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Drop in Solutions Revenues, One‐time Provisioning lead to Disappointing Results
During Q3FY11, Allied Digital Services Ltd. (ADSL) has delivered disappointing results with its
Consolidated Revenues registering a drop of 10.8% QoQ & 2.9% YoY. The QoQ drop in
Revenues can be attributed to a sharp 20.6% QoQ decline in its solution business Revenues
to Rs. 700 mn along with lower than expected Revenues from its IMS business, especially
from Enpointe Global Services (EPGS), which delivered USD 10.1 mn revenues in Q3FY11
against USD 10.8 mn in Q2FY11. Its consolidated EBITDA declined 35.1% QoQ & 24.7% YoY to
Rs. 268.7 mn, while its EBITDA margins fell by 570 bps QoQ to 15.5%. The sharp drop in
margins was mainly due to one‐time provisioning of Rs.75.3 mn for doubtful debts. Hence, its
consolidated APAT declined by 30.6% QoQ & 24.1% YoY to Rs. 206.3 mn.
Services Biz Growth below Expectations; Company reduces FY11 Guidance
During Q3FY11, ADSL exited from some of its accounts in solution business, which have high
portion of hardware items & long execution cycle, which led to sharp fall in its Revenues,
while growth in its services business also remained sluggish, due to technical issues with
some large clients and Revenue Conversion was slower than anticipated. Hence, considering
the above changes, ADSL management reduced its FY11 guidance and now expects to deliver
Revenues & APAT to the tune of Rs. 7,750 mn & Rs. 1,150 respectively during FY11.
Stock plunges amid Negative Sentiment due to I‐Tax Survey
ADSL’s share price has dropped substantially in recent days, primarily due to negative market
sentiments following the I‐Tax survey on its premises. Negating some of the rumors doing
rounds following the I‐Tax action, the management clarified that “The unsubstantiated media
allegations of financial misconduct are false and speculative. A routine survey was conducted
by the Income‐Tax department, wherein the I‐T department randomly picks a company to
verify and assess their books of accounts and ensure credibility. Confident of our credibility,
we offered complete support and cooperation to the I‐T officials, presenting them with the
required documents and records of our transactions. After verification and analysis, the I‐T
officials have found the documents satisfactory and the survey was concluded by the end of
day.” We believe impact of the aforesaid event along with disappointing results & overall
negative market sentiments is overdone and expect the stock to bounce back as the above
rumors wane & its performance comes back on track from Q4FY11 onwards.
Board Meeting to be held for Share buy‐back approval: A Positive Step
The company has informed BSE that a meeting of the Board of Directors of the Company will
be held on February 18, 2011, inter alia, to consider and approve the proposal regarding the
Buy Back of its securities. We believe the management’s plan to go for a buy‐back is a
positive step and should restore investor’s confidence in ADSL’s business, core fundamentals
and its management. Moreover, the management also announced its intension to appoint a
reputed auditor as a joint auditor to further improve transparency in its Biz operations.
JV with Singapore based e‐Cop to provide Managed Security Services
Recently, ADSL announced a joint venture (JV) with Singapore‐based e‐Cop, a leading service
provider of managed risk and information security services, to provide Managed Security
Services (MSS) to enterprises in 20 countries. ADSL will hold a majority stake of 80% while e‐
Cop will hold the remaining 20% in the JV. This JV will give ADSL greater visibility in the MSS
market place, as e‐Cop is a well acknowledged MSS Player.
OUTLOOK & VALUATION
Going forward, in view of 9MFY11 performance, its revised FY11 guidance and slower growth
expectation in FY12 due to lower contribution from solutions biz, we have reduced our FY11E &
FY12E Revenues and APAT estimates. However, with its strong business model & service
offerings, we expect ADSL to bounce back from FY12 onwards. We now expect its FY11E &
FY12E Revenues to grow by 9.1% & 6.8% respectively, its PBT (including Other Income) to grow
by 5.3% & 14.7% and APAT to grow by 2.4% & 6.9% in FY11E & FY12E respectively. At the CMP
of Rs.78, the stock is available at a very attractive valuation of 3.3x & 3.1x its FY11E & FY12E
earnings of Rs.23.4 & Rs.25 respectively. We maintain our “BUY” rating with a reduced target
price of Rs. 200 (8x FY12 AEPS).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Drop in Solutions Revenues, One‐time Provisioning lead to Disappointing Results
During Q3FY11, Allied Digital Services Ltd. (ADSL) has delivered disappointing results with its
Consolidated Revenues registering a drop of 10.8% QoQ & 2.9% YoY. The QoQ drop in
Revenues can be attributed to a sharp 20.6% QoQ decline in its solution business Revenues
to Rs. 700 mn along with lower than expected Revenues from its IMS business, especially
from Enpointe Global Services (EPGS), which delivered USD 10.1 mn revenues in Q3FY11
against USD 10.8 mn in Q2FY11. Its consolidated EBITDA declined 35.1% QoQ & 24.7% YoY to
Rs. 268.7 mn, while its EBITDA margins fell by 570 bps QoQ to 15.5%. The sharp drop in
margins was mainly due to one‐time provisioning of Rs.75.3 mn for doubtful debts. Hence, its
consolidated APAT declined by 30.6% QoQ & 24.1% YoY to Rs. 206.3 mn.
Services Biz Growth below Expectations; Company reduces FY11 Guidance
During Q3FY11, ADSL exited from some of its accounts in solution business, which have high
portion of hardware items & long execution cycle, which led to sharp fall in its Revenues,
while growth in its services business also remained sluggish, due to technical issues with
some large clients and Revenue Conversion was slower than anticipated. Hence, considering
the above changes, ADSL management reduced its FY11 guidance and now expects to deliver
Revenues & APAT to the tune of Rs. 7,750 mn & Rs. 1,150 respectively during FY11.
Stock plunges amid Negative Sentiment due to I‐Tax Survey
ADSL’s share price has dropped substantially in recent days, primarily due to negative market
sentiments following the I‐Tax survey on its premises. Negating some of the rumors doing
rounds following the I‐Tax action, the management clarified that “The unsubstantiated media
allegations of financial misconduct are false and speculative. A routine survey was conducted
by the Income‐Tax department, wherein the I‐T department randomly picks a company to
verify and assess their books of accounts and ensure credibility. Confident of our credibility,
we offered complete support and cooperation to the I‐T officials, presenting them with the
required documents and records of our transactions. After verification and analysis, the I‐T
officials have found the documents satisfactory and the survey was concluded by the end of
day.” We believe impact of the aforesaid event along with disappointing results & overall
negative market sentiments is overdone and expect the stock to bounce back as the above
rumors wane & its performance comes back on track from Q4FY11 onwards.
Board Meeting to be held for Share buy‐back approval: A Positive Step
The company has informed BSE that a meeting of the Board of Directors of the Company will
be held on February 18, 2011, inter alia, to consider and approve the proposal regarding the
Buy Back of its securities. We believe the management’s plan to go for a buy‐back is a
positive step and should restore investor’s confidence in ADSL’s business, core fundamentals
and its management. Moreover, the management also announced its intension to appoint a
reputed auditor as a joint auditor to further improve transparency in its Biz operations.
JV with Singapore based e‐Cop to provide Managed Security Services
Recently, ADSL announced a joint venture (JV) with Singapore‐based e‐Cop, a leading service
provider of managed risk and information security services, to provide Managed Security
Services (MSS) to enterprises in 20 countries. ADSL will hold a majority stake of 80% while e‐
Cop will hold the remaining 20% in the JV. This JV will give ADSL greater visibility in the MSS
market place, as e‐Cop is a well acknowledged MSS Player.
OUTLOOK & VALUATION
Going forward, in view of 9MFY11 performance, its revised FY11 guidance and slower growth
expectation in FY12 due to lower contribution from solutions biz, we have reduced our FY11E &
FY12E Revenues and APAT estimates. However, with its strong business model & service
offerings, we expect ADSL to bounce back from FY12 onwards. We now expect its FY11E &
FY12E Revenues to grow by 9.1% & 6.8% respectively, its PBT (including Other Income) to grow
by 5.3% & 14.7% and APAT to grow by 2.4% & 6.9% in FY11E & FY12E respectively. At the CMP
of Rs.78, the stock is available at a very attractive valuation of 3.3x & 3.1x its FY11E & FY12E
earnings of Rs.23.4 & Rs.25 respectively. We maintain our “BUY” rating with a reduced target
price of Rs. 200 (8x FY12 AEPS).
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