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India business, Smart city projects and data center opportunities to see for

ADSL reported Q2FY25 consolidated revenues at INR 2,030mn, up 13.3% QoQ and 19.3% YoY. Standalone Revenues for Q2FY25 were higher by ~33% on a YoY basis, driven by disciplined execution of the order book while maintaining consistent EBIDTA and PAT levels. RPAT for the quarter came at INR116mn (+11.4% QoQ and 1.1% YoY) led by high other income. EPS for the quarter stood at INR1.8. Company won INR675mn+ 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 Q2FY25, it had an order book of INR6.7bn+ to be executed in next 5-6 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. Despite a cautious backdrop in the US market ahead of the presidential election in November, ADSL have been able to add a couple of new customers in that region this quarter. Their teams have proactively sought out pockets of opportunity in the RoW market as well. Business visibility is strong, with robust performance in the Indian market. 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. Traction remains strong and the company is currently in discussions to close few more deals in Q3. 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 growing in the UK, Africa, and AsiaPacific, opening opportunities beyond India. Tapping into new enterprise markets and GCC strengths can boost global access and new prospects. In the cybersecurity arena, there are numerous exciting prospects. The ongoing demand for cybersecurity services is expected to grow significantly, particularly within smart city projects that require recurring cybersecurity solutions. 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 centers is a considerable advantage, and efforts are underway to achieve empanelment. Many smart city projects necessitate robust data center infrastructure, which could serve as a crucial growth area.

* Margins to reach mid-teens: EBITDA margin for the quarter stood at 9.5%. The company clarified that this was adversely affected by a one-off expense incurred during the period. Excluding this exceptional cost, the adjusted margin would have exceeded 11%. Looking ahead, the company is targeting mid-teen margins and remains optimistic about achieving in the next 6 to 7 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. We have introduced FY27E and expect Revenue/EBIT/PAT to grow at a CAGR of 18.0%/ 27.6%/ 30.1% respectively over FY24-FY27E. We maintain our rating to BUY with a revised target price of INR288 implying a PE of 20x on Sep-FY27E EPS of INR14.4.

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