Sify Stock: Expertise In Indian IoT Market, Cheap (NASDAQ:SIFY)

Sify Technologies Limited (NASDAQ:SIFY), a communication network solutions’ business, expects to benefit from the growing demand for cloud systems to operate IoT, 5G networks. In my view, with around 25 years of technological transformation and adaptation to new environments and markets, Sify is well positioned. Yes, there are some risks from small competitors and investment restrictions from the Indian government, but the company appears quite undervalued.

Sify Technologies

Established in India, Sify Technologies Limited offers communication network solutions, including mobile services, data centers and analysis, management and administration of information in the cloud, and application of regeneration of its clients’ networks.

Regarding Sify Technologies, I would highlight first of all the digital management service, which allows learning interfaces as well as inter-company communication platforms together with the management of assets through these platforms, which are provided through cloud services, implying that the contracting company does not necessarily have to have computers and data centers to store this information.

In the same way, an element of relief in relation to its segment of information centers is the sustainability option that it offers when making the facilities, offering a 28% reduction in the carbon footprint and a greater effectiveness, between 20% and 40%, with regard to energy consumption.

Analysts Believe In A Median Sales Growth Of 9% And Median EBITDA Margin Of 21%

I believe that Sify Technologies is worth a look because most analysts expect beneficial figures for the years 2023 and 2024. Analysts expect net sales of $587 million, sales growth of 16.70%, 2024 EBITDA of $139 million, and an EBITDA margin of 23.68%. 2024 EBIT would be $55.2 million with an operating margin of 9.41%. Market expectations also include EBIT of $25.9 million and a net income of $18.1 million.

Balance Sheet

As of September 30, 2022, Sify Technologies presented a property worth $226.878 million with a right of use assets of $55.171 million in addition to other assets worth $39.758 million. Total non-current assets stand at $350.815 million.

Inventories are worth $39.258 million with trade and other receivables of $197.238 million, restricted cash of $16.305 million, and cash and cash equivalents of $17.728 million. Total current assets stand at $283.411 million, and total assets are worth $634.226 million. The asset/liability ratio stands at close to 1x, so I would say that the balance sheet stands in good shape.

Liabilities include borrowings worth $111.180 million, lease liability of $21.288 million, contract liabilities of $26.946 million, and total non-current liabilities of $162.266 million. Short term borrowings include $78.350 million with trade and other payables worth $164.888 million. Finally, total current liabilities are equal to $289.873 million with total liabilities worth $452.139 million. I am not concerned about the total amount of net debt because I expect 2024 EBITDA close to $139 million.

Sify Technologies’ Readaptation Capabilities Would Lead To Fair Price Of $1.87 Per Share

Sify Technologies’ contracting provides a radical transformation towards the digitization of its servers, information centers, communication networks for employees, browsing from servers provided by the company, and the readaptation of the current technological infrastructure. I believe that the company’s know-how accumulated during the last 25 years of transformation will likely interest both clients and investors. The list of different products offered through these 25 years is quite impressive.

Although the business model of the company began as an Internet service provider in the local Indian environment, it has managed to develop on a large scale by correctly reading the needs of the industry and expanding its services to different business segments with more specialized and greater degrees of customization.

In addition, considering the large population in India and the percentage of the population active in business fields, having a leading position in the local market means the possibility of accessing a large number of customers. In this case, I assumed that Sify’s access to the Indian market and the 5G revolution in the country will likely bring more revenue growth than other competitors in countries like China or the United States. As soon as more investors understand the potential of the Indian market, the demand for Sify’s stock will likely increase.

Sify Technologies offers clients the possibility of integrating systems into the same business system, having a development in the field of high-tech cybersecurity, and securing the data of its clients. Considering the number of cybersecurity threats these days, I believe that Sify’s services will likely receive more attention.

I am quite optimistic about the company’s objectives in the cloud and the Internet of Things in India. Considering the expectations about home automatization, transportation, and the growing number of IoT devices, Sify’s cloud offering will likely receive more demand in the coming years.

Under the previous conditions, I assumed 2032 net sales of $1.136 billion with net sales growth of 8.60%. 2032 EBITDA would stand at $245.3 million accompanied by an EBITDA margin of 21.60%. Besides, I assumed 2032 free cash flow of $67 million with a FCF margin of 5.89%.

If we assume 2032 EV/EBITDA multiple of 14x and a discount of 14%, the implied enterprise value would stand at $512 million. Keep in mind that the enterprise value was obtained by summing the net present value of the terminal value and the net present value of future FCF. If we also include cash of $33 million, with a debt of $204 million, the implied equity valuation would stand at $341 million. Under this case scenario, the internal rate of return would be 6.63%. Finally, the fair price would be $1.87 per share.

Risks from Lack Of Geographic Diversification And Small Competitors

The telecommunications industry has grown exponentially since the advent of the internet, and Sify has ridden on this wave to develop and scale the breadth of its operations. 80% of its annual income from active operations at this moment continues to be in the territory of India, while only 17% of its annual income is in other parts of the world, which shows that out of its more than 10,000 customers, a small number of customers is not in its local region, and the company has not yet been able to comfortably land in other regional markets. Although the company has 1,600 cities with its network facilities, most of which are in Indian territory. This can be seen as a risk factor, since the lack of diversification in its global operations generates a great dependence on the Indian economy and market. I believe that a bit more exposure to other growing markets may help convince more investors.

Sify Technologies may have to compete with small nascent companies specializing in certain niches. This is a risky factor as these companies have 100% of their investments and capacities allocated to a purpose that for Sify is only an element in one of its business segments. It is possible that the service of these nascent companies is of better quality with lower cost. Under this scenario, I assumed that small competitors may push the company’s revenue and FCF down.

According to the last annual report, Sify suffers from complications to attract foreign investment due to regulations imposed by the Indian government. This, together with the factors that we mentioned before in relation to its lack of global scope and its dependence on the local markets, accentuates the obvious risks that the company currently faces in scaling its business, even though it appears quite efficient in India.

My financial model includes 2032 net sales of $1.074 billion together with a net sales growth of 7.85%. 2032 EBITDA would stand at $231.6 million with an EBITDA margin of 21.55%. 2032 free cash flow would be $54 million with the FCF margin of 5%.

I also assumed an EV/EBITDA multiple of 12.5x, which implied an enterprise value of $325 million. Besides, with cash of $33 million accompanied by a debt of $204 million, I obtained an equity valuation of $154 million. The internal rate of return would stand at -2.48%, and the fair price would be $0.84 per share.

My Takeaway

Sify Technologies Limited benefits from exposure to the growing IoT and 5G markets, and management has 25 years of technological transformation and readaptation. Considering the expectations given by market analysts, Sify will likely offer revenue growth in the coming years. I believe that even taking into account the risks from small competitors and changing technological markets, the company appears quite undervalued.