Buy Allied Digital Services; target of Rs 155: IIFL

“Allied Digital Services, 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 Rs 75 million 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.”

“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.”

“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 (Rs 160), we believe that the worst is behind. Recommend BUY with a 6-9 month price target of Rs 155 (assigned multiple and target have been adjusted downwards),” says IIFL research report.

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