Allied Digital Services Limited (ADSL) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Allied Digital Services Limited Q2 and H1 FY '26 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, Renju. Good morning, everyone, and thank you for joining us on Allied Digital Services Limited's Earnings Call for the Second Quarter of FY '25-'26. We have with us on the call today, Mr. Nitin Shah, Founder and CMD; Mr. Ramanan Ramanathan, Global Head of Strategy for Growth, Innovation and Partnerships; Mr. Nehal Shah, Whole-Time Director; Mr. Paresh Shah, Global Chief Executive 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 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 morning, everyone, and thank you for joining us today. I hope you have had a chance to review the earnings material we shared earlier. We are pleased to report a strong performance in the second quarter, continuing the momentum from the start of the financial year as we have reported consolidated revenues of INR 234 crores, registering growth of 15% year-over-year. This has been a quarter of strong execution as we have delivered revenue growth of 7% on a quarter-on-quarter basis. We have witnessed business verticals as well as -- across all geographies, which is reflected in the broad-based quarter -- growth this quarter. Importantly, this has been accompanied by strong improvement in profitability, too. In quarter 2, PBT has grown by 32% year-over-year to INR 21 crores, and PAT has increased by 33% year-on-year to INR 15 crores. During the quarter, Rest of the World operations reported a year-on-year growth of 17%, driven by improving traction in our U.S. business. Meanwhile, execution in Europe and the Middle East progressed well, contributing steadily to a diversified global revenue base and healthy order pipeline. India operations continued to grow double-digit revenue with stand-alone revenues rising 12% year-on-year in quarter 2 FY '26, supported by healthy momentum across both the enterprise and the government segment. The strong traction in the smart city projects followed -- following a series of meaningful order wins in recent quarters underscores our ability to execute at scale as India advances its digital infrastructure. From a segmental perspective, our services business grew 17% year-on-year, while solutions revenue increased by 8%. As many of you are aware, the Solutions segment often acts as strategic feeder to our services business, generating recurring revenues and providing long-term stability to operations. Reflecting the renewed enterprise sentiments, revenues from nongovernment customers increased 18% year-on-year, outpacing growth from the government segment, which reported 7% year-on-year growth. This shift highlights the strengthening engagement and investment appetite among the enterprise clients as they revive their digital transformation plans. During the quarter, we recorded an order intake of approximately INR 698 crores, further strengthening our order book. This includes both new order wins and annual renewals of multiyear contracts. Over the past few quarters, consistent high-quality wins have helped us build a diversified portfolio, enhancing long-term growth visibility and business resilience. Paresh, our Global CEO, will share more insights on this shortly. A particularly noteworthy milestone this quarter was successful completion of the new command and control center for the Pune Smart City project in August 2025. As you may recall, we have secured the initial order and a subsequent follow-up order together aggregating to INR 510 crores in October '24 and May 25, respectively. In August 2025, we proudly handed over the cutting-edge command and control center named Drishti, developed by us as a part of the Pune City Surveillance project. The facility was inaugurated by the Honorable Chief Minister, of Maharashtra Shri. Devendra Fadnavis in the presence of the Honorable Deputy Chief Minister, Shri. Ajit Pawar. Drishti represents one of the most advanced CCTV-based surveillance system in the country. The network comprises over 2,800 cameras installed across the city, features automated alerts for camera malfunctions with a 24-hour repair guarantee, it integrates -- and integrates public address system at key junctions. Additionally, 5 mobile command and control brands equipped with drones have been introduced to function as [indiscernible] during the emergency and disasters. We believe this project sets a benchmark for urban surveillance and public safety. We are confident that similar opportunities will emerge as India continues to upgrade its own security infrastructure in the coming years. Another positive development during the quarter was a sustained momentum in order flows. We see abundant opportunities within the ecosystem and remain confident that our order pipeline will stay robust. While maintaining strict discipline to protect our threshold margins, we continue to evaluate strategically significant opportunities, including those with tighter pricing that hold the potential to deliver superior margins and long-term value creation over time. I will now invite Paresh, our CEO, to share further insights on the performance and outlook. Over to you Paresh.

Yes. Thank you, Nehal, and good morning, everyone. It's great to be speaking with you again. The second quarter has been a period of steady growth and continued execution momentum for Allied Digital. We have maintained our focus on strengthening global delivery, enhancing operational excellence and deepening our relationships with marquee customers across industries and geographies. Our efforts to build a robust and diversified portfolio are being -- bearing really good fruit with significant new wins across both international and domestic markets. During the quarter, we continued to strengthen our client portfolio through several strategic wins and renewals. Let me share a few highlights from these engagements. We are proud to have been chosen by a leading global health care and pharmaceutical company with operations spanning several countries. This engagement further reinforces our credibility in developing complex enterprise-scale workplace services that support the mission-critical operations of global enterprises. In the retail and consumer segment, we secured a multiyear partnership with one of the largest iconic apparel groups, the parent company of brands like Tommy Hilfiger and Calvin Klein. Through this engagement, Allied Digital will enable digital workplace and retail infrastructure service across their offices, warehouses and stores worldwide, further strengthening our position as a trusted partner for large distributed retail ecosystems. We also expanded our presence in the industrial technology and safety solutions domain through a new engagement with a global leader in fire, flame and gas detection system. This partnership underscores our growing expertise in delivering reliable digital workplace solutions in safety critical environments. On the domestic front, we continue to diversify meaningfully. We partnered with a leading plotted land development company headquartered out of in Mumbai to provide CCTV and networking solutions across multiple states and also renewed an engagement with a key government agency responsible for infrastructure planning and other urban development in Rajasthan. Alongside these new engagements, we successfully renewed contracts and several long-standing clients across BFSI, chemicals, textiles, mining, automobile parts, FMCG, sports and gas distribution. These renewals reflect the enduring trust our customers place in our capabilities, service reliability and innovation-driven approach. Collectively, these wins and renewals reinforce the strength of our global delivery model and the depth of our technology expertise. As we move into the second half of the year, our focus remains on scaling execution, leveraging automation and AI and service delivery and driving value for clients through transformation-led initiatives. With a strong pipeline and growing customer confidence, we are well positioned to sustain the positive momentum in the quarter ahead. Now I will hand over to our CFO, Mr. Gopal Tiwari, who will share an overview of the financial performance for the quarter gone by.

Thank you, Paresh, and good afternoon, everyone. Let me begin by sharing some of key financial highlights for Q2 FY '26. We are pleased to report continued strong momentum in our business as reflected in robust double-digit growth in top line performance. Revenues for Q2 FY '26 stood at INR 234 crores, representing a year-on-year growth of 15%. This also marks the highest ever quarterly revenue in our history, putting us firmly on track to surpass our stated target of INR 250 crores in quarterly revenues. To further illustrate the expanding scale of our operations, our trailing 12 months revenue now stands at approximately INR 878 crores compared to INR 807 crores for the full year FY '25. This clearly demonstrates the solid progress we are making and our teams remain fully aligned towards achieving our next milestone of INR 1,000 crores in annualized revenue. In Q2 FY '26, EBITDA grew by 23% year-on-year basis to INR 28 crores. As our top line continued to expand, we are seeing a parallel increase in profitability also. However, the environment remains challenging with persistent customer pricing pressure. To mitigate this, we continue to maintain operational flexibility and agility to ensure that our margin performance remains resilient. Our teams are working actively to enhance efficiencies, and we typically see margin improvements as contracts mature and initial setup activities are completed. That said, given the upfront costs associated with the commencement of a few large contracts, cost pressures persisted this quarter as well. With disciplined cost management and agile execution, we have been able to ensure stability in margins during the quarter. We do expect margin pressure to continue over the next 3 to 4 quarters, but our focus remains on maximizing operating leverage as top line growth continues. This quarter, we have also reported our half yearly balance sheet and cash flow statement. It is evident that the execution of orders has required upfront deployment of financial resources. I would like to assure our stakeholders that we had anticipated these requirements and proactively put in place adequate measures. In addition to the strong cash position on our books, we have diversified banking relationships and access to multiple source of funding, keeping us well placed to support both ongoing projects and new orders win. With that, I conclude my remarks. Thank you once again, and I'll hand over to the moderator to open the floor for Q&A.

[Operator Instructions] The first question comes from the line of Jyoti Singh with Arihant Capital Markets Limited. Since there is no reply from the line of Mr. Singh, we'll go to the next participant. That is Kunal Bajaj from Choice India.

Congratulations on good set of results. I have 3 broad questions. Firstly, what we see is that subcontractor costs rose by 11% on a quarter-on-quarter basis. So what factors led to this increase on a sequential basis? And in the last con call, the management has mentioned that they are establishing a direct sales and partnership network, which will aid in providing margin resilience. So what is an update on that? And thirdly, on the macro factor, I mean, how are we seeing that U.S. enterprises are taking ahead in terms of spending? And also are still the pricing pressure there in terms of deal negotiations with them? These are broad 3 questions.

I would want you to repeat the first question, but before that, I'll give you the answer for the next 2 ones. So for the direct sales update, let me tell you that we have hired a Chief Revenue Officer for our U.S. subsidiary, who is going to be working directly for acquiring large direct clients. Typically, from a strategy perspective, we have done straight that we're going to be targeting midsized to small and medium enterprises in the U.S., which sit in the periphery, which will help us in starting with a good revenue from a direct source. So probably in the coming quarters, we'll have more updates. Maybe the order size could be smaller, but we will start getting some direct customers coming up. And from a pricing pressure perspective, yes, we've started getting some good deals in the U.S., which we've announced also, and there are good deals in the pipeline as well. But you rightly mentioned that there is still some pricing pressures due to the environment that is there in the U.S. And I think it will continue for a couple of quarters more. But having said that, the pipeline looks okay. A lot of renewals, a lot of change of deals happening everywhere across the IT industry. One of the major reasons for that is the pricing negotiation that is happening in [indiscernible]. So we are also on that line, and I feel that we will see some progress on that as well. Now if you could repeat your first question, please.

Sure. The first question was being on the point of subcontractor cost. So it rose sharply this quarter. So what are the factors leading to this increase?

Subcontractor is not very clear. Where from you are coming, I mean, Kunal, can you tell which figure you're talking about? Subcontractor means direct cost, you are talking about purchase cost.

Yes, yes. Yes, it's direct cost.

Okay. So there, you can see it depends on the solution activities. In any quarter, if solution piece is a little heavy or we have more supply of equipment for the projects for the smart city projects. So then this figure goes a little high. Then again -- but by and large, it's in the range of -- you'll see overall, if it is 50% -- 50% to 55% is the overall purchase cost is there. But it depends sometimes there is a supply of material is more in any quarter, then your purchase cost goes high. So last quarter, it was the reason.

So Kunal, just -- this is Paresh Shah. So as you know, we are implementing large Pune City projects. So currently, we are a lot into solution space. So that time, we use subcontractors for local equipment implementation, cablings and also, you have a quarter of increase in costs at that time, but it then subsides. That's what Gopal is trying to say.

Sure, sure. And last question on the large deal which we won last quarter. So what is the update on that? Have we started ramping up? And when are we expecting the revenue from that particular deal from the pharmaceutical health care company in the Europe?

Yes. Correct, correct. So we've started already hiring, and we've almost completed all our hiring for the Europe and the U.S. region. We have accrued some amount from a billing perspective. However, the go-live is phased out in the month of December, January and February. So as we move forward, the go-live dates are coming in the next 3 months. Post that, we should be able to bill out completely. The transition is getting built currently.

Okay. So from Q4, we expect some revenue coming forward?

Q1 of next year should be having the full revenue because until the February of next year, we would be still doing the go-live for different countries. So the full revenue for the whole quarter will be coming in from the first quarter of next year.

Okay. And one very last question on the Smart City projects pipeline. So how do we see that pipeline going ahead?

The pipeline there is strong. I do feel that there are certain projects that we are hiring right now. There is a project in the Pune city itself where there is some additional revenue expected. There are 2 or 3 more smart cities coming up. I already mentioned about Noida in my previous call. Due to some budget constraints, it had got delayed a bit. We have got all the budget clearance coming in from the government. And I think the RFP should be out or while we are talking RFP is already out and the bidding is underway. Apart from that, there's a large project which is due for renewal in Mumbai. We are still figuring out strategically to partner with someone to bid for that project. We'll keep all of you updated. This should be in the month of December or January. It's a very large project, close to about INR 2,100 crores. So we are figuring out to partner with somebody and do it together so that all of us could bid together.

[Operator Instructions] Next question comes from the line of Jyoti Singh with Arihant Capital Markets Limited.

Basically, my question is on the order book side. Like currently, we are having INR 98 crores of new wins. So just wanted to understand how much of this is a net new versus expansions? And also, the current order book size and execution visibility over the next 12 to 18 months? And are there large government or smart city opportunity in pipeline post Pune Drishti? And how should we think about quarterly revenue volatility given project-based execution cycle? And after all of this, just wanted to understand on the government budget side, the relief of the fund. Are there -- we are facing any delays because a lot of other companies facing similar kind of issues and why it is happening, if we can explain on that side?

I think too many questions, but I'll try to answer most of them. From a revenue perspective, 90% -- 85% to 90% revenue has come in as net new for us this quarter, the announcement that we've done INR 700 crores -- INR 700 crores approximately. From the government standpoint, I think a project perspective, I already gave you an update in the previous question. From the budget perspective, I think when the budget is allocated for any project, there isn't a problem in getting the monies out. Yes, there could be some delays, maybe 2 weeks, 3 weeks, 4 weeks here and there. But apart from that, if something is budgeted for, we do not see a challenge of them not giving out the money on time, whether it is any government, any state government or any central government or any other projects that we are doing. The only point is that sometimes when the budgets are not there, the government is smart enough to not go ahead with the RFP so that nobody gets stuck later on. And similar case happened with Noida, which got delayed a bit since the budgets were not in place for the last quarter. So that's how government is working. I think we are very confident that once we go for a bid, there could be minor delays, which are very, very agreeable and achievable. But apart from that, there are no major concerns that we see from a collection perspective.

I just wanted to understand on the outlook side, what's our revenue margin growth aspiration for '26, '27? And any smart city projects nearing compensation where do you see the next growth engine? And also any guidance on the CAGR growth on the EBITDA?