Investments In Talent And Digital Solutions Will Drive Future Market Expansion

Key Takeaways

• Capitalizing on digital solutions demand and securing significant contracts enhance Allied Digital's revenue visibility and future growth prospects.
  
• Strategic focus on long-term contracts, domestic expansion, and talent investments could boost margins and broaden market opportunities.
  
• Heavy reliance on the U.S. market and potential cost pressures from talent acquisition may impact net margins and expose the company to geopolitical volatilities.

Catalysts

Designs, develops, deploys, and delivers end-to-end IT infrastructure services and digital solutions in India, the United States, the United kingdom, and internationally.

• The company is capitalizing on the increased technology spending by global enterprises, particularly in digital engineering, cloud, and cybersecurity solutions, which is expected to drive revenue growth as businesses continue to invest in IT infrastructure and digital transformation.
  
• Allied Digital has secured significant orders and contract renewals, including projects with multinational companies and a large-scale cloud deployment initiative, which contribute to a stronger order book and enhanced revenue visibility for the future.
  
• The company’s expansion in the domestic market, supported by government initiatives for increased capital investment and manufacturing, is expected to drive revenue growth and improve economic activity in India.
  
• Allied Digital's strategic focus on long-term contracts and technology management solutions positions the company to enter high-margin segments, potentially improving net margins and contributing positively to earnings growth.
  
• Investments in talent development and geographical expansion will support the company’s ability to win more complex contracts globally, thus broadening its total addressable market and paving the way for sustained earnings growth.

Allied Digital Services Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Allied Digital Services's revenue will grow by 17.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.9% today to 9.7% in 3 years time.
• Analysts expect earnings to reach ₹1.2 billion (and earnings per share of ₹19.0) by about February 2028, up from ₹538.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.2x on those 2028 earnings, down from 28.3x today. This future PE is lower than the current PE for the IN IT industry at 32.4x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.72%, as per the Simply Wall St company report.

Allied Digital Services Future Earnings Per Share Growth

Risks

• Despite growth in revenues, there are potential cost pressures from increased employee costs due to wage hikes and talent acquisition, which may impact net margins.
  
• The reclassification of employee costs in the U.S. operations leading to adjustments in direct expenses could create discrepancies in gross margin calculations, impacting overall earnings.
  
• The company faces potential risks from a previous cybersecurity incident with a claim against them, which, although insured, could affect financial stability and insurance costs.
  
• Heavy reliance on the U.S. market, making up 62% of revenue, exposes Allied Digital to geopolitical and economic volatilities that could affect the steady flow of revenue.
  
• The need for continuous investment in talent and technology for geographical and service expansion might suppress short-term profitability, thereby impacting net margins during the growth phase.

Valuation

• The analysts have a consensus price target of ₹288.0 for Allied Digital Services based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹12.6 billion, earnings will come to ₹1.2 billion, and it would be trading on a PE ratio of 24.2x, assuming you use a discount rate of 14.7%.
  
• Given the current share price of ₹271.27, the analyst price target of ₹288.0 is 5.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.