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Growth Intact, but Earnings Visibility Yet to Improve:

ALDS’ Q1FY27 performance indicates that the underlying growth opportunity remains intact but revenue conversion continues to lag behind the pipeline. The focus on pricing discipline and quality of revenue should support healthier returns over the medium term, albeit with some near-term growth trade-off. We see AI-led delivery and higher-value managed services as key structural opportunities, with operating leverage offering scope for margin improvement as investments mature. However, sustained pipeline conversion and a more consistent profitability trajectory remain critical for earnings visibility. We have moderately trimmed FY27–28E estimates and revise our TP to INR 125, valuing the company at 12x FY28E EPS.

Growth Holds, but Conversion Remains a Concern:

ALDS delivered 19% YoY revenue growth to INR 2.60 Bn in Q1FY27, marking the first quarter with TTM revenue above INR 10 Bn; however, growth was below our estimate amid a mature demand environment and elongated client decision cycles. The quarter saw >INR 1.20 Bn of new orders and renewals across enterprise applications, workspace, managed services and infrastructure, including a strategic entry into US enterprise application services. Government-led opportunities remained mixed, with management exiting a INR 1.8–2.0 Bn railway project following a sharp increase in hardware prices, underscoring its focus on pricing discipline and returns. Renewals across BFSI, pharmaceuticals, chemicals and medical devices provide a stable base, while management expects AI-led delivery efficiencies and large deal ramp-ups to support growth. We remain cautiously constructive, but see limited near-term upside to growth estimates until pipeline conversion and decision cycles improve

Margin Recovery Hinges on Deal Ramp-up and AI Productivity:

ALDS reported EBITDA margin of 10.0% (incl. other income), with profitability remaining below our expectations as the company continued to absorb higher employee cost from annual wage revisions and leadership investments, alongside upfront spending on AI capabilities. Margin pressure was further compounded by heightened competitive intensity in the US, customer expectations of automationled pricing benefits and higher working-capital cost as large projects entered the execution phase. The management expects EBITDA margin to improve towards 12-13% as deal ramp-ups and AI-led productivity gains increasingly offset these investments. We see a gradual path to margin normalisation, but expect the recovery to remain execution-dependent, with meaningful improvement contingent on large-deal ramp-ups, better utilisation and conversion of AI investments into measurable delivery efficiency. In our view, the current margin profile leaves limited room for near-term upside until these levers begin to translate into operating benefits.

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