Allied Digital Services Limited (ADSL) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Allied Digital Services Limited earnings conference call. [Operator Instructions] 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, Mr. Vaswani.

Thank you, Yusuf. Good afternoon, everyone, and thank you for joining us on Allied Digital Services Limited's Earnings Call for the First Quarter of FY '25-'26. We have with us on the call today, Mr. Nitin Shah, CMD; Mr. Nehal Shah, Whole-Time Director; Mr. Paresh Shah, Global CEO; Mr. Ramanan Ramanathan, Global Head of Strategy; 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 will then 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 today. I hope you have had a chance to review the earning materials we shared earlier. We are pleased to report a promising start to FY '25-'26 with a solid performance in the first quarter, and we have reported consolidated revenues of INR 219 crores, registering growth of 22% year-on-year. Our performance this quarter has been characterized by broad-based growth driven by continued execution of our business pipeline. Our India operations have been a primary growth driver, with the standalone revenues rising 27% year-on-year in quarter 1 FY '26, driven by accelerating momentum in both enterprise and government segments. The momentum we are seeing in the Smart City's revenues on the back of the meaningful order wins over the last several quarters underscores our ability to execute at scale as India advances its digital infrastructure. As technology and governance increasingly intersect, we are proud to contribute towards building smarter, more connected communities across key cities. Our international business is showing encouraging signs of recovery. In the U.S., enterprise clients are reengaging with clarity and renewed intent, signaling a gradual return to confident decision making and a willingness to commit to long-term transformation programs. At the same time, conversations with prospective clients across Europe and Middle East point to growing interest and a more consistent contribution to our diversified revenue base and global order pipeline. Segment-wise, our services business grew by 20% year-on-year, while solutions revenue rose by 32%. [Audio Gap] segment often serves as a pipeline for our services business, which generate recurring revenues and provide long-term stability. We recorded order intake of around INR 185 crores this quarter, further strengthening our order book. This includes new order wins as well as annual renewals of multiyear contracts. Over the past few quarters, consistent high-quality wins have helped us to build a more diversified portfolio, enhancing our long-term growth visibility. Paresh Shah, our CEO, will share more on this shortly. Importantly, we are seeing an increase in the average ticket size of new wins, an increasing sign of our growing value proposition and the trust our clients place in. I'm sure all of you have followed our announcement this morning regarding winning of INR 420 crores multiyear order with a leading pharma company in Europe. We are already in the transition phase as hiring is underway with go-live scheduled for [ September ]. One of the key challenges we are facing is the growing pressure from customers to control costs. With budgets under tighter scrutiny and persistent inflationary pressures, customers are seeking highly competitive pricing, aggressively changing vendors to realize cost savings. This trend is not isolated. It reflects a broader industry-wide phenomenon, and we anticipate this will continue over the next 3 to 4 quarters. Under normal circumstances, we maintain a firm stance on pricing to protect our threshold margin with the willingness to let go business that is below our threshold. However, the current environment calls for a more strategic and flexible approach. Looking ahead, we remain cautiously optimistic whilst macroeconomic uncertainties persist. We are encouraged by the early signs of recovery in discretionary spending and continued customer engagement. The strong business momentum from the last 3 quarters, coupled with a healthy deal pipeline and increased win rates, position us well to deliver consistent growth in the coming quarters. Having added some sizable orders in recent months and quarters, including the large orders we announced this morning, we -- give us strong execution momentum. We are confident in our ability to sustain this growth trajectory throughout FY '26 and beyond. That's all from my side. I hand over to Mr. Paresh Shah, Global CEO, who will walk you through the order book and strategic initiatives in more detail.

Thank you, Nehal. Good afternoon, everyone. I want to start by thanking you for joining us today for our Q1 FY '26 earnings call. This quarter, our focus on targeted innovation and global reach has translated into tangible business success. We have seen a healthy flow of wins and renewals, underscoring the strong value proposition we offer our clients. Our team has delivered impactful solutions across multiple sectors, and I'm proud of the work we have done. Here is a look of some of the key wins for this quarter. As already announced, we won a very large deal with a pharmaceutical giant globally of a deal worth of INR 421 crores (sic) [ INR 420 crores ] for 5 years for doing digital transformation for their end-user services. I will further announce that in India, we are deploying an AI-based video analytics for a leading real estate developer to enhance human safety on construction sites and executing the turnkey networking and surveillance project for a new university campus in Hyderabad. We have also secured a project with a major Indian fashion retailer to implement a face recognition solution for employee productivity tracking across their 800-plus stores. Our work extends to critical infrastructure, where we provide CCTV AMC services for a leading power sector brand and a turnkey surveillance and PA system for a major transportation and logistics company. On the services front, we will be providing managed services, services and end-user services to a very large global provider of digital business transformation and consulting. Our cybersecurity expertise is also in high demand as we conduct and IT ISO 27001 audit for a power transmission and renewable generation company and a Security Operation Center assessment for the old and large commercial bank in Bhutan. Moving to the U.S. We have been awarded a 3-year contract by a leading global investment bank to provide comprehensive workplace support services across North America, Europe and Asia Pacific. A global leader in premium fuel systems, a large e-charging company has chosen us for a digital workplace services contract to support their employees and contractors across the U.S., Latin America, Europe and Asia Pacific. Finally, we are a strong partner for a newly independent global recognized premium ice cream brand, covering 24/7 global services operations as they establish a robust stand-alone IT infrastructure. These wins demonstrate our ability to adopt innovation, innovate and deliver impactful results for our clients on a global scale. We are confident in our position and look forward to the opportunities ahead. I will now hand it over to our CFO, Mr. Gopal Tiwari, who will provide a detailed overview of our financial performance for this quarter. Thank you.

Thank you, Paresh, and good afternoon, everyone. Let me highlight some of the key financial achievements in Q1 FY '26. We are pleased to report continued strong double-digit growth in our top line performance. Revenue for Q1 FY '26 stood at INR 219 crores, reflecting a 22% year-on-year increase. This marks the fourth consecutive quarter with revenues exceeding INR 200 crores, showcasing the underlying momentum of the business. To further illustrate the expanding scale of our operations, our trailing 12 months revenue now stands at approximately INR 850 crores. This represents a meaningful increase from INR 807 crores reported for the full year FY 2025 and indicates the solid progress we are making towards our goal of achieving INR 1,000 crores in annualized revenue. As you evaluate our performance, I'd like to begin with a disclaimer. The consequential comparison with Q4 FY '25 is not very meaningful as that quarter included several onetime items and adjustments. You may recall that our new auditors conducted a multiyear revenue of our financial statements, and the resulting adjustments were incorporated into Q4 FY '25 only. Therefore, Q1 FY '26 figures are more appropriately compared with Q1 of the previous year, allowing for an apple-to-apple comparison. In Q1 FY '26, EBITDA rose by 16% year-on-year basis to INR 22 crores. While we continue to see strong visibility in top line growth, margin pressures are expected to persist over the next 3 to 4 quarters. As Nehal mentioned earlier, customer pricing pressure remains a key challenge. In response, we are maintaining operational flexibility and agility to ensure our margin performance remains resilient. Our teams are actively working to drive efficiencies, and we tend to see margins improve as contracts mature once initial activities are complete and processes are fully established. This quarter, there was also an impact due to the recognition of deferred tax assets. In contrast, Q1 of the previous year had negligible impact from deferred tax. This has augmented the year-on-year increase in profit after tax, which rose by 44% to INR 14 crores. I'm also pleased to inform that Board has declared 30% dividend as in the last previous year in '23-'24 for the year '24-'25 again this year. With this, I conclude here. Thank you so much. I'll now hand it over to the moderator to open the forum for Q&A session.

[Operator Instructions] First question is from the line of Kunal Bajaj from Choice India.

Congrats on a good set of results...

Mr. Kunal, your line is unmuted.

Am I audible?

Mr. Bajaj, your line is unmuted. Please unmute yourself and go ahead with your question.

Am I audible?

Mr. Bajaj, you're not audible. As there is no response from the current questioner, we will go to the next question from the line of Jyoti Singh from Arihant Capital Markets.

Sir, I just wanted to understand, like revenue from India grew strongly this quarter. So is this because of any specific sector like government or enterprises that are driving growth? And is this sustainable into H2? And second, with India now contributing 37% of our revenue, and earlier, we used to say that our focus is basically more on U.S. and other geographies. So do you foresee this growth further from India only? Or is international still a key pillar of your growth plan?

Thanks, Jyoti, for the question. I think to answer your first question regarding the growth momentum, I think you've seen that we have put out an order win to just about last quarter. Regarding the Pune City Surveillance project that we won, that project is going fantastic. And most of the billing that you see this quarter and the next quarter will happen from that project. To tell everyone we would be inaugurating the newly made command center this Friday with the government of Maharashtra inaugurating it for the Pune City. Having said, the momentum is very strong for India as well as global. As you have seen, we typically have 2 set of different companies working in tandem to make sure that the growth happens everywhere. Here, we are seeing -- in India, we are seeing more opportunities due to the Smart Cities, and the government business, the ticket size is larger. Because of the solutions business, the revenue for some quarters look to be a little higher. And that's one of the primary reasons that we are seeing a lot of growth happening in the India region. However, the large deals that we are closing globally also is going to push us to the revenue growth in the U.S. as well. We just announced today morning of a very large deal that we won, which is a $50 million kind of, INR 420 crore kind of deal, which will be built out for the period of the next 5 years. So we feel that the momentum for growth in the global market is also going to be parallelly very high. I hope I answered your question.

Sir, just wondered how much... total order book?

I just wanted to say that we are running a company, we have started getting a large ticket business. And 1 or 2 large ticket in India can overweigh what revenue we are getting from U.S. and vice versa. Often, we get a good deal, large deal, large ticket deal in U.S. market or international market. So then you will see that -- so it's more bent towards international business than India business. So while running a business, we are not constantly watching whether India is better or international even is better.

Sure, sir. The order book, if you can. [Audio Gap] Sir, so if you -- yes. Give us an idea on the order book size?

So Jyoti, as communicated earlier in my previous calls as well, we typically don't give an order book number because that generally we have seen is confusing because our order pipeline is a mix of renewals, the extra farming that we do in the current customers and net new order wins. So giving a number will typically not be justifiable. Hence, we always try to give out the new order wins and the renewals that we do every quarter. And any large deals that we win, we have a separate communication given to the stock market, which is material in nature; and then how we would want to continue.

Okay. Sure, sir. And sir, you have good cash now [ INR 188 crores ]. And is there any possibility or chance of...

Sorry to interrupt, Ms. Jyoti. Your voice is breaking.

Yes. So what I was asking...

It's still not clear, ma'am. Your voice is still breaking.

Am I audible now?

Please go ahead, in between it breaks. Please proceed.

So just wanted to understand, like currently strong cash. So are there any planned acquisition for any -- anything?

Yes. So that's correct, Jyoti. We are looking at possible acquisitions in the cybersecurity and the cloud space. However, we are shortlisting some of them. As and when it reaches the next stage of finalizing someone, we will be announcing it. So right now, the search is on. And that's one of the reasons that we have kept cash in hand so that whenever we need to acquire when the market is down, we are in a strong position to do that kind of acquisition.

Okay. Just last question. The -- you mentioned [indiscernible] because there's a [indiscernible] in the presentation on the agentic AI side, so are the [indiscernible] or are they part of the engagement?

Your voice is -- Jyoti, this is Paresh Shah. I understand your question is around agentic AI. So it is part of our engagement already. So it's in production. However, a lot of U.S. customers and some Indian customers are already on the agentic AI platform. We are doing some pilots with some Indian customers, and we're actually running our NOC operations using agentic AI. So this is our own indigenous development of agentic AI architecture. And we have moved forward into production this quarter, and we see a very strong result moving forward because as we get into more strength in developing these applications, we will be seeing a good future into this. Is that answering your question? Or do you have -- because we had a lot of voice break.

No issues.

Next question is from the line of Kunal Bajaj from Choice India.

Am I audible?

Yes, you're audible now.

Congratulations on great results. So I had 3 broad questions. Firstly being the revenue top line target of INR 1,000 crores and the quarterly revenue run rate of around INR 250 crores. So are we seeing with the time line of 4 to 5 quarters? The second question being EBITDA margins had some pressure. So are we looking at a 10%, 11% to 12% margins level for FY '26? And what are the levers we have to improve the margins? And the third question is update on the sales team. In the last con call, the management has mentioned about setting up sales team for direct customer acquisition. So what is an update on that? So yes.

Ramanathan can...

Yes. Can I answer?

Yes. Yes, go ahead.

Yes. So a couple of responses to this. Number one, I think from the point of view of the type of projects that we are targeting, they are more solutions and services oriented. And so you're going to see the EBITDA margin growth in the organization. There is more and more value-adding components, not only in terms of the services themselves, but also in leveraging technology like agentic AI and so on in our solutions. So you're going to see an improved margin in the quarters ahead. Of course, it takes some time for it to reflect, but that is a short trajectory from the point of view of the organization. The second is from the point of view of direct sales. In fact, most of our wins during the last quarter in India have been direct sales. In the international market also, we are targeting very clearly a new value proposition in terms of direct sales. So we are increasing the sales capability in the U.S. as well as in other parts of the country, in the other parts of the world. We have already inducted a few salespeople during the last quarter, and some more will be inducted during this quarter. So again, the emphasis there will be to diversify our partnerships. We have very core strong partnerships, but our attempt is to diversify these partnerships and have more stronger partnerships. We also are looking at SI partnerships which will bring our SI capability to fore in these markets because there is a big opportunity for SI projects, Smart City projects as technology is becoming more and more important in many counties, in many states across the country. And finally, in terms of our approach to -- in India, there is a very strong focus on enterprise sales in addition to government Smart City projects, and that's been reflected in some of the wins that Paresh mentioned. So in terms of being on track regarding our forward growth, I think we are doing all the right things to be on course, and you should see the effect of it over the next couple of quarters and a couple of years.

So the other question -- I'll just answer the other question that you had regarding the revenue top line and the quarter-on-quarter top line. So we are still sticking to the revenue and top line growth of INR 1,000 crores in the next 4 to 5 quarters. Top line, INR 250 crores, we should be -- ideally be going towards that in a couple of quarters. Because generally, in the Smart City or the other kind of projects, whenever you typically build out, there are a lot of dependencies. So if you ask me do I have the order book? I mean the order's in hand, yes. But when will they be built out? Probably it might shift here, there 1 quarter. So we are very confident if not next, maybe next or next quarter, we should be doing INR 250 crore kind of quarter. Regarding EBITDA margin, yes, you're right. The EBITDA margins have been a little lower this quarter. We are targeting to be in the steady state of 11% to 12%. Hopefully, we should be reaching there in a couple of quarters. Whenever we are in the Smart City implementation phase, there is a lot of product billing that happens, due to which there could be a little bit jittery in terms of margins because you all are aware that margins during the product bill-out is typically lower than the services. So whenever we are in this implementation phase of any Smart City, there is a lot of product billing that happens, and that is one of the reasons which could have some kind of pressure on our margins. But I would request if you could look at our margins from a year-on-year perspective rather than keeping it very strict to quarter-over-quarter. And I think regarding the sales team, Ramanathan has already updated you that we have hired some people, and we are in the process of hiring a very senior resource in the U.S. as well, for which probably in the next 2 or 3 weeks, you'll see some kind of announcements coming in as well. And this would be typically only to onboard direct customers. So we are very confident in the next couple of quarters, we will see some direct wins coming in from our international customers as well. Does that answer all your questions? Or do you have anything else?

That helps. Also one more question. So we reported strong order wins. So can we provide some color on the breakup in terms of wins and renewables and also the breakup mix in terms of solutions and services?

Yes. So what I'll do is we will -- I don't have the numbers currently at hand. We will send it across on e-mail. If you could share your details with our team, we will give you the breakup of the details.

Sure. That helps.

Next question is from the line of Jayshree Bajaj from Trinetra Asset Managers.

My question is what -- like how much the Pune Smart City project has contributed to quarter 1 of FY '26? And when we can expect a significant contribution from Pune Smart City project?

So currently, if you look at in the current top line for India, I think about 15% to 20% would have been coming in from Pune Smart City. And this will keep on happening for the next 2 quarters as well. Because as we keep on implementing, we are implementing security surveillance I mean across the city. So it is going to be staggered over a period of 3 to 4 quarters. So there won't be a sudden spike or a sudden drop in the next 3, 4 quarters is what we think. So it's going to be staggered in 3 or 4 quarters.

Okay. So in 3 or 4 quarters, it will be fully operational, fully contributing to the revenue?

Yes, the solution portion of the project will go live in the next 3 to 4 quarters. Services will kick in once we go live with the project, which will be billed quarter-over-quarter for next 5 years.

Next question is from the line of Santosh, an individual investor.