIMS space.
Key drivers of growth in RIMS space
About 89% cost saving by offshoring services to low-cost destinations like India
Regulatory compliance of acts like PCI, SOX, HIPAA and BASEL-II will be the key
drivers of growth in Security Operation India Center (SOC)
Europe, Japan and the Middle East are opening up in terms of spending in the
RIMS space, which will increase the addressable market opportunity
Total addressable market estimated at $80-150 billion globally, 70-75% of
infrastructure management roles can be offshored
India is well positioned to capture $26-28 billion of the global opportunity by
2013—that is over 30% CAGR
Strategic alliances helping in building global footprints
ADSL has entered into some key strategic alliances in the
last few years with the likes of Lenovo, Intel, LANDesk
and PRESIDIO to build formidable footprints in the
overseas markets. As per the management’s indication,
these strategic alliances have started witnessing traction
with the build-up of some strong deal pipelines. With
LANDesk ADSL has launched services in the US, European
and Asia-Pacific markets. On the other hand, ADSL has
partnered with Intel for strengthening its RIMS offerings
by using Intel’s vPro and AMT technologies in the RIMS
space. In case of Lenovo alliances, there has been a delay
in the ramp-up due to late migration of Windows 7.
Nevertheless, it has now been normalized and the
management has hinted at the closure of a few deal
proposals in this year.
Betting big on Cloud Computing, though still at nascent
stage
Cloud Computing has become the buzzword in the IT space
and industry reports suggest the growth in Cloud
Computing would exceed the growth in the traditional IT
service offerings in the coming years. As per Gartner
estimate, addressable revenue for Cloud Computing space
will be around $149 billion by 2014. ADSL’s management
has strongly emphasized the company’s Cloud offering
and with two successful implementations in the US regions
already, the management is quite confident of making
further inroad in this space.
Other offerings: Systems in place, meaningful rampup
still to happen
VDI: As per Gartner estimate, the virtual desktop
interface (VDI) market is expected to reach $65 billion
by 2013. Enterprises will spend over $90 billion on
desktops as a service (Daas) over the next five years.
ADSL has already done some implementations in the
US regions.
Security: As per a Gartner estimate, the VDI market is
expected to reach $16 billion by 2011. The spend is
likely to increase by 9% year on year (YoY). ADSL already
has a dedicated SOC facility for catering to this space;
however, there have been some concerns raised by its
US clients relating to data security in the remote
centres. These have been addressed by the company
with an SOC facility in the USA. However, the unit will
be remotely managed from India. ADSL has a joint
venture with one of the leading security providers
globally. The company’s management has indicated
that there is strong demand from the BFSI and retail
sectors for these offerings.
Green data centre: As per a Gartner estimate, the
green data centre market is expected to reach $16
billion by 2011. Newer areas of spending are evolving
in the green initiatives space, with spending seen in
virtualisation of servers, storages and back-up, and ewaste
management. ADSL has already completed some
projects in the green data centre.
ADSL digital mobile ARM: ADSL is launching its offering
in mobility management services, “Allied Digital Mobile
ARM”, in the USA by early next year. ADSL has already
received positive feedback from Research in Motion’s
Blackberry for mobile data management from the
remote centre. The management is still deciding on
the mode of the launch in the USA.
No further equity dilution
There are investor concerns surrounding the multiple
equity dilution by ADSL in the last two years via the issue
of warrants to Intel and Bennett, Coleman & Co Ltd (BCCL)
and a qualified institutional placement (QIP) issue of $50
million. However, the management has maintained that
all these dilutions were strategic in nature and were made
to fund the future growth of the company and to build
strategic alliances. Going forward, the ADSL management
has indicated that there will be no further equity dilution
in the near future.
Valuation
ADSL’s management has indicated that growth will
accelerate through both organic and inorganic routes as
expansion in the RIMS space will be the top priority of
the company in the coming year. On the other hand,
ramping up the newer areas of growth like Cloud
Computing, VDI, mobile mobility service and green data
centre will be at the forefront of the management’s
priorities.
We remain positive on the long-term sustainability of the
company’s business model, with incremental thrust from
the management on the high-margin RIMS business and a
gradual decline in the low-margin segments. At the current
market price of Rs177, the stock trades at 6x FY2011 and
5x FY2012 estimated earnings. We maintain our Buy
recommendation on the stock with a 12-month price
target of Rs326. At our price target, the stock will be
valued at 9xFY2012E earnings.
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