Allied Digital Services Limited (ADSL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Allied Digital Services Limited Q1 FY '27 Earnings Conference Call. [Operator Instructions] I now hand the conference over to Mr. Mayank Vaswani from CDR India. Thank you, and over to you, Mayank.

Thank you, Rayo. Good afternoon, everyone, and thank you for joining us on Allied Digital Services Limited's Earnings Call for the first quarter of financial year '26-'27. We have with us on the call today Mr. Nitin Shah, Founder and CMD; Mr. Nehal Shah, Joint Managing Director; Mr. Paresh Shah, Chief Innovation Officer; and Mr. Gopal Tiwari, Chief Financial Officer. We will begin with comments from Mr. Nehal Shah, who will cover recent developments across the business. Mr. Paresh Shah, who was CEO for the quarter under review, will discuss the operational performance and order wins, followed by Mr. Gopal Tiwari, who will walk us through the financial highlights. Thereafter, we will open the call for the Q&A session. Before we begin, I would like to point out that some of the statements made in today's call may be forward-looking in nature, and a disclaimer to this effect has been included in the earnings documents that have been shared with all of you earlier. I would now like to hand over the call to Mr. Nehal Shah for his opening remarks. Over to you Nehal.

Thank you, Mayank. Good afternoon, everyone, and thank you for joining us for Allied Digital Services earnings call for the first quarter of FY '27. I hope all of you had an opportunity to review our financial results and investor presentation that we shared earlier. I will start with some recent developments. Last month, we announced augmentation of our senior leadership team, reflecting the company's evolution as we prepare for the next phase of growth. In the new role, I have been entrusted with the responsibility of Joint Managing Director. Paresh has transitioned into a newly created role of Chief Innovation Officer to lead our AI and technology transformation agenda. And we are delighted to welcome Arun Phatak as CEO of Cloud Infrastructure Services for India and Middle East. Together, these changes are designed to sharpen execution, deepen customer engagement and strengthen our ability to capitalize on the significant opportunities emerging across AI, cloud, cybersecurity and managed services. The first quarter marks an important milestone in Allied Digital's journey. On a trailing 12-month basis, our revenues have crossed INR 1,000 crores mark, an aspiration we had set ourselves nearly 3 years ago. Achieving these milestones reflect the steady evolution of our business. And while we take satisfaction reaching it, our focus is already on building the next phase of sustainable growth. Now coming to the quarter 1 numbers, we are pleased to report another quarter of resilient performance with revenues of INR 260 crores in quarter 1 FY '27, representing growth of 19% year-on-year. EBITDA increased by 18%, while PBT, that is profit before tax grew by 19% to INR 17 crores. These results reflect disciplined execution, healthy customer engagement and the continued strength of our diversified business model. The global economic environment continues to evolve rapidly, while macroeconomic and geopolitical uncertainties have made customers more measured in their spending decisions. Investments in AI, cloud, cybersecurity and digital infrastructure remains strategic priorities. Procurement cycles have become longer and more rigorous with greater emphasis on governance, business outcomes and return on investment. However, we see this as a shift in the timing of decisions rather than underlying demand. Our opportunity pipeline remains healthy. Customer engagement is robust, and we are increasingly participating in larger and more strategic transformation programs, including opportunities beyond our traditional partner ecosystem. These trends play directly to Allied Digital's strength. Our integrated capabilities across managed services, cloud, cybersecurity digital infrastructure and AI-enabled operations position us well to support customers through their end-to-end transformation journey. Whether it is enterprises accelerating automation and cloud adoption or governments investing in smarter and more connected infrastructure, we believe our addressable opportunity continues to expand. Accordingly, our priorities for FY '27 remain clear. Alongside pursuing growth opportunities, we are also strengthening the foundations required for our next phase of expansion by growing our sales engine, refreshing our delivery organization, deepening customer relationships and embedding AI across our service portfolio. These initiatives are aimed to improve execution at scale, increasing our share of direct customer engagement, enhancing long-term competitiveness. Another important milestone this quarter is the completion of our governance transformation. For the first time since the comprehensive review commenced, the audit report carries no qualifications or observations. This reflects the successful resolution of all matters identified in earlier periods and reinforces the significant progress we have made in strengthening our governance standards, financial reporting framework and internal controls. As we augment our leadership team and continue to build a stronger institutional foundation, we believe Allied Digital is entering the next phase from a position of greater strength than ever before. While the near-term environment may remain dynamic, the long-term demand drivers for our industry remain compelling, and we remain focused on executing consistently, expanding our enterprise presence and creating sustainable long-term value for our stakeholders. With that, I will now hand over the call to Mr. Paresh Shah, our Chief Innovation Officer, who will take you through the operational developments, key order wins and strategic initiatives during the quarter. Over to you, Paresh.

Thank you, Nehal. Before I speak about the progress we made during the quarter, I would like to take a moment to acknowledge my transition into the role of the Chief Innovation Officer. I am excited to take on the new responsibility at a time when AI is fundamentally reshaping how technology services are delivered. My focus going forward will be on driving innovation, accelerating AI adoption across our offerings and developing next-generation capabilities that enable our customers to realize greater value from the technology investments. The order wins during the quarter reflect the continued confidence that customers place in Allied Digital's capabilities and execution. Beyond the diversity of customers and industries, these engagements demonstrate our ability to deliver across the entire technology services spectrum. During the quarter, we expanded our presence with global enterprises, strengthened our position in the government and public sector and added new enterprise customers across key industries. Collectively, these engagements span workspace services, enterprise applications, managed services, digital infrastructure, IT asset management and integrated command and control solutions. They reflect the breadth of our capabilities and reinforce our position as a trusted partner to end-to-end digital transformation. During the quarter, ADSL has booked orders for INR 120-plus crores towards new wins as well as renewals for multiyear contracts. A few key wins this quarter include won an enterprise application services engagement with a leading NYSE-listed electronics design and testing solutions company to provide application maintenance and support to core enterprise platforms, including ServiceNow, Jitterbit and Boomi. This engagement marks Allied Digital's entry into enterprise application services space in the U.S. secured an end-to-end workspace service management solution with a leading customer-owned mutual bank in Australia, delivering desk site support services across its corporate offices and retail branches in Melbourne, Sydney and Adelaide to enhance end user experience and operational efficiency. Awarded a turnkey system integration project by the Department of School Education, Government of Punjab for the design, build, commissioning, operations and maintenance of an integrated command and control center, enabling centralized monitoring and management capabilities. Secured a managed services and implementation support engagement with the Government of India's prestigious organization under the Ministry of Commerce to provide comprehensive IT managed services supporting critical business applications and ensuring seamless day-to-day technology operations. Won an IT asset management engagement with a leading international property consulting firm to manage the life cycle of enterprise IT assets, enabling manpower important assets, visibility, governance and operational efficiency. Secured an IT infrastructure support engagement with one of India's leading FMCG companies to provide end-to-end IT infrastructure services, ensuring reliable IT operations across the customers' enterprise environment. Renewed multiple strategic customer engagements across the pharmaceuticals, chemicals, real estate, BFSI, medical devices and the retail design sectors, reflecting continuous customer confidence in Allied Digital service capabilities and long-standing customer relationships. Equally encouraging is the continued renewal of our long-standing customer engagements across multiple industry verticals. This reflects the trust our customers place in Allied Digital and reinforces the strength of our execution and long-term partnerships. As we continue to embed AI across our services and solutions, we are not only enhancing operational efficiency, but also creating differentiated outcome-driven offerings that will define the next phase of Allied Digital's growth. I look forward to leading this innovation journey and working closely with our customers and teams as we build the future of Allied Digital. Together, with our strengthened leadership team, we remain committed to deliver innovation-led growth, deepening customer partnerships and creating sustainable long-term value for all our stakeholders. With that, I would now like to hand over the call to our Chief Financial Officer, Mr. Gopal Tiwari, who will take you through the financial performance of the quarter in greater details. Thank you.

Thank you, Paresh bhai, and good afternoon, everyone. I'll briefly take you through the financial performance for the quarter and highlight the key financial developments. Before turning to the numbers, I would like to touch upon 2 important milestones achieved during the quarter. First, I'm pleased to share that all the observations and qualifications raised by our auditors in earlier periods have now been fully addressed. The necessary accounting interventions, process enhancements and governance improvements have been implemented to the satisfaction of the auditors. And the audit report for the quarter is unmodified with no further communications. This marks an important milestone in our ongoing efforts to strengthen governance, financial reporting and internal controls. The second milestone is equally significant. Our trailing 12 months revenue have now crossed the INR 1,000 crore mark, reaching to INR 1,009 crores. Many of you will recall that we had articulated these aspirations nearly 3 years ago. While INR 1,000 crores is simply a milestone and not a destination, it reflects the steady progress Allied Digital has made in scaling the business and provides a strong foundation for the next phase of growth. Coming to our financial performance. We delivered another quarter of strong double-digit growth despite a major demand environment and elongated customer decision cycles. Revenue for the quarter stood at INR 260 crores, higher by 19% on a year-on-year basis, supported by healthy execution across our existing customer base. EBITDA for the quarter stood at INR 25 crores with an EBITDA margin of 10%. During the quarter, employee cost reflects the impact of annual wage revisions and continued investments in strengthening our talent base and leadership team. Finance costs also increased modestly during the -- due to higher working capital deployment and as large projects moved into the execution phase. Other income was lower during the quarter, primarily due to reduced foreign exchange gains. As part of the governance and accounting measures completed during FY '26, funds deployed in our U.S. subsidiary were reclassified from debt to equity. Under the earlier accounting treatment, these balances were revalued every quarter, resulting in foreign exchange gains or losses being recognized in our other income. Following the conversion to equity, this quarterly revaluation no longer applies, making reported earnings more reflective of the underlying operating performance of the business. These factors were partly offset by continued cost optimization initiatives across the businesses, resulting in lower operating overheads. Consequently, profit before tax increased to about INR 17 crores, demonstrating the resilience of our operating model despite the cost headwinds during the quarter. These headwinds were partly offset by continued cost optimization initiatives across the business, resulting in lower operating overheads. Consequently, profit before tax increased to about INR 17 crores, demonstrating the resilience of our operating model despite the higher employee and finance costs in the quarter. At the PAT level, it is important to note that the comparison with the corresponding quarter last year is influenced by taxation. During Q1 FY '26, the company has recognized a gain in tax provision due to recognition of deferred tax asset, resulting in a net tax benefit of INR 0.3 crores for that period. In contrast, the current quarter reflects a total tax provision of about INR 4.5 crores. Despite the significantly higher tax outgo of nearly INR 5 crores in this quarter, profit after tax stood at INR 12 crores compared to INR 14 crores in the corresponding quarter last year, highlighting the underlying improvement in operating profitability. Overall, the financial performance for the quarter reflects the continued strengthening of the business. Our focus remains on improving the quality of earnings through disciplined execution, tighter cost management and prudent capital allocation while continuing to invest in leadership, delivery capabilities and AI-led service offerings that will support long-term growth. With that, I'll now hand over the call back to the moderator for the question-and-answer session. Thank you.

[Operator Instructions] The first question is from Vishal Pandya, who is an individual investor.

I just wanted to understand if there is some kind of competitive pressure because we have seen that the EBITDA margins and the PAT margins are on a declining trend from last 3 to 4 years. So can you throw some highlight on that? And how can we kind of improve that?

So yes, you're right. There is certain competitiveness that is there in the business from the last 4 to 8 quarters. With that, I would also want to say that we are investing as well while we are growing. So if you see us consistently over the last 4, 5 years, we've been growing at 20%. And to do that, we have done a lot of investments with respect to hiring new people, getting the leadership in place, getting the mid-level leadership in place. So one side, we are investing. We are investing on people. We are investing on technology where we are doing a lot of investment on AI to make sure that our service portfolio is AI ready. And third is with the global scenario, specifically in the U.S. market, we have seen a lot of competitiveness happening because of the war issue that was there over the last 3, 4 quarters. While the -- of course, the business actually is growing, but there is a lot of demand when it comes for margin reduction or bettering the bottom line from a service perspective. So that has been a little bit of a challenge. To counter that, what we are doing is that while we are investing in the AI, we expect that once we start implementing all this automation to our clients on a broader basis, we should be able to improve or optimize our service delivery and get better margins over the next few quarters.

Okay. So can we -- let me put it on another way. Is AI being a beneficiary to our business? Or is AI a threat to our business? Because because of AI, are we losing that competitive edge in the market or something like that? Can you throw some light?

So AI or any other technology that is always future tech, we are next-gen tech, we always consider it as an opportunity, an opportunity to go to customers and acquire more customers. Of course, the rule of the game changes, it is not going to be as easy as it was for the last couple of years, but the new challenge also gets us new opportunities. And we are -- with both our open hands are welcoming AI and making sure that our service portfolio, our people get realigned towards AI and the requirements that the customer has. So that way, I will consider that as an opportunity, not at all a threat. But yes, up to what extent is only when we start implementing and start getting cost optimization done at the customer level is when we will be able to give you an exact strength at which we can get an output from AI implementation.

So as of now, can we understand that there's some kind of revenue deflation because of AI that we are facing?

So revenue deflation is happening because of 2 reasons. One is in India, specifically, if you recollect, due to the war situation, a lot of the product prices have gone up. So in the last couple of quarters, we have stayed away in the last quarter of last financial year and the first quarter of this year, we have stayed away from going too aggressive on acquiring customers at a related lower margin. The reason for that is the speculation in the price changes from the hardware side that is happening. So things have slowed down a bit there. But having said that, I think from this quarter onwards, we are seeing that a lot of stagnancy is coming in that as well. Prices are getting bottomed out. We are seeing a lot of positive feedback coming in from OEMs to go and bid for it. So probably one more quarter and after that, when the RFPs are out and then we start bidding again, we will see a lot of newer deals coming in. So if not in the second quarter, third quarter, I'm pretty confident that we will have some good announcements coming up from the pipeline that we see. So that's how -- that's one of the reasons that I feel the top line has been declining a bit quarter-over-quarter.

But I will [indiscernible] here. I think your question I understood. AI is a boon to us actually. We would want the AI to spread more because I don't think so every company will be able to cope up with the change that's going to happen. However, we've been in the industry for the last 42 years and always taken a new challenges, and we are going to be far ahead. And with the new initiative that we have taken by focusing a lot on innovation, I think we'll be ahead of the curve. So answer is yes, AI is good for us. It's a matter of time that you will see a change is going to happen.

Okay. So when can we expect the margin pressures to bottom out? And from when can we see an increasing trajectory on the margins? And what will be your sort of guidance for FY '28?