Allied Digital Services IPO - Invest at cut-off

Founded in 1995 by Amit Shah, a first-generation entrepreneur with 30 years experience in the Indian IT industry, Allied Digital Services (ADS) is a provider of IT infrastructure management and technical support services. Operating across a network of 92 locations in 25 states with a team of around 1250 employees countrywide, the company follows a direct approach.

ADS operates through six strategic business units (SBUs) spread across the services and solutions space. The solutions segment includes information technologies solutions (SBU-1) including IT infrastructure, storage solutions, information security and data security solutions, enterprise management solutions and telecom solutions. The second SBU comprises networking/communication Solutions. The third SBU provides integrated solutions to set up security & safety devices, asset tracking devices, intelligent building management system and energy management solutions. The fourth SBU’s services cover software solutions in the enterprise management system (EMS) and enterprise resource planning (ERP) for manufacturing; retail; banking, financial services and insurance (BFSI); and telecom.

In the services segment the fourth SBU provides information technology services including test and repair/service centre, technical BPO, incident-based support, annual maintenance contract (AMC), facilities management services, enterprise management services and infrastructure/professional services. SBU-6’s services include remote management services (RMS) including network operation centre (NOC) offering enterprise IT helpdesk, remote desktop management, and server and network management. The security operation centre (SOC) offers 24x7 information security surveillance services.

Solutions contributed 79% of the revenue and services 20% in the year ending March 2007 (FY 2007), Services contributed about 50% of the earning before interest, tax, depreciation and amortisation (EBITDA). The top client contributed 12%, top 5 clients 34% and top 10 clients 47% of the revenue. International business accounted for only 6% of the operating revenue.

The net proceeds of the present issue would be utilised for setting up a global service delivery centre comprising a 250-seater technical BPO, IT service delivery centre, remote management service centre, software solution unit, data centre and centre of excellence. Other uses of the funds would be for upgradation and expansion of existing infrastructure such as increasing the warehouse space, expanding geographically, and setting up the NOC/SOC business facility. ADS would also go for strategic acquisition. It has identified three companies: one an Oracle services provider in India addressing India, the US and the Middle East; a security services provider in India addressing India and the Middle East; and a technical BPO services provider in Canada addressing US and Canada.

Strengths

• ADS is collaborating with e-Cop to enter remote management services through the NOC/SOC initiative. This is still not a competitive segment as it is in the nascent stage. Its partnership with e-Cop, the leader in SOC with more than 90% market share in the Far East market, will be a big positive. The SOC facility would be operational by July 2007. There is possibility of transfer of work from e-Cop to the partnership due to competitiveness of Indian operations.
• Due to its direct-customer and neutral-vendor approach and national presence across 92 locations and 25 states, ADS enjoys a strategic advantage to capture the fast growing market opportunity.
• Through its acquisitions, ADS will expand clients and geographically, enabling it to cross-sell services and solutions.
• Currently, ADS has an order book of Rs 107.81 crore. Of this, Rs 54.70 crore is annuity revenue arising from services contracts and Rs 53.11 crore from the solutions business. These would be executed within 8-10 months.

Weaknesses

• ADS is operating in a highly competitive market. This could affect its cost advantages, and reduce its share of business from clients.
• Growth is dependent on manpower. The industry suffers from high attrition rate.

Valuation

From FY 2004-FY 2007, the operating income of ADS recorded a CAGR of 58.5% and net profit zoomed from Rs 32 lakh to Rs 22.93 crore due to focus on infrastructure management services, storage and security services.

At a price band of Rs 170-Rs190, FY 2007 EPS on post-issue equity works out Rs 13.3, and P/E 12.8-14.3. Its closest peer, Tata Elxsi, is trading at a trailing 12-month P/E of 20. Considering its thrust on new business initiatives, Allied is expected to post a robust growth in FY08. This will make its current valuations even cheaper. Investors with a medium-to-long term horizon can consider investing in the stock. It will also reward handsome listing gains.

reference:- www.capitalmarket.com

ANURAG DUJARI

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