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Allied Digital Services Ltd. (CMP: Rs. 183/- M. Cap Rs. 8,509 Mn, P/E 9x FY10, Not Rated)
We attended Allied Digital’s Investor day on 06 Dec’ 2010. Key highlights include:
n Allied is a midcap IT service player providing IT infrastructure services and solutions with key focus on Remote Infrastructure Management Services (RIMS). 70% of the revenues are domestic and 30% international (mainly US). Solution segment (nature: system integration & consulting) contributed 45% of the revenues in FY10 (V/s. 50% in FY09) and Infrastructure Management Services contributed 55% of the revenues (V/s. 50% in FY09).
n Allied has key strategic alliances with Lenovo, Intel, LANDesk and Presidio. All these alliances are in RIMS space and none of the deals are reflected in financials yet. Execution remains key challenge for these deals.
n Allied has tied-up with Intel as a Strategic Technology Partner for Remote Management Technology. Currently working with Intel Enterprise Sales team to address their large Enterprise customers and partners globally. Intel capital has made strategic investment in the company. Allied has entered into an agreement with Intel Capital in Sept 10 where the latter will invest in over 13 lakh warrants for Rs 320 Mn and buy up to three per cent in the company.
n Allied has recently introduced mobile ARM which will help Enterprises meet mobile user service expectations in a complex world. Per management, Blackberry (RIM) has recognized this solution and has added Allied as their Global technology partner.
n Company is expanding their capabilities towards cloud solutions and investing in leadership team, streamlined processes and smart technology.
n Key concerns include (1) low operating cash flow caused by higher debtor days of ~144 days (2) Execution challenges in new deals (3) Allied has done two dilutions post IPO (July 2007). It diluted about ~26% through QIP in Oct 2009 and ~ 2.8% through issue of convertible warrants to Intel in Sept 10.
n The management has guided for Rs. 8,700 Mn of Turnover (+29% YoY) and Rs. 1,250 Mn of PAT (+29% YoY) . The company has already done Rs. 4,131 Mn of Revenues (+30% YoY) and Rs. 499 Mn PAT (+36% YoY) in 1HFY11. The stock trades at P/E of 7x FY11 Guided EPS of Rs. 26/-.
Steel industry update
Steel prices remain firm both in the domestic markets as well as in the international markets. All the major global markets including North America, Europe and China have seen slight improvement in steel prices over the past 2-3 weeks despite overall bleak demand scenario during the current quarter. Chinese HRC prices have been hovering around US$650/ tonne in the first week of December against US$625/ tonne during late October. While, CIS Black Sea export prices (FoB) of HRC have been moving around US$600/ tonne, the Western European HRC prices are stable at ~US$670/ tonne.
In India too prices have been stable after the 1- 1.5% cut during early Q3FY11. There have been talks of hike in steel prices by the producers in India at the beginning of the Q4FY11. Sentiment has been positive in the spot markets also across the country as far as the prices are concerned. According to some industry participants TMT bar prices in North Indian markets are hovering around Rs 32000/ tonne, while that of HRC are being quoted around Rs 34000 - 35000/ tonne.
Why steel prices are higher?
n This is mainly due to higher raw material costs. While, coking coal contract prices for Q4FY11 is reported to have settled at US$225/ tonne between Japanese steel mills and BHP Billiton, iron ore contract prices also are likely to be settled at US$130- 135/ tonne for the same period. On QoQ basis contract prices of coking coal and iron ore would be higher by ~12.5% and ~7-8% for Q4FY11
Reason for higher raw material prices
n China contributes ~45% of the global crude steel production. In recent month the production trend in China has been stable with improvement seen again in October numbers (50.3 million tonnes) after witnessing some decline during prior three months. According to the World Steel Association (WSA), during the first 10 months China has produced ~525 million tonnes of crude steel, (up ~11% YoY) out of ~1165 milion tonnes produced by 66 countries reporting to WSA. Along with China, India’s steel production also has been growing at a good pace. According to the WSA India’s crude steel production in October remained at 57.5 million tonnes, up by ~9% on YoY basis. This also helped particularly coking coal prices to remain firm
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