>ALLIED DIGITAL SERVICES (ANAND RATHI)

Revenue visibility adequate; retain Buy

■ Visit takeaways. We estimate that Allied’s revenue target for FY10 is achievable. However, we reduce our margin estimates on account of a challenging environment in the US and thus lower margins from EPGS. Our new target of Rs410 is at target PE of 7x (58% discount to Infosys target multiples). Retain Buy.

■ Adequate revenue visibility. Allied has adequate revenue visibility, backed by its order book. The Solutions order book is Rs1.3bn (to be executed over the next three to four months). The Services order book is Rs3.6bn (executable over the next 12 months).

■ Working capital a concern. Debtor days of the standalone business, at 178, are high. Debtor days for EGS are a manageable three months. Allied is trying to bring them down. In the current economic environment, however, that would be difficult in the short term, in our view.

■ Lowering estimates. We trim FY10/11 EPS, by 10.7% and 3.5%, respectively on account of lower margins in EPGS.

■ Valuation. We assign a target multiple of 7x for Allied Digital, which is at a 58% discount to Infosys target PE of 16.5x and a 36% discount to HCL Tech and MphasiS (11x). Based on the
target PE of 7x one-year forward EPS of Rs58, we arrive at a target price of Rs410.

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