SIFY TECHNOLOGIES LIMITED January 26, 2023 | Company Sponsored Research Morning Meeting Note | Sidoti & Company, LLC |
Lower Earnings Estimates; Earnings Release | Member FINRA & SIPC |
Sify Technologies Limited Sponsored ADR (SIFY)
3Q:F23 Revenue Beat, Profit Missed Our Forecast; Think Growth Potential Of Planned Data Center Capacity Expansion Remains Unappreciated; Maintain $7 Target
F2022 | F2023E | F2024E | F2025E | ||||
OLD | NEW | OLD | NEW | OLD | NEW | ||
June | $0.03 | $0.02A | $0.02 | $0.01 | $0.02 | ||
Sep. | 0.03 | 0.01A | 0.02 | 0.03 | |||
Dec. | 0.03 | 0.02 | 0.02A | 0.03 | 0.02 | 0.04 | |
Mar. | 0.03 | 0.03 | 0.01 | 0.04 | 0.02 | 0.06 |
EPS (FY) | $0.12 | $0.08 | $0.07 | $0.10 | $0.07 | $0.14 |
EPS (Cal.) | $0.08 | $0.09 | $0.04 | $0.08 | ||
P/E (FY) | 26.3x | 26.3x | 13.1x | |||
P/E (Cal.) | 46.0x | 23.0x |
Note: NR = Not Rated. Risk Ratings: H = High; M = Moderate. F2022-F2025E EPS estimates assume 178 million fully diluted shares, constant- currency USD/INR exchange rate of 65. Sum of quarterly data may not equal full-year total due to rounding and/or changes in share count. NC = Not covered by Sidoti & Company, LLC.
Year | F2016 | F2017 | F2018 | F2019 | F2020 | F2021 | F2022 | F2023E | F2024E | F2025E |
Rev.(Mil.) | $231.3 | $283.6 | $318.2 | $331.5 | $353.1 | $374.1 | $415.8 | $504.5 | $550.8 | $667.3 |
GAAP EPS | $0.04 | $0.06 | $0.08 | $0.09 | $0.06 | $0.09 | $0.12 | $0.07 | $0.07 | $0.14 |
Description: Sify Technologies Ltd., (www.sifytechnologies.com) is one of the largest integrated Information & Communication Technology (ICT) solutions and services companies in India, offering end-to-end solutions over a common telecom data network infrastructure. Sify's network reaches more than 1,550 cities in India and connects 45 data centers, including six owned Tier 3 data centers. Headquarters are in Chennai, India.
- Sify delivered another quarter of strong revenue growth. Revenue in 3Q:F23 increased 31% year-over-year to $136.9 million, topping our $124 million forecast.
- Although revenue topped our estimate, operating profit was below our expectation.
- The revenue beat was driven by Sify's Digital Services, which had an excellent quarter, growing 90%, driven by several project completions in the quarter.
- Sify's Data Center services grew 19%. This was lower than we projected, but with its data center capacity set to double by the end of 2023, we remain bullish on the growth potential for this business.
- We think the stock price may not reflect Sify's growth potential nor the potential for profitability to improve as Sify gains leverage on its infrastructure investments and expanded headcount.
- Given the company's track record of revenue and operating profit growth, modest leverage and potential for further gains backed by strong secular trends, we think the stock's valuation is heavily discounted.
- We maintain our $7 price target, based on 50x our F2025 EPS forecast of $0.14 as we shift away from 70x estimated F2024 EPS. The lower multiple reflects the longer time horizon of our estimates.
- Given the company's growth potential and modest leverage, we maintain our moderately risky rating.
Revenue in 3Q:F23 beat our forecast… Revenue in 3Q:F23 grew 31% to $136.9 million, topping our $124 million forecast, driven by Sify's Digital Services segment, where revenue increased 90% to $48.5 million, blowing past our $28.5 million forecast. This segment is comprised of Sify's Cloud and Managed services as well as its Technology Integration and Application Integration services. The upside was mainly timing related as the company's Technology Integration services are very project-based and several large projects were completed in the quarter. Growth in the company's Network Services was as expected with revenue rising 8% to $51.3 million. Data Center Services grew 19% to $37 million, missing our $43 million forecast. Recent quarters contained some nonrecurring project work that led
NR
Price Target: $7
Price: $1.84
Risk Rating: M
Gregory Burns (212) 894-3317 (gburns@sidoti.com)
Key Statistics
Analysts Covering | 1 | |||||||||||||||||||||||||||||
Market Cap (Mil) | $340 | |||||||||||||||||||||||||||||
Enterprise Value | $541 | |||||||||||||||||||||||||||||
52-Week Range (NASDAQ) | 3-1 | |||||||||||||||||||||||||||||
5-Year EPS CAGR | 20% | |||||||||||||||||||||||||||||
Avg. Daily Trading Volume | 89,000 | |||||||||||||||||||||||||||||
Shares Out (Mil) | 182.742 | |||||||||||||||||||||||||||||
Float Shares (Mil) | 24.1 | |||||||||||||||||||||||||||||
Insider Ownership | 86% | |||||||||||||||||||||||||||||
Institutional Holdings | 1% | |||||||||||||||||||||||||||||
Annualized Dividend | Nil | |||||||||||||||||||||||||||||
Dividend Yield | N/A | |||||||||||||||||||||||||||||
FCF Per Share (F2025E) | ($0.10) | |||||||||||||||||||||||||||||
FCF Yield (F2025E) | NM | |||||||||||||||||||||||||||||
Net Cash Per Share (F2025E) | ($1.63) | |||||||||||||||||||||||||||||
Price to Book Value | 1.8x | |||||||||||||||||||||||||||||
Return on Equity (F2025E) | 10.2% | |||||||||||||||||||||||||||||
Total Debt to Capital | 56% | |||||||||||||||||||||||||||||
Interest Coverage Ratio | 1.5x | |||||||||||||||||||||||||||||
Short Interest % | N/A | |||||||||||||||||||||||||||||
Short Interest Days To Cover | 0.5 | |||||||||||||||||||||||||||||
Russell 2000 | 1,890 | |||||||||||||||||||||||||||||
Russell 2000 - Last 12 Months | -5.7% | |||||||||||||||||||||||||||||
SIFY - Last 12 Months | -36.8% | |||||||||||||||||||||||||||||
Required disclosures appear on page 6 | 1177 Avenue of the Americas 5th Floor | Phone: 212-297-0001 |
Analyst certification appears on page 8 | New York, NY 10036 | www.sidoti.com |
SIFY TECHNOLOGIES LIMITED SPONSORED ADR
us to overestimate the near-term growth for this segment. That said, we remain bullish on the long-term growth potential of this segment and we continue to see it as Sify's primary growth engine. The company operates 11 data centers with about 100 megawatts of capacity and it has three green-field projects underway that will be operational by the end of 2023, nearly doubling its existing capacity with an incremental 78 megawatts. While we project steady growth from Sify's Data Center business, these new Data Centers will be a major catalyst that will accelerate growth as they come online in the latter part of the year.
…but profitability was below our forecast. Gross margin declined to 35.2% from 42% a year ago, missing our 41.1% forecast. EBITDA margin declined 500 basis points to 18.2%, missing our 22.2% forecast. Margins vary depending on the revenue mix in a given quarter, with lower-margin project work in its Technology Integration Services typically driving quarterly variances. That was the case this quarter, but Sify is also adding to its headcount to support its network investments and the growth of its Digital Services. Management, in our view, has been prudent in controlling spending, and although margins (excluding the change in revenue mix) were a little lower than we projected, the company is still delivering profitable growth and we expect to see margins rebound as the company's network and data center investments begin generating more meaningful revenue. EBITDA grew just 3% to $24.9 million, missing our $27.6 million forecast. Net income declined 25%, due to higher depreciation and interest expense tied to Sify's Data Center and network investments, leading to EPS of $0.02, which was in line with our forecast.
Exhibit 1: Sify Technologies Variance Analysis
3Q:F23E | 3Q:F23A | Var | 3Q:F22A | 3Q:F23A | % Change | |
Total revenue | $124.0 | 136.9 | 12.9 | $104.4 | 136.9 | 31.1% |
Gross Profit | 51.0 | 48.1 | (2.9) | 43.9 | 48.1 | 9.6% |
(%) | 41.1% | 35.1% | 42.0% | 35.1% | ||
EBITDA | 27.6 | 24.9 | (2.7) | 24.2 | 24.9 | 2.9% |
(%) | 22.3% | 18.2% | 23.2% | 18.2% | ||
Diluted EPS | $0.02 | $0.02 | $0.00 | $0.03 | $0.02 | (25.0%) |
Sources: Sidoti & Company, LLC estimates and company filings
Valuation
Key Risks
We maintain our $7 price target on SIFY. The pandemic curbed India's economic growth for a short period but did not change the long-term trajectory of digital transformation. We view Sify as a primary beneficiary of this transformation. With the stock trading at enterprise value of just 4.5x our F2024 EBITDA projection and 3.5x our F2025 forecast, SIFY is valued at a steep discount to peers in the India telecom and application and technology integration market players group, which trade 8x-12x. Given Sify's track record of revenue and EBITDA growth and its potential for continued expansion, we see merit to trading at the high-end of the peer range. Our $7 price target is based on 50x our new F2024 EPS estimate of $0.14; previously we valued the stock at 70x estimated F2024 EPS. This new valuation equates to 10x our F2025 EBITDA estimate of $154 million, less projected net debt of $300 million, to yield $1.24 billion, or $6.80 per share. The company's growth potential and modest leverage support our moderate risk rating.
Foreign exchange | Concentrated ownership |
Sidoti & Company, LLC
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SIFY TECHNOLOGIES LIMITED SPONSORED ADR
Table 1: Sify Technologies Ltd., Income Statement | ||||||||||||||||
(Dollars in millions except where noted) | ||||||||||||||||
Jun | Sep | Dec | Mar | F2022 | JunA | SepA | DecA | MarE | F2023E | JunE | SepE | DecE | MarE | F2024E | F2025E | |
Total revenue | 99.2 | 107.5 | 104.4 | 104.7 | 415.8 | 118.6 | 122.1 | 136.9 | 127.0 | 504.5 | 129.5 | 135.5 | 137.5 | 148.4 | 550.8 | 667.3 |
COGS | 60.1 | 64.6 | 60.5 | 62.7 | 247.9 | 75.5 | 76.7 | 88.7 | 77.3 | 318.3 | 77.6 | 81.6 | 81.6 | 88.8 | 329.6 | 390.6 |
Gross profit | 39.2 | 42.8 | 43.9 | 42.0 | 167.9 | 43.1 | 45.4 | 48.1 | 49.7 | 186.3 | 51.9 | 53.9 | 55.9 | 59.6 | 221.2 | 276.6 |
SG&A | 16.8 | 20.1 | 19.7 | 18.4 | 74.9 | 19.6 | 22.2 | 23.2 | 23.6 | 88.6 | 24.6 | 25.1 | 25.4 | 26.4 | 101.5 | 122.6 |
EBITDA | 22.4 | 22.7 | 24.2 | 23.6 | 92.9 | 23.5 | 23.2 | 24.9 | 26.1 | 97.6 | 27.3 | 28.8 | 30.4 | 33.2 | 119.7 | 154.0 |
D&A | 12.3 | 12.2 | 12.9 | 13.2 | 50.5 | 14.3 | 14.7 | 15.3 | 15.9 | 60.2 | 16.6 | 17.6 | 18.5 | 19.6 | 72.3 | 84.6 |
EBIT | 10.0 | 10.6 | 11.4 | 10.5 | 42.4 | 9.2 | 8.5 | 9.6 | 10.2 | 37.5 | 10.7 | 11.2 | 11.9 | 13.5 | 47.4 | 69.4 |
Interest and other expense (income) | 3.5 | 3.9 | 4.3 | 4.1 | 15.8 | 4.3 | 5.6 | 6.5 | 7.2 | 23.6 | 7.8 | 7.8 | 7.8 | 7.8 | 31.1 | 36.9 |
Other expense (income) | (0.2) | (0.4) | (0.3) | (0.9) | (1.8) | (1.2) | (0.4) | (0.4) | (0.5) | (2.6) | (0.5) | (0.5) | (0.5) | (0.5) | (2.2) | (2.2) |
EBT | 6.8 | 7.1 | 7.3 | 7.2 | 28.4 | 6.1 | 3.4 | 3.5 | 3.5 | 16.5 | 3.5 | 4.0 | 4.7 | 6.3 | 18.4 | 34.6 |
Taxes | 1.7 | 1.6 | 2.0 | 2.2 | 7.6 | 1.9 | 1.7 | (0.5) | 1.1 | 4.1 | 1.0 | 1.2 | 1.4 | 1.9 | 5.5 | 10.4 |
Net income | 5.1 | 5.5 | 5.3 | 5.0 | 20.8 | 4.2 | 1.7 | 4.0 | 2.5 | 12.3 | 2.4 | 2.8 | 3.3 | 4.4 | 12.9 | 24.2 |
EPS - diluted | $0.03 | $0.03 | $0.03 | $0.03 | $0.12 | $0.02 | $0.01 | $0.02 | $0.01 | $0.07 | $0.01 | $0.02 | $0.02 | $0.02 | $0.07 | $0.14 |
Shares outstanding - diluted | 178.0 | 178.0 | 178.0 | 178.0 | 178.0 | 178.0 | 178.0 | 178.0 | 178.0 | 178.0 | 178.0 | 178.0 | 178.0 | 178.0 | 178.0 | 178.0 |
Margins | ||||||||||||||||
Gross margin | 39.5% | 39.9% | 42.0% | 40.1% | 40.4% | 36.3% | 37.2% | 35.2% | 39.1% | 36.9% | 40.1% | 39.7% | 40.6% | 40.1% | 40.2% | 41.5% |
EBITDA | 22.5% | 21.1% | 23.2% | 22.6% | 22.3% | 19.8% | 19.0% | 18.2% | 20.5% | 19.4% | 21.1% | 21.2% | 22.1% | 22.3% | 21.7% | 23.1% |
Operating margin | 10.1% | 9.8% | 10.9% | 10.0% | 10.2% | 7.8% | 7.0% | 7.0% | 8.0% | 7.4% | 8.3% | 8.3% | 8.7% | 9.1% | 8.6% | 10.4% |
Net margin | 5.1% | 5.1% | 5.1% | 4.8% | 5.0% | 3.5% | 1.4% | 2.9% | 1.9% | 2.4% | 1.9% | 2.1% | 2.4% | 3.0% | 2.3% | 3.6% |
Growth YoY | ||||||||||||||||
YoY | ||||||||||||||||
Total revenue | 22.7% | 18.4% | 7.6% | (0.8%) | 11.1% | 19.5% | 13.6% | 31.2% | 21.3% | 21.4% | 9.2% | 10.9% | 0.4% | 16.9% | 9.2% | 21.1% |
Gross profit | 18.0% | 23.7% | 20.6% | (4.1%) | 13.4% | 10.0% | 5.9% | 9.7% | 18.3% | 11.0% | 20.5% | 18.7% | 16.1% | 19.9% | 18.8% | 25.1% |
EBITDA | 26.1% | 24.2% | 21.9% | 5.6% | 18.8% | 4.9% | 2.2% | 2.9% | 10.3% | 5.1% | 16.3% | 24.0% | 22.2% | 27.3% | 22.6% | 28.7% |
EBIT | 26.1% | 24.2% | 21.9% | 5.6% | 18.8% | 4.9% | 2.2% | 2.9% | 10.3% | 5.1% | 16.3% | 24.0% | 22.2% | 27.3% | 22.6% | 28.7% |
EPS | 91.3% | 38.5% | 36.5% | (10.5%) | 29.7% | (17.6%) | (68.5%) | (25.0%) | (50.9%) | (40.9%) | (42.1%) | 62.3% | (17.6%) | 79.7% | 4.7% | 88.1% |
Note: Historical results and estimates assume constant currency USD/INR exchange rate of 65
Sources: Sidoti & Company, LLC. estimates and company reports
Sidoti & Company, LLC
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SIFY TECHNOLOGIES LIMITED SPONSORED ADR
Table 2: Sify Technologies Ltd.. Cash Flow Statement(Dollars in millions except where noted)
F2022 | F2023E | F2024E | F2025E | |
Net income | $19.3 | $12.3 | $12.9 | $24.2 |
D&A | 50.7 | 61.9 | 72.3 | 84.6 |
Provision for doubtful accounts | 6.7 | - | - | - |
Stock compensation | 0.4 | 0.2 | 0.2 | 0.2 |
Net finance (income) / expense | 15.8 | - | - | - |
Unrealized (gain) / loss on account of exchange differences | (0.2) | - | - | - |
Amortization of leasehold prepayments | - | - | - | - |
Accounts receivable | (62.8) | (10.7) | (20.8) | (52.4) |
Inventory | (15.3) | 2.0 | (1.2) | (6.7) |
Prepaid and other current assets | 10.6 | - | - | - |
Accounts payable | 21.0 | 32.5 | 7.4 | 39.7 |
Employee benefits | (1.1) | - | - | - |
Deferred income | - | - | - | - |
Income taxes (paid)/ refund received | (19.6) | - | - | - |
Cash from operating activities | 34.5 | 90.5 | 70.7 | 89.5 |
PPE | (104.6) | (164.6) | (160.0) | (106.8) |
Intangible assets | - | - | - | - |
Investments in debt securities | (4.1) | - | - | - |
Finance income received | - | - | - | - |
Cash from investing activities | (112.4) | (164.6) | (160.0) | (106.8) |
Proceeds (purchase) of common stock | 0.7 | - | - | - |
Debt | 85.5 | 83.1 | 53.8 | 38.5 |
Finance expenses paid | (17.1) | - | - | - |
Proceeds (repayment) finance lease liabilities | (4.9) | - | - | - |
Dividend and distribution tax | - | - | - | - |
Cash from financing activities | 64.2 | 83.1 | 53.8 | 38.5 |
FX | - | - | - | - |
Net change in cash | (13.7) | 9.0 | (35.5) | 21.2 |
Cash at the beginning of period | 84.3 | 70.6 | 79.6 | 44.2 |
Cash at the end of period | 70.6 | 79.6 | 44.2 | 65.4 |
FCF | (70.1) | (74.1) | (89.3) | (17.2) |
FCF / share | ($0.39) | ($0.42) | ($0.50) | ($0.10) |
Note: Historical results and estimates assume constant currency USD/INR exchange rate of 65
Sources: Sidoti & Company, LLC. estimates and company reports
Sidoti & Company, LLC
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SIFY TECHNOLOGIES LIMITED SPONSORED ADR
Table 3: Sify Technologies Ltd., Balance Sheet(Dollars in millions except where noted)
F2022 | F2023E | F2024E | F2025E | |
Cash | 58.2 | 67.2 | 31.8 | 53.0 |
Restricted cash | 12.2 | 12.2 | 12.2 | 12.2 |
Inventory | $37.0 | $35.0 | $36.3 | $43.0 |
Accounts receivable | 216.3 | 227.0 | 247.9 | 300.3 |
Prepaid expenses | 14.8 | 14.8 | 14.8 | 14.8 |
Total current assets | 338.6 | 356.3 | 342.9 | 423.2 |
PPE | 256.8 | 346.0 | 433.6 | 455.8 |
Intangible assets | 9.8 | 9.8 | 9.8 | 9.8 |
Lease payments | - | - | - | - |
Other assets | 32.9 | 32.9 | 32.9 | 32.9 |
Other investments | 7.3 | 7.3 | 7.3 | 7.3 |
Total assets | 645.4 | 752.2 | 826.5 | 929.0 |
Finance lease obligations | - | - | - | - |
Borrowings | 109.4 | 109.4 | 109.4 | 109.4 |
Bank overdraft | 5.7 | 5.7 | 5.7 | 5.7 |
Accounts payable | 174.4 | 206.9 | 214.3 | 253.9 |
Deferred income | - | - | - | - |
Total current liabilities | 324.7 | 357.2 | 364.5 | 404.2 |
Finance lease obligations | - | - | - | - |
Long-term debt | 119.5 | 148.8 | 202.6 | 241.1 |
Employee benefits | 2.2 | 2.2 | 2.2 | 2.2 |
Other liabilities | 55.0 | 55.0 | 55.0 | 55.0 |
Compulsory convertible debentures | - | 53.8 | 53.8 | 53.8 |
Other | - | - | - | - |
Other | - | - | - | - |
Total liabilities | 501.4 | 617.0 | 678.2 | 756.3 |
Share capital | 28.3 | 28.5 | 28.6 | 28.8 |
Share premium | 302.7 | 302.7 | 302.7 | 302.7 |
Share based payment reserve | 5.4 | 5.4 | 5.4 | 5.4 |
Other components of equity | 1.2 | (20.0) | (20.0) | (20.0) |
Accumulated defecit | (114.9) | (102.6) | (89.7) | (65.4) |
Total stockholders' equity | 222.7 | 214.0 | 227.1 | 251.5 |
Total liabilities and equity | 724.1 | 831.0 | 905.3 | 1,007.8 |
ROE | 10.7% | 6.2% | 5.9% | 10.2% |
Total Debt-to-capital | 50.7% | 54.7% | 57.9% | 58.2% |
Net debt-to-TTM EBITDA | 1.76x | 1.89x | 2.28x | 1.89x |
Cash (debt) per share | ($0.92) | ($1.04) | ($1.54) | ($1.63) |
Note: Historical results and estimates assume constant currency USD/INR exchange rate of 65
Sources: Sidoti & Company, LLC. estimates and company reports
Sidoti & Company, LLC
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Sify Technologies Limited published this content on 27 January 2023 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 27 January 2023 13:18:01 UTC.
