Allied Digital Services (NSE:ADSL) Q2 2027 Earnings Call

0:00 Ladies and gentlemen, good day, and welcome to Allied Digital Services Limited Q2 and H1 FY 'twenty seven Earnings Conference Call. A reminder, all participant lines will be in the listen only mode, and there will be an opportunity for you to ask question after the presentation conclude. Please note that this conference is being recorded. I now hand the conference over to Mr. Mayank Vaswani from CDR India. Thank you, and over to you, sir. Thank you, Danish. Good afternoon, everyone, and thank you for joining us on Allied Digital Services Limited's earnings call for the second quarter of FY twenty six twenty seven. We have with us on the call today mister Nitin Shah, founder and CMD, mister Ramanan Ramanathan, global head of strategy for growth, innovation, and partnerships, mister Nehal Shah, joint managing director, and mister Gopal Tiwari, chief financial officer.

1:03 We will begin with comments from mister Nehal Shah, who will cover recent developments across the business, including the operational performance and order wins, followed by Mr. Gopal Diwari, who will walk us through the financial highlights. Thereafter, we will open the call for the Q and 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 mister Nehal Shah for his opening remarks. Thank you, ma'am, and good afternoon, everyone, and thank you for joining us today. I trust you have had the opportunity to review the financial results and earning what you have shared earlier.

1:49 We are pleased to report another quarter of healthy growth and consolidated revenues of two sixty five growth in quarter two f y twenty seven, representing an increase of 14% year on year. For the first half, revenue stood at 526 crore, growing 16% over the corresponding period last year, making the highest ever h one revenues in Allied Digital industry. This is reassuring given the challenging operating bank... Backdrop. On the profitability front, EBITDA for the quarter stood at 27 crore with a margin of 10% while profit before tax was 17 crore. Margins continue to reflect investments in talent, leadership, and growth capabilities alongside the competitive pricing and the operating cost pressures. Our focus remains on centering the business with progressively improving operational efficiency and profitability.

2:36 Let me turn to the industry landscape by... Which continues to evolve rapidly, particularly in the terms of accelerating pace of innovation. Even as enterprises remain committed to modernization, automation, digital transformation, they are becoming more deliberate in their investment decisions. With newer AI models and platforms emerging at a rapid pace and with each new model promising superior capabilities at low... At lowering computing costs, customers are understandably cautious about committing to technologies that could quickly be superseded. Consequently, investment decisions are increasing focus on flexibility, cost efficiency, measurable returns, long term relevance. This means extended evaluation of approved cycles, particularly for larger transformation programs. We are witnessing these trends within our business too. Customer inquiries remain robust and engagements are becoming deeper and more strategic, but large contracts are taking longer to conclude as clients evaluate technology choices and commercial considerations more closely.

3:35 Molar and mid sized opportunities, however, are converting relatively faster and enabling us to sustain business momentum. An important element of our strategy is to increase the contribution from direct customer engagements. Allied Digital has built a solid track record when participating in large partner led projects, consortium led projects, which provide scale and allow execution responsibility and risk to be shared. However, direct relations... Relationships give us greater ownership of the customer engagement and create more opportunities to expand our services, deepen relationships, and increase our share of customer technology spending over time. We're therefore strengthening our sales operation and go to market capabilities in order to build a healthier balance between partner led, consortium led, and direct business.

4:22 We are now seeing... We are now starting to see renewed activity in the government segment as well. As we highlighted in the earlier calls, the sharp increase in equipment and hardware costs had affected the commercial average of certain projects, dealing with delays and and being more selective towards the bidding approach. While costs remain elevated, prices have shown signs of stabilization, and we are beginning to see projects run to active consideration. Given our expertise in safe cities, smart cities, surveillance projects, company... A combined control systems, and integrated digital infrastructure, remain encouraged by our opportunity in the pipeline in this segment. Coming to operational development... Developments, we secured over 74 crore in new orders and renewals during the quarter. Among the key developments was strategic partnership in The US to deliver infrastructure cloud and cybersecurity services through our offshore delivery center. We also secured an engagement in The U... US leading health care service provider to implement and support twenty four seven AI based AI powered service desk.

5:28 In India, we were selected by MITC to be the system integrator for implementation, maintenance, and support of its Internet leased line connectivity solution across Maharashtra. This marks an order being from a government agency after a gap of three quarters, validating our view that domestic government ordering activity is set to pick up again. Additionally, we renewed several long standing customer engagements across pharmaceuticals, BFSI, real estate, and medical devices, reinforcing the strength of our customer relationships. Internally, we continue to build a leading... Build on the leadership augmentation at earlier this year. Our priorities are to strengthen sales execution, expand direct customer relationships, enhance delivery capabilities, and exceed the integration of AI across our services. We recognize that these investments will take time to translate into results, but believe they are essential to building a more competitive and scalable organization.

6:21 FY twenty seven is therefore also a period of consolidation and institutional centering as we prepare the business for its next stage of expansion. With that, I would like to hand over the call to our CFO, mister Gopal Diwari, who will take you through the detailed financial ex... Performance for the second quarter and the first half of FY twenty seven. Over to you, Gopal. Thank you, Nihal, and good afternoon, everyone. I'll take you through the key financial highlights for the quarter and the first half along with some important developments relating to working capital and the balance sheet. As Nehal mentioned, revenue for q two stood at 265 growth, growing 14% year on year, while h one revenue reached 526 growth, an increase of 16%, sorry, 16% over the corresponding period last year.

7:07 Having crossed 500 crore in first half revenues, we have established a healthy revenue run rate and remain well positioned to sustain our annual revenue milestone of thousand crore. A notable feature of our performance has been the strength of our services business, represent predictable multiyear annuity contracts, which grew 31% year on year in q two. International revenues also increased by 36% this quarter, more than offsetting the softness in domestic government projects. These trends reinforce the resilience of our diversified business model and the progress we have made in scaling our global operations. Coming to profitability, EBITDA for q two stood at rupees 27 crore, improving subsequently from rupees 25 crore in q one, with margins remaining stable at 10%.

7:53 On a year on year basis, EBITDA was marginally lower compared with 28 crore in q two f y twenty six. Margins continue to reflect the investments we have made in strengthening our sales engine over the last... Over the past year. Alongside prevailing cost basis, we remain focused on optimizing our cost structure, improving delivery productivity, and enhancing resource utilization to progressively strengthen profitability. Importantly, we have also adopted a disciplined approach to new business acquisitions, which clearly define profitability and commercial thresholds for evaluating prospective engagements. We remain selective in pursuing opportunities and have declined to take on contracts that do not meet our return expectations. Our focus is to deliver profitable and sustainable growth. Profit before tax for q two stood at rupees 17 crore, broadly stable subsequently, while profit after tax improved to 13 crore from 12 crore in the q one.

8:48 For h one FY twenty seven, PBT stood at rupees 34 crore and PAT at rupees 25 crore. While profitability continues to absorb the impact of growth, investments, and cost basis, our focus is on translating... Increasing business scale into stronger earnings. With the significant onetime accounting adjustments undertaken in FY twenty five and FY twenty now behind us, we are placing greater emphasis on operational efficiency, consistency in financial reporting, and sustainable margin improvement. Turning to the balance sheet, I would like to highlight some encouraging developments in our working capital position. Despite the increasing scale of our operations and execution of larger contracts, trade receivables declined to rupees 264 crores as of September 30 compared with 320 crore as of end of the March twenty twenty six.

9:37 Letters days also improved to approximately eighty four days from ninety six days at the end of FY twenty six, reflecting our continued focus on timely milestone billing and collection efficiency. On the liquidity front, cash and cash equivalents stood at rupees 185 crores as of 09/30/2026 compared with 162 crore a year earlier. Gross borrowings increased from rupees 98 crore to 167 crore over the same period, largely reflecting the higher funding requirements associated with the growing scale of our business. Importantly, we continue to maintain a positive net cash position. On governance and financial reporting, we have shared a detailed update during our previous calls regarding the resolution of legacy audit observations. Having addressed those matters, our emphasis is now on maintaining the strengthen our controls and reporting practices as part of regular financial processes.

10:31 Overall, our proprieties for the remainder of FY twenty seven are clear. Maintaining cost discipline, supporting growth investments, and progressively strengthening profitability. While the business environment remains competitive, we believe a greater contribution from managed services, better replacement of resources, and increased automation can support operating efficiency over time. With that, I'll now hand the call back to moderator for the question and answer session. Thank you. Thank you so much, sir. Ladies and gentlemen, anyone who wishes to ask a question may press 1. We will now begin with the question and answer session. Anyone who wishes to ask a question may press 1. If you wish to remove yourself from the question queue, you may please press 2. We request everyone to use handsets while asking a question.

11:22 We'll wait for a moment while the question queue assembles. First question comes from the line of Roshil Gathia with Choice Institutional Equities. Yeah. We see order book have declined from $1.20 crores to 74 crores. And you indicated that in the last call that OEM pricing stabilization will enable to participate more aggressively in large government tenders. So wanted some color on that. And what's the status on Movida Smart City project?

12:13 So... Yeah. Thanks, Jose, for the question. You're correct. In in fact, in my previous calls also, had said that we are going slow on government orders due to the price increase and life... Viability of those projects becoming difficult. However, having said that, I think this quarter post the mid of October, we have seen a lot of stability coming in the prices. OEMs have come down and are backing us to go after projects and pick them up. So that gives a lot of engagement. With respect to the noise of ACT, I think the the big submission is on the November 6. So we are going ahead and going ahead with the with the RFP. And, hopefully, if things go in the right way, we might turn out to be winning it as well. Other than that, there are others projects also that we have already bid it for in the last couple of couple of days and couple of weeks for which we would be able to have some kind of results in in the next two to four weeks.

13:16 Having said that, I think other than that, the pipeline also looks very, very encouraging. The... Lot of case studies are moving from the initial requirement to the RFP stage. And once they move on to the RFP stage is when we become very active and we bid for it and and we can figure out, you know, or expect the results to be in our favor. Oh, okay. Thanks. That helps. Mister, have you done with your question? Yeah. Our next question comes from the line of Hitesh Gadam with Arihant Capital Markets Limited.

14:11 Hello. Thank you for the opportunity. So my question is, sir, on government revenue dropped from 23% to 13% in Q2. So given the given the recent Punjab and MIT savings, so how do you expect the government versus enterprise order mix to evolve? And how are these contracts structured to protect against payments like address and hardware in... Inflation? Thank you for the question, Hitesh. As I told before also that we are being very picky and choosy on the accounts and the customer that we go after. So, typically, the the orders that we've won in the ILL with the MITC and other projects, all the pricing have been blocked with the OEM, and and we are absolutely okay on the margin if we're able to get in with respect to the product pricing.

15:11 Having said that, I think there is a lot of stability coming in as well with respect to the pricing of other products as well, and lot of these OEMs are asking us to go and bid bid for larger projects. With respect to the the project pricing, I I mean, to say the billing and other things, typically, any project that we get is a is a combination of product and services. So, typically, any CSCD, smart city, or any implementation projects work about six to eight months is the implementation phase, which we bid... Which we build and give the solution to our customer. And the remaining is about three to five years of maintenance that we have to do. The the the revenue split is up... About 60 to four... 60 to 40. So 60% during the build phase and 40% during the services phase.

16:03 And with respect to the the government money recognition, yes, there there could be sometimes a bit of delay here and there. But overall, we have seen that the payments have come come by, and we have not seen any large money getting stuck or not not getting, you know, delivered to us. So so that gives us a lot of confidence to go after these projects. The the biggest last point of going with government project is is the kind of the size that they give us. You know? Any large government project will will will be of the size of anything between 100 crore to $507,100 crore single ticket order. So that gives us a lot of delta jump that we need and and a lot of growth and optimization opportunity at the longer range. With respect to making...

16:49 We are also making sure that while the government side of the projects keep on increasing, but we are also putting a lot of focus on acquiring enterprise customers. Because enterprise customers, I take a little bit of more time, maybe smaller in size, but they they give a lot of longevity with them. You know? It is it is not very bound to external circumstances like elections or or government being changed or decision makers being changed. It's it's much more structured in that way and and very stable. So while the ticket side is smaller, but the longevity and the continuity of business with the customer with with direct customer, cross selling also increases. You do not always have to go through the RFP phase. So, you know, it's tight... It's striking a tight balance between the government and the enterprise business is what is our focus on.

17:36 Here, I would like to add the market, especially the product price point point of view, is so volatile and highly unpredictable. And that's why we are doing lot of cautious decision. And probably, we are not aggressive to take any and every business. So we do a lot of assessment, and I would say that I'm happy that there are no sticky issues with our company in terms of corrections right now. Okay, sir. That helps. And one more question. Given the 32% l one ticket deflection and 21% of cost to serve from our AI desk, so when will internal AI savings outpace the revenue depletion caused by client discount demands?

18:29 Erez, you could come back on the question. I'll get the question clearly. Actually, I'm asking, guys, given that 32% of l one ticket deflection and 21% of cost to serve got from your AI desk. So when will internal AI savings outpace the revenue deflation or cost by client discount is only once. Is it something that you capture from our information, or you're talking in general from the market point of view? 3216%. Is this parameter from from our information? Yeah. Yeah. Like, it it was mentioned in the No. No. Hitesh, you are you are correct.

19:16 So so while you are right that we are seeing a lot of reflection on l one tickets, but what we are right now focusing on is making sure that we have a parallel run of doing that before we take a eventual decision of reducing the direct cost of people and replacing it with AI models. So we are on the right path. It gives me a lot of That's that's the trend that's going on, and lot of, we say, level zero kind of tickets would be taken care by itself. So that will reduce the number of tickets, and we do not have to deploy people for that. And there's a trend which is going on in every company is doing that where the cost is getting reduced, people cost. If I if I can add to that, Ramanan, here, the strategy for managed services for us is, one, how do you increase automation wherever it is possible? Second, how can you use AI for preventive or anticipative problem solving, not just corrections?

20:20 And the third is, how do we also develop the agent ecosystem in terms of better agent orchestration for AI driven managed services. So all of these things are happening and different organizations' needs are different from the point of view of the nature of tickets that come, the nature of technologies that they have already within their systems and the nature of sensor technology that are getting integrated into many of their devices. So it's not a one size fits all approach. It is driven by customer analysis, the analysis of the trends of tickets that are coming, and a basic framework of an automation that can be equally applied to multiple scenarios. So that's the approach. And I think with the digital desk that we already have in place, the automations that we already have in place, we are in a very good situation to leverage innovation in all of this to be able to provide much more cost effective and reliable managed services.

21:33 So you might have seen our strategic decision that our old CEO, mister Parisha, is technically very brilliant. So we have given him a new task of being on the innovation. So he's very busy in handling a team of innovations. So you will hear a lot of things coming from that side, innovation. Innovation can reduce the cost also in AI environment. Okay, sir. And one last question. To achieve our 20 percentage of CADR ambition, what what is the target ratio of direct enterprises sales versus partner led sales over the next twenty four months? So, Itesh, as I told previously, we've not kept a target of going direct and indirect. We are going after the right contracts, the right ticket size, and the customer's stability.

22:29 So while we are okay to do the partner led business, it does give us the scale that we want to go and go after large customers. With the help of the partner, we can serve them. And and most of those contracts are for a larger period of time. We are targeting the mid size and the small size customers to go direct where we can start small and expand eventually. And the third is... The third bucket is the government business where we are going after a lot of the large RFPs coming in for safe cities, smart cities, metros, airports, and all of it where we fit correctly with with lot of case studies that we have in the background. So putting three strategies, I think, you know, one of the two buckets of them will successfully fire, and that that should help us in in giving us the revenue jump of 20% CAGR year over year. That's the setting that we are looking at right now.

23:22 Okay. Thank you. That's it from my side. Thank you. Thank you. Ladies and gentlemen, anyone who wishes to ask a question may press 1. Reminder to all the participants that if you wish to ask a question, you may press 1. Our next question comes from the line of Roshil Kartia with Choice Institutional Equities. Thanks for the opportunity again. I just wanted to understand, are we exploring any partnerships with the large caps to, you know, gain new contracts and... Or or are we planning to have any acquisition plans also? Thanks for the question.

24:10 So there there are a lot of these partnerships that we've already done. We are going ahead and doing a lot of OEM partnership especially due to an increased demand in the product sales as well. So a lot of these OEM partnerships are also being taken into place. Regarding m and a, m and a has always been in our eye. We are constantly looking at some of the other company, but, unfortunately, for us, we have not reached to a stage where we could give you updates that we have we have shortlisted certain companies. But the the line of sight from an execution perspective is something on AI or cyber... Or cybersecurity. So these are the two things that we are looking at from from an acquisition perspective, which could help us, you know, from a delivery as well as sales perspective. Okay. Understood. Yeah. Thanks.

24:56 Thank you. Ladies and gentlemen, anyone who wishes to ask a question may press 1. Reminder to all the participant that if you have a question, you may please press 1 on your touch tone phone. Thank you so much. Ladies and gentlemen, as there are no question from the participant, I now hand the conference over to the management for the closing remarks. Thank you and over to your team. Thank you. Thank you again for your participation and engagement during today's call. For the past few years, we have made considerable progress in scaling Allied Digital, expanding our capability and strengthening the organization. As we look ahead, our focus is shifting... Increasing it towards the quality and sustainability of growth. This means building deeper and more direct customer relationships, expanding our share of their technological spending, and create a business with a greater revenue visibility and operating leverage.

25:47 We remain excited about the opportunities ahead. Before I sign off on behalf of the entire Allied Digital family, I would like to convey wishes for for a happy Diwali and a prosperous New Year to all of you and your families. Should you require any further information or have additional questions, please feel free to reach out to our team or connect with CDR India. We sincerely appreciate your continued support and confidence in Allied Digital. Thank you. Thank you so much, sir. Ladies and gentlemen, on behalf of Allied Digital Services Limited, that concludes today's call. Thank you for joining us, and you may now disconnect your lines. Thank you. Thank you. Thank you.