Allied Digital Services Ltd Management Discussions.

Industry Overview Global Overview

The uncertainty and unpredictability brought in by the pandemic Covid-19, has impacted a large number of industries across the world. Developed and developing countries alike, have been impacted, and the global economic growth is stalled. According to survey of CFOs by BCG, ‘COVID-19 CFO Pulse Survey, 78% of the CFOs predict that sales will decline.

With no signs of definitive recovery path, the intelligentsia are struggling to predict the future socio-economic scenarios. The commutative macro-economic impact and its implications on IT industry is still being studied. It is thus hard to predict the outlook for the year 2020-21. As we write this, US and India face a growing crisis, even as Europe is showing signs of recovery.

Amidst the slowdown, a few industries have been called to the front and healthcare is one of them. The undisputable role of a preventive vaccine for corona virus, seems to be the magic bullet each country is hoping for. The investments are thus flowing into drug discovery, as well as in expansion of healthcare infrastructure to handle the exponential increase of patients.

The role of IT as the business enabler, has come to the forefront. Within IT industry, the impact has been varied. While the companies like ours, which provide IT operations services as well as transformative projects, are facing milder impact, the headwinds are fierce for those companies which depend solely on software development projects and products.

There is a simultaneous dual ask on enterprises today. There is an acute need to keep the lights on, as well as change the business models, for reducing operational costs and introduction of newer service lines. The IT investments are accordingly emerging into two major streams; one for business resilience like cloud migration, work from home solutions and cybersecurity and the other to identify new business lines, Robotic Process Automation, Advanced Analytics and AI, and IoT.

Globally, the cloud business continues to grow, including in India. With ‘Working from Home being the major enabler, there is an increased demand for collaborative solutions and cybersecurity. Machine learning, AI and Data science continue to dominate the trainings space, at least for this year. Due to economic constraints on new project budgets, we are seeing small dampening of AI and IoT related business. Smart city solutions have slowed down, as the governments are busy handling the pandemic.

Remote Services, online media, healthcare, FMCG, and to some extent logistics companies are expected to experience growth. IT industry will see a large part of demand coming in from these industries. The businesses which utilize this time, to revisit the business model canvass, train their resources and ideate on new value creation, will bounce back higher and faster, once the times improve.

India Overview

As we write this report, India has just come among the top five countries in terms of number of Covid-19 cases. The numbers are on a rapid upward trajectory, with no signs of slowing down in the immediate vicinity. In addition, the brewing political challenges in the region, are putting Indian economy in one of its toughest times.

The focus for Indian companies is survival through business sustainability. A large number of companies faced a sudden need for business continuity planning, leading to the demand for IT lead BCP, cloud-based solutions, work from home and cyber security. While IT operations remain unaffected, the demand for transformative solutions should pick up from the third quarter.

Our Business

ADSL is also impacted by the unprecedented business environment. The impact, however, is not as severe, since your company has a holistic portfolio, spanning both IT modes, "run" and "build". We have continued strong demand from IT operations business ("run"), even as we witness some slowness in transformative "build" business. New technology adoption and large transformational projects has always been a strength at Allied Digital.

We have had a wonderful year of growth and exhibited mature leadership in financial planning, business continuity planning, new technology adoption and customer focus. The leadership team has continued to spend time in introspection, training and upgrading the company on new technologies and re-polishing its offerings. ADSL has increased its expertise in AI, Cyber Security, Cloud DevOps, loT and RPA. This made our business model much more resilient, relevant on the dimensions of customer intimacy and value offerings. We are at the pole position and ready for the future growth cycles.

During lockdown times, your company has shown exemplary success in managing operations and customers support seamlessly. Taking advantage of fully redundant, highly available IT infrastructure and processes, our global workforce was able to seamlessly work remotely. Those engaged in essential, government or health services on the field continue to work relentlessly on customer premises. The company educated all its employees and continues to take adequate precautions for their personal health and safety.

Core Offering: Infrastructure Management Services

In India, just like previous years, we added large and medium deals in our core services area, which includes Facility management, NOC and SOC services. Our constant endeavor to bring global best practices to the India customers and ‘Partner led Sales model brought positive outcomes.

US operations continued to grow in revenues. Our meticulous account management for global delivery in Service Desks, Field Services, AI based SOC and NOC, enabled penetrating existing accounts. Our delivery excellence continues to earn recognition amongst our partner base, and propelled new customer wins in multiple industry verticals. We excelled in bringing valuable customer insights leveraging, powerful analytics. Europe operations continued to run and win confidence of the market. Unfortunately, due to the covid-19 scenario, the desired growth rate in Europe has been slightly deferred.

The ADiTaaS version 5.0 is upgraded with technology refresh. It is now cloud friendly and the upgradations offer a major boost for automation and chatbots. We won appreciations on our cloud services, for increasing our DevOps skillsets, and exemplary work on several cloud migration and support initiatives. We set-up a global "Center of Excellence" for service delivery initiating the plan of becoming market leader in IT services. The four areas of focus on are Smart Governance, "Automation and AI, "Industry benchmarked Standardization" and "Advanced Training" in new technologies. We added cognitive technologies such as AI, AR/VR, RPA to our portfolio, to activate new revenue streams in coming years.

Smart Cities Solutions

Pune City project, our first, completed 18 quarters and has two more quarters remaining. We continue to bring value to the police and the Government of Maharashtra even in these tough times. Our efforts have been applauded by various departments, citizens and media. There is a high probability that there would be a contract extension for at least a year, if not five more years. We have been actively completing projects in other cities, namely Rajkot, Aurangabad, Bidkin and Kalyan-Dombivli.

We developed advanced solutions for Covid-19 pandemic, such as bringing intelligent alerts of crowd gathering during the pandemic, automated centralized public announcements in streets, Drone based surveillance, to name a few. During the year, we continued to sharpen IoT and computer vision-based technology skillsets, to enhance smart city solutions and innovative thermal scanning solutions.

We re-skilled our engineering services division to address Global IT solution needs, in areas of IoT and camera sensor-based technologies. We developed new service revenue from global markets, by leveraging our "Master System Integration" expertise in India.

Trending Technologies - Artificial Intelligence

Artificial intelligence is gaining an important position in all transformative projects. Several large companies like Google, Microsoft and Amazon have released AI frameworks and Machine Learning tools and libraries, which will further bring strong impetus to the industry for AI adoption.

Allied Digital stands highly invested in growth, by adding AI capabilities to all its current services (Global service Desk, Field Services, NOC and SOC) . ADiTaaS platform 5.0, has built-in Natural Language Processing and intelligent Chatbot features. We have formed various industry and education institute partnerships to promote AI initiatives, deliver enterprise projects and impart training in AI and Design thinking. With the beginning of post-covid era, we foresee a huge demand for AI skill sets globally, and Allied Digital is all set, to pick up such opportunities.

Financial Highlights:

The key financial highlights of the Company on a consolidated basis for the financial year ended March 31, 2020 are given below:

(Rs. In Lakhs)

Particulars Consolidated
FY 2020 FY 2019 Y-o-Y Change
Revenue 33,572 24,384 38%
EBITDA 5,324 4,266 25%
EBITDA Margin 16% 17% -
PBT 2,404 1,452 66%
PAT 1,922 1,237 55%
PAT Margin 6% 5% -

Key Financial Ratios:

Particulars Standalone Consolidated
FY 2020 FY 2019 FY 2020 FY 2019
Debtors Turnover 0.60 0.56 1.66 1.24
Inventory Turnover 1.54 1.21 6.85 5.09
Interest Coverage Ratio 2.34 1.83 4.44 2.45
Current Ratio 2.67 2.52 2.66 2.17
Debt Equity Ratio 0.10 0.14 0.11 0.14
Operating Profit Margin (%) 32% 31% 22% 20%
Net Profit Margin (%) 8% 12% 6% 5%

• Debtors turnover ratio and Inventory turnover ratio has improved mainly due to higher turnover achieved during the year.

• Interest Coverage Ratio has improved due to considerable reduction in debt and reduced finance costs during the year.

• The Company reported Net Profit Margin of 8% for the FY 2019-20 as compared to 12% for previous year which was higher mainly due to exceptional income during the previous financial year.

Details of any change in Return on Net worth as compared to the immediately previous financial year:

Return on Net Worth stands at 1.67 % for FY 2019-20 as against 2.08% in the FY 2018-19.

Key Drivers of Growth Innovation and Adaptability

Allied Digital has the clear perspective of the utilizing such testing times, to introspect, research the industry offerings and map customer trends. Your company is geared to adapt to the "new normal", be it early adoption of new technologies, scaling new bars in services through innovation or developing innovative solutions such as "Work from Home", loT solutions, Drone based surveillance, Social distancing solutions or augmenting new cognitive features in ADiTaaS. We are steadfast on the Innovation journey. Having adopted Design Thinking methodologies in the company, the leadership continues to ideate and build new customer solutions for newly defined problems. We continue on our motto of "Passion, Innovation and Teamwork".

New markets

In these tough times, technology is going to be the key enabler for bringing business resilience. As constant innovators with high degree of client intimacy, we understand that its time to sharpen our pencil. We see ourselves at a threshold for massive growth in the coming years.

Allied Digital continued to sustain existing "run" business by delivering excellent operational services to its clients and scaling new benchmarks. Our "build" mode is well geared to deliver services and solutions in new technologies, and undertake transformative projects, as industrys leading Systems Integrator and Global Transformation Architect.

Human Resources

Human Resources practices have been hugely instrumental in the companys growth. On all counts, be it handling resources efficiently, hiring new resources for rapidly scaling existing or new projects, the human resource division has been a pillar of strength. The start of this year has been extremely challenging for our HR. During the growing Covid-19 pandemic, the team has played a leadership role in ensuring smooth service delivery by driving "Work from home" policies. The department has been driving continuous communication and providing extra care to support and field staff across the globe. The team received tool kits for employee protection and has actively reached out to all customers for mutual co-operation. In addition to this exemplary work, it has been engaging management, as well as top skilled resources, into new technology trainings and ideation workshops. The total permanent employee strength as March 31, 2020 is 680.

Government Initiatives

AI continues to be the key enabler for national growth. Allied Digital is actively involved in promoting startups for incubation and "Make in India" initiatives. In the financial year gone by, Allied Digital created extra capacity to fuel technology and business mentorship to startups as well as to impart training and awareness programs in the area of AI, cybersecurity. New support initiative to drive student innovation projects is planed with various well-known engineering institutes. India will re-start on its growth path in coming quarters, and of course technology will play a significant role in implementing the transformation.

Risks and Concerns

Volatile Global Outlook

Like any other corporate with global presence, the Company is exposed to interest rate risk, currency fluctuations, credit risk and regulatory risks. Companys internal audits ensures a robust risk management readiness. Risks are reviewed on the quarterly basis by the management. This year the added risk of global slowdown during the pandemic, is being actively studied and early indicators are being examined for mitigation.

Technology

Technology is directly related to innovation and change is eminent. The Company has been constantly pursuing change management and innovation, thus enhancing the potential to tap new business opportunities. The Company continuously engages in training and skill development programs to update the knowledge base. Allied Digital now has a clear roadmap for next three years of its operation and will focus on new opportunities. It will continue to invest into R&D to develop new offerings across the geographies.

Compliance Risk

Companys operations are spread across the globe and hence it becomes imperative for the organization to comply with legal and regulatory laws of various countries. Failing to comply with the specific countrys laws and regulation may expose the company to legal and financial penalties and also dilute the brand image. Identified key stakeholders across sales and business units and corporate functions ensure compliance of all applicable laws on a continuous basis. Any changes in the applicable regulations are updated and monitored by respective departments. The company has also appointed third-party agencies, to support standard compliance in certain countries, for reducing local statutory risks.

Delivery Risk

As there is immense competition in standard core services, there is a constant risk of losing the customer or incurring penalties when not delivered to topmost standards. For instance, the Pune project is run on highest availability standards, by ADSL and so are many such global operations. Ensuring high quality service by delivering top SLAs is challenging, but the company has been performing consistently well. It has been able to get timely payments from government and corporates, thus controlling the receivables risk. Global delivery poses multiple challenges, but current success stories build confidence in delivering complex large-scale projects. This year, the start of "Center of Excellence" in service delivery is one big step towards risk reduction and promoting indirect business growth.

Contract Management

Sometimes ambiguities are created in the scope of work which lead to unaligned expectations from the parties involved in the project. We have standardized certain contracts and are constantly putting efforts on stronger contract management and building deeper insights into customers environment to avoid risks of service failure at desired levels.

Employee Related Risk

As a talent-driven organization, one of our key strategies, is to have the best talent, with highly specialized skills in each part of our business. We balance the right levels at the right locations, at the appropriate time, to enhance our differentiation and competitiveness.

Our attrition rate has reduced over the last year in India, though some challenges have emerged in the US, as the local inflation is higher than past few years. Allied Digital is mitigating risks by cross-training and working diligently with in-house as well as third party recruiters. In Europe, due to immigration law changes, there are attrition issues, but Allied has developed a constant vigilance in its delivery operations so that the customer deliverables are never affected. This year, due to the pandemic, employee health has been an important factor and HR has been playing active role. Adequate business insurance policies are also in place on errors, omissions and general liability.

Internal Control systems

Adequate internal controls ensure that transactions are authorized, recorded, reported correctly and assets are safeguarded against loss from unauthorized use or disposition. In addition, operational controls and fraud risk controls, cover the entire spectrum of internal financial controls. Your company has put a lot of emphasis on improving the internal control systems in multiple areas such as Finance, Sales, Legal and HR.

• In finance, the internal checks and balances are managed by a formal system of internal audit. Alert mechanism is in place for regulatory changes. Transition to GST compliant processes was smooth. The Company has appointed, M/s S. P. Natani, Chartered Accountants, Mumbai as Internal Auditors of the Company to carry out the Internal Audit.

• On the sales front, more emphasis is given to customer credit checks, profitability and sales closures.

• On the delivery and operations end, we improved on alerts communication, automation and customer systems health checks. This has vastly improved the overall quality of delivery, reducing customer concerns.

• In the US, new software has been implemented for managing contracts. We plan to implement the same in India.

• We have embarked on a major initiative of CMMI Level 3 compliance this year. The work is on the last stage for achieving the certification before this year end.

Other initiatives such as management performance audit were also successfully implemented last year. The quality management system of the company is ISO certified each year.

Way Forward

• Last year, the company has been on a good growth path, with many new customers added globally. New smart city projects have been added. This year though globally challenging, we hope to weather this storm quite well.

• This year our revenues will continue from our existing contracts, and also from new business from a reasonably strong current sales pipeline.

• The Pune City project is continuing in full swing. We are quite positive of getting extension due to our continuing good performance.

• The company has entered into new partnerships across the globe, which will further enhance sales in US, Europe and India.

• Management plans to continue with cost control measure that it has put in place over the last few years.

• The management is currently looking at various alternatives to monetize the Hard Assets (Real Estate) of the company. This includes creating a value-added shared offices infrastructure management. AI based incubation center development.

In this roller-coaster global economy, the company stands tall on a strong foothold of expertise in new technologies and proven track record of operational excellence. The company continues to live its motto "Passion, Teamwork and Innovation", and honor its promise of "IT Managed, Responsibly".

The Directors present the Companys Report on Corporate Governance for the year ended March 31, 2020, in terms of Regulation 34(3) read with Schedule V of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (The "Listing Regulations").