Allied Digital Services Limited — Q3 FY25 earnings call

Call held 3 Feb 2025

Management summary

Allied Digital reported a strong Q3 FY25 with consolidated revenue of Rs. 220 crore, a 29% YoY increase, driven by robust growth in both India (56% YoY) and international markets (16% YoY). The company secured over Rs. 200 crore in new orders, strengthening its order book and future visibility. While employee costs increased by 11% YoY, management aims to maintain and improve the current 12% EBITDA margin, and liquidity remains strong with Rs. 180 crore cash on books for strategic growth.

Highlights

  • Consolidated revenue of Rs. 220 crore, up 29% YoY.

  • India operations revenue grew 45% YoY, and 56% YoY overall for India business.

  • Solutions segment revenue grew 59% YoY, and Services segment grew 22% YoY.

  • Order intake of over Rs. 200 crore, strengthening order book.

  • Improved margin profile, with EBITDA at about 12%.

  • DSO reduced to 72 days, with a target of 60-65 days.

Concerns

  • Employee costs in Q3 FY25 were Rs. 37.5 crore, 11% higher YoY due to increased associates and wage hikes.

  • Cybersecurity incident occurred, though management states it's covered by insurance and not expected to have significant financial impact.

Key financials

  1. Revenue ₹220 Cr +29%YoY
  2. Employee Cost ₹37.5 Cr +11%YoY
  3. EBITDA Margin 12%
  4. Tax Rate 12%

What they filed

Q1 FY27: revenue down 4.3%, net profit down 17.0% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue91 100 100 95 101 +10%95 −5%97 −3%91 −4%
EBITDA10 10 -14 9 9 −11%12 +18%-27 −95%14 +57%
Net profit6 6 -4 8 6 +10%4 −35%-19 −339%7 −17%
How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Segment breakdown

  • India Operations
    45% Revenue Growth56% Revenue Growth12% Revenue Growth38% Share of Total Revenue
  • Rest of World (US/Global)
    16% Revenue Growth62% Share of Total Revenue
  • Services Segment
    22% Revenue Growth
  • Solutions Segment
    59% Revenue Growth

Order book

high confidence

Inflow this quarter

₹200 Cr

The company secured over Rs. 200 crore in new orders and contract renewals, strengthening its order book and long-term growth visibility, despite having stopped providing overall order book numbers due to their dynamic nature.

Source: Prepared remarks

Capital allocation

high confidence
  • Liquidity Cash ₹180 Cr Cash is being kept as a war chest for acquiring larger customers and for good acquisition opportunities.
    So, cash on book currently that I recollect of was about Rs. 180 crore, and we are keeping this money in our war chest for a larger customer that we acquire so that if we need to invest in acquiring those customers, we can invest upfront. Also, we are constantly keeping our eyes open for good acquisitions as well.

Guidance & targets

Revenue

  • Top Line Revenue Revenue · FY26 · High confidence Rs. 1,000 crore
    In the past, previous quarters and previous years, we have been saying that FY '26 looks at a top line of about Rs. 1,000 crore, and that is what we are right now looking towards.

    — Nehal Shah

  • Recurring vs Solutions Revenue Mix Revenue · FY26 · High confidence 75% recurring revenue, 25% solutions business
    The mix is going to be anywhere between 75% of our recurring revenue, 25% solutions business, that is the project business.

    — Nehal Shah

Profitability

  • EBITDA Margin Profitability · every quarter · Medium confidence about 12% (maintain and improve)
    At present, we are at about 12% EBITDA. We will try to maintain 12% and try to improve from here on.

    — Nehal Shah

Tax

  • Tax Rate Tax · FY26 · High confidence 20% plus
    overall, it will be in the range of 20% plus only, FY '26.

    — Gopal Tiwari

Working Capital

  • Days Sales Outstanding (DSO) Working Capital · ongoing · Medium confidence below 70 days, ideally 60 to 65 days
    currently, I would say that we would want to come down below 70 as fast as we can. We would be very happy if we can do anywhere between 60 to 65 days.

    — Nehal Shah

Market Expansion

  • European Geographic Expansion Market Expansion · coming quarters · Medium confidence some European geographies
    So, there is a possibility that in the coming quarters, we would be expanding some European geographies as well.

    — Nehal Shah

What to watch in Q4 FY25

DSO Reduction

next quarter
Current 72 days
Target below 70 days, ideally 60-65 days

Why it matters

Improvement in working capital management and cash flow.

Our September half year, we have come down to 72. And hopefully, we will keep on improving. I don't have a timeline in mind because we think this is a continuous process and we have to keep on improving until, you know, we reach that milestone of 60 to 65 days.

Risks & concerns

  • Modestly challenging microeconomic environment

    medium

    Despite a modestly challenging microeconomic environment, the company reported strong performance.

    Management acknowledged

  • Wage hikes impacting margins

    medium

    Wage hikes were in the range of 7-8%, contributing to increased employee costs, but management aims to sustain/improve margins.

    Analyst acknowledged

  • Competition in Smart City projects

    medium

    Management highlighted the company's unique position as a hands-on, end-to-end IT services integrator in smart cities to counter competition.

    Analyst acknowledged

  • DeepSeek / GenAI disruption and pricing pressure

    medium

    Management sees DeepSeek's potential to reduce GenAI costs as an opportunity for increased adoption and new development, despite potential for increased competition.

    Analyst acknowledged

  • Cybersecurity incident

    low

    A data breach occurred, but the company is fully covered by cyber security insurance, expecting no significant financial impact.

    Management acknowledged

Q&A highlights

5 direct
Geographical distribution and margin expansion from US business Partial
We would not like to benchmark our international business with India business. What we are emphasizing and focusing is on the class of business that we do, and the kind of business that we keep getting, the kind of clientele that we address, and we have a lot of options coming but we are very cautiously growing.

Analyst was probing for higher margins from US business, but management emphasized a multi-pronged strategy and quality of business over specific geographic margin targets.

Asked by Pratik Dedhia

FY26 guidance, recurring vs solutions contribution, and EBITDA mix Direct
In the past, previous quarters and previous years, we have been saying that FY '26 looks at a top line of about Rs. 1,000 crore, and that is what we are right now looking towards. The mix is going to be anywhere between 75% of our recurring revenue, 25% solutions business, that is the project business.

Provides clear top-line and revenue mix targets for the next fiscal year, which is a key forward-looking indicator.

Asked by Arjun Agarwal

Financial impact of the cybersecurity incident Direct
But to be rest assured, even if there is any claim, it will always be settled through the global insurance that we have taken. And we are absolutely more than two times covered. I think more than three times covered with our cyber security insurance. So, we don't see any impact financially coming on our books on through this claim.

Addresses a potential financial risk and provides strong reassurance that the company is adequately insured, mitigating investor concern.

Asked by Arjun Agarwal

Impact of wage hikes and ESOPs on margins Partial
So, wage hike is, typically, we have this quarter or the previous quarter, the wage hikes have been very minimal in the range of 7 to 8%.

Provides a specific figure for wage hike impact, a common concern for IT services margins.

Asked by Jyoti Singh

Driver monitoring business opportunity size and margin trend Partial
So, this probably may not be looked upon in terms of the scale at which we have got the business, but it's a very innovative idea that we are looking into it, and it's a solution developed by our digital engineering services team, and that's very innovative, where we keep monitoring continuously the driver fatigue systems and lot of other parameters and which is futuristic.

Highlights a new, innovative solution and its potential, though current financial contribution is small.

Asked by Jyoti Singh

Competition in smart city projects Direct
Yes, see, we have secured a very unique position in smart cities. We are very hands-on technology players. There are large companies, but they are mainly outsourcing or they are just doing financing. But we are pretty much strategic players. We do right from the top to the bottom, right from the architecture, design, all the way to implementation.

Addresses competitive landscape in a key growth area and explains the company's differentiated approach.

Asked by Jyoti Singh

Onsite/offsite employee ratio and cost structure for US/export business Direct
When it is offshore, obviously we have much better margins and obviously much better profits. When it is pure onsite, definitely there is a local impact there at the margin level. But definitely there is an offshore component which takes care of a lot of margin capabilities.

Clarifies how the company manages costs and margins across different delivery models (onsite vs. offshore) in international projects.

Asked by Gaurav Desai

DeepSeek impact on AI applications and industry Direct
So, from the point of view of DeepSeek, what we need to see is how that can influence further application development using the tools that are being created in Generative AI. But the important thing is that the cost of Generative AI may come down as compared to what was originally being envisaged.

Discusses the strategic implications of new AI technologies like DeepSeek, particularly regarding cost reduction and increased adoption of Generative AI, which could impact the company's service offerings.

Asked by Arjun Agarwal

3 min read 7 chapters

Detailed narrative

Strong Revenue Growth and Margin Rebound

Allied Digital reported a robust Q3 FY25, with consolidated revenue reaching Rs. 220 crore, marking a 29% year-over-year increase. This performance signifies the second consecutive quarter exceeding the Rs. 200 crore threshold, maintaining improved business momentum. The company also noted a strong rebound in margins, particularly on a sequential basis, with current EBITDA at approximately 12%, which management aims to maintain and improve.

Robust Order Intake and Diversified Portfolio

The company secured over Rs. 200 crore in new orders and contract renewals during the quarter, further strengthening its order book and long-term growth visibility. Key wins included projects with a leading US-based multinational investment bank, a major US-based eye care provider, a large-scale cloud deployment project, and data center solutions for India's second-largest public sector bank. These wins contribute to a more diversified portfolio across various sectors.

Geographical and Segmental Performance

India operations continued to excel, with standalone revenues growing 45% year-over-year, and overall India business showing a 56% YoY and 12% sequential growth. The US market also demonstrated improved traction, contributing to a 16% year-over-year revenue growth from the rest of the world segment. The Services segment grew 22% YoY, while the Solutions segment saw a significant 59% YoY increase, serving as a pipeline for recurring revenues.

Strategic Focus on Long-Term Growth and Innovation

Management emphasized a multi-pronged strategy focusing on long-term business, diversity in geography and customer base, and leveraging technology and AI for increased productivity and profitability. The company is investing in talent development and geographic expansion to capitalize on market tailwinds such as increased technology spending in digital engineering, cloud, and cybersecurity solutions, and the growing maturity of Indian enterprises. This approach enables them to compete and win larger, more complex contracts.

Cybersecurity Incident and Financial Impact

The company disclosed a cybersecurity incident involving a data breach that occurred before they onboarded a customer. While an ex-employee impersonation led to a subsequent attack, management clarified that the incident was not their fault and the company is fully covered by cyber security insurance, expecting no significant financial impact. The customer remains with Allied Digital, and the company is actively working with legal teams to resolve any claims, with the incident having taken place in December 2023.

Capital Allocation and Liquidity Management

Allied Digital reported approximately Rs. 180 crore in cash on its books. This liquidity is being maintained as a 'war chest' for potential strategic acquisitions and upfront investments required for acquiring larger customers. The company is actively seeking good acquisition opportunities to enhance its capabilities and market reach, ensuring they have sufficient funds without needing to secure money from banks.

Outlook and Key Targets

For FY26, Allied Digital is targeting a top-line revenue of Rs. 1,000 crore, with a revenue mix of 75% from recurring services and 25% from solutions. The company aims to maintain and improve its EBITDA margin from the current 12% and reduce Days Sales Outstanding (DSO) from 72 days to a target range of 60-65 days. The tax rate for FY26 is expected to be over 20%, up from 12% in Q3 FY25.

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