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IT survey misconstrued as IT Raid; impact not material
An income tax team, as a part of its routine survey, had visited the
official premises of ADSL to check its books of accounts on concern of
expenditure manipulation. According to the management, this survey,
misconstrued as ‘raid’, concluded the same day with no prima facie
evidence and no documents seized. Company further re-assured of
minimal impact of the IT Survey on its financials.
Results materially below expectation; business largely intact
The Q3 FY11 results were undoubtedly disappointing with revenues
falling 10.5% and OPM faltering by 540 bps qoq. The revenues were
weak due to continued transformation of solutions business. Very low
traction from key deals (Lenovo, Microsoft) and seasonally weak
quarter kept services flat. Margin was down materially mainly due to
Rs75mn one-time bad debts write-off. Our recent interactions with the
management suggest that the core business of IMS/MSS is intact with
the recent JV with e-Cop being a case in point. Company also indicated
of no further write-offs in the foreseeable future. Moreover, growth
expectations have now been set right with a more achievable guidance
and pragmatic commentary.
Strong selling pressure seems to have abated
Stock exchange data reveals that one of the large FII investors in
ADSL has sold its entire stake in the days following the result and the
IT investigation. Due to the intense selling, the stock has declined
more than 60% in the past few days. With company expecting no
other large investor to pare stake or exit, it is likely that the selling
pressure could significantly abate and the stock may bounce back
sharply.
More than commensurate de-rating of valuation makes ADSL a
strong value pick
We believe that the company’s fundamentals are largely in place with
its continued attempts to transform itself into a high value adding
services player. Also the company’s decision of considering buy-back
and appointment of a reputed joint-auditor are likely to restore some
credibility. With valuations cheap at 3.7x FY12 P/E (on our
substantially reduced estimates) and the current stock price at
significant discount to FY11E Book Value (Rs160), we believe that the
worst is behind. Recommend BUY with a 6-9 month price target of
Rs155 (assigned multiple and target have been adjusted downwards).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
IT survey misconstrued as IT Raid; impact not material
An income tax team, as a part of its routine survey, had visited the
official premises of ADSL to check its books of accounts on concern of
expenditure manipulation. According to the management, this survey,
misconstrued as ‘raid’, concluded the same day with no prima facie
evidence and no documents seized. Company further re-assured of
minimal impact of the IT Survey on its financials.
Results materially below expectation; business largely intact
The Q3 FY11 results were undoubtedly disappointing with revenues
falling 10.5% and OPM faltering by 540 bps qoq. The revenues were
weak due to continued transformation of solutions business. Very low
traction from key deals (Lenovo, Microsoft) and seasonally weak
quarter kept services flat. Margin was down materially mainly due to
Rs75mn one-time bad debts write-off. Our recent interactions with the
management suggest that the core business of IMS/MSS is intact with
the recent JV with e-Cop being a case in point. Company also indicated
of no further write-offs in the foreseeable future. Moreover, growth
expectations have now been set right with a more achievable guidance
and pragmatic commentary.
Strong selling pressure seems to have abated
Stock exchange data reveals that one of the large FII investors in
ADSL has sold its entire stake in the days following the result and the
IT investigation. Due to the intense selling, the stock has declined
more than 60% in the past few days. With company expecting no
other large investor to pare stake or exit, it is likely that the selling
pressure could significantly abate and the stock may bounce back
sharply.
More than commensurate de-rating of valuation makes ADSL a
strong value pick
We believe that the company’s fundamentals are largely in place with
its continued attempts to transform itself into a high value adding
services player. Also the company’s decision of considering buy-back
and appointment of a reputed joint-auditor are likely to restore some
credibility. With valuations cheap at 3.7x FY12 P/E (on our
substantially reduced estimates) and the current stock price at
significant discount to FY11E Book Value (Rs160), we believe that the
worst is behind. Recommend BUY with a 6-9 month price target of
Rs155 (assigned multiple and target have been adjusted downwards).
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