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ADSL reported Q1FY25 consolidated revenues at INR 1,791mn, up 1.3% QoQ and 6.0% YoY amidst global headwinds. Standalone Revenues for Q1FY24 were higher by ~13% on a YoY basis, driven by disciplined execution of the order book. RPAT for the quarter came at INR140mn (+21.3% YoY) with EPS at INR1.9. Company won INR1,500mn worth orders including new wins and multi-year projects.

*  Outlook and revenue trajectory: ADSL sees a lot of opportunity in Middle East and hence it has opened a subsidiary branch in Dubai. At the end of FY24, it had an order book of INR14bn to be executed in next 3-4 years, however, it does not include renewal and annuity business. Management maintains its revenue target of INR10bn by FY27E to be driven by recovery in global business demand in next 4-6 quarters, good traction in Smart/Safe city projects from Government and other large projects in the pipeline. There has been delay in decision making by customers due to macro-uncertainties and high inflation in US. ADSL expects recovery in coming quarters with Indian business growing robustly. Business visibility is strong, with robust performance in the Indian market and early signs of improvement internationally. Global customers are prioritizing IT investments in transformative areas like cloud, cybersecurity, AI, big data, and machine learning, despite a focus on cost optimization. This trend is reflected in the recent multiple order wins and contract renewals.

*  TAM and other opportunities: India business is doing good and is on a growth trajectory with ample opportunities in smart cities space. Of 100 smart cities announced earlier, only 22 have gone live, of which 14 has been allotted to ADSL. There are around 3-4 large competitors for the same while it mentions to be at the forefront of the race. It is in advanced stages of communication with implementing one of the smart city projects, to be announced in next 2-3 quarters. Indian government’s focus on infrastructure shall boost proposal of 1,000 smart-town projects which offers a substantial market size of ~INR400bn. Smart city projects are also growing in emerging countries like UK, Africa and Asia-Pacific, presenting opportunities beyond India. Moreover, entering the non-penetrated enterprise market, leveraging capabilities for Global Capability Centers (GCCs), and diversifying into direct access into global markets can further capitalize on new opportunities. Increasing adoption of low-code/no-code platforms like Digital Desk can attract large global brands looking for enterprise service orchestration. Company’s experience in designing, implementing, and maintaining data centres is a strong advantage. Many smart city projects require robust data centre infrastructure, which can be a key area for growth.

*  Margins to reach mid-teens: EBITDA margins for the quarter came at 10.7% (flattish YoY). Company mentioned that margins are bottomed out this quarter and aims to achieve mid-teen margins in next 6-8 quarters via cost reduction techniques and selling Digital desk more as it has a Gross Margin of >50%.

Valuation: ADSL is uniquely positioned to capitalise on the emerging opportunities leveraging next-gen technologies given the skill sets, empowered teams, global partnerships and strategic relationships with marquee customers. It is poised for 20% CAGR for FY26E as it is into two growth sectors viz. smart/safe cities and data centres. We downgrade our rating to BUY and arrive at a revised target price of INR265 implying a P/E of 17x on FY26E EPS of INR15.7.

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