Sushil Finance neutral on Allied Digital Services

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Sushil Finance neutral on Allied Digital Services

Sushil Finance has maintained neutral rating on Allied Digital Services (ADSL), in its April 30, 2011 research report.

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Sushil Finance has maintained neutral rating on Allied Digital Services (ADSL), in its April 30, 2011 research report.

"Allied Digital Services (ADSL) has yet again delivered disappointing results during Q4FY11, with its Consolidated Revenues registering a drop of 0.7% QoQ & 10.8% YoY Rs 1,725.6 million. Its consolidated EBITDA declined sharply by 48% QoQ & 64.5% YoY to Rs 139.7 million, while its EBITDA margins fell by 737 bps QoQ to 8.1%. The management attributed the drop in Revenues & EBITDA margins to one-off hit due to expensing of USD 2.8 million invested in a project with a customer who was acquired by some other company during Q4FY11 and ADSL couldn't realize the Revenue for this project, which might be freshly relooked-at by the acquirer. Hence, its consolidated APAT declined by 63.7% QoQ & 75.5% YoY to Rs 77.3 million. Going forward, with change in customer's demand more towards value added services for their business, ADSL is in process of transforming itself in terms of systems & processes, people and the business mix targeted to address new opportunities & challenges, and expects its FY12 Revenues growth & EBITDA margins to remain sluggish due its initiative to shift its focus with changing market environment."

"During Q4FY11, ADSL was also unable to book Revenues from a high margin Rs 400 million Government Project in telecom space, where-in ADSL was L1, on the back of uncertainties in the space (post the 2G scam). Going forward, the management continues to be selective in terms of bidding for projects in solutions segment due to uncertainty involved with Government's projects along with the fact that solutions based projects require large portion of hardware items. Hence, its solutions business growth would also likely to be muted going forward."

"In order to improve the transparency in its Business operations, after Q3FY11 results, the company had shown its intention to appoint a reputed auditor as a joint auditor to audit its accounts. It had also announced a share Buy Back plan to boost investors' confidence. Though, ADSL has begun its Buy Back process recently, it has not yet finalized the Joint Auditor. We believe swiftness in finalizing a reputed auditor and decisive decision making to intensify the Buy-back of shares during such phase of dwindling investor confidence will be of a paramount importance, to demonstrate company's resolve in "walking the talk".

"Going forward, in view of disappointing FY11 performance, its muted FY12 growth guidance along with the fact that FY12 might turn out to be a transformation year for the company, we have reduced our FY12E Revenues and APAT estimates. We now expect its FY12E Revenues to grow by 2.7%, its PBT (including Other Income) to decline by 5.9% and APAT to decline by 12.8%. At the CMP of Rs 91, the stock is quoting at 5.4x its FY12E earnings of Rs 17. Given the company's inability to deliver on guidance in successive quarters, muted growth guidance for FY12E and dwindling investor's confidence, we believe the stock may underperform in the interim period. Hence, we change our rating on the stock to Neutral (from Buy) and recommend investors to liquidate their holdings at the current price," says Sushil Finance research report.

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To read the full report click on the attachment