JP Morgan has reiterated Overweight rating on Allied Digital Services [ALDS] because of its focus on the booming IT Services market within India. For Q4FY08, Revenues grew 3% Q/Q with strong 40%+ Q/Q growth in the services segment offset by a ~10% decline in the solutions segment. EBITDA margins expanded 4% Q/Q with higher services contribution. However, lower other income and higher taxes led to net profit growth of just 2% Q/Q, still ahead of expectations.
ALDS has set up a procurement assistance group to reduce the low-margin hardware procurement business. While this led to a ~10% Q/Q decline in solutions revenues in 4Q FY08.
ALDS management guided to 70% Y/Y revenue growth in FY09 with further margin expansion. The company has a strong order book of Rs780-800MM in its solution business executable over the next 3-4 months.
JP Morgan expects ALDS to report an EPS of Rs 46 and Rs 83 for FY09 and FY10 respectively.The stock is trading at a P/E of 18x FY09E EPS with a 75% EPS CAGR over FY08-10E. Given the strong domestic demand outlook with corresponding low risk from rupee appreciation, expect the stock to move up gradually, after the sharp 4x jump from its IPO price. JPM has set a target price of Rs 1,200.