2023-11-02 00:08:18 ET
Summary
- Sify Technologies announces ESG efforts and capacity investments, expects AI models to drive future business growth.
- The growth of 5G in India may lead to significant net sales growth for Sify Technologies.
- Despite risks from competitors and lower-than-expected growth, Sify Technologies appears undervalued.
Sify Technologies ( SIFY ) recently announced ESG efforts and capacity investments. It also reported that the use of AI models by clients may accelerate future business growth. There are other market participants that expect significant business growth. Besides, the growth of 5G in India may bring significant net sales growth. Yes, there are some risks from competitors, lower growth than expected, or failed new services. With that, SIFY does look undervalued like last time I covered the stock.
Sify Technologies
Serving more than 10,000 businesses by 2023 and becoming part of the Fortune 500, Sify Technologies is an Indian company that offers a broad portfolio of digital solutions that include cloud storage, data storage centers, and security services among others.
In addition, it is recognized as the first company in the country to offer digital and technological infrastructure solutions. Currently, its scope of activities is in 6 countries, including the United States and the United Kingdom. The company has positive projections about its market participation in the future, based on broad growth forecasts for the next decade in the capitalization of more than $3 trillion in global digital markets and 11% growth in e-commerce year after year.
Despite conducting its business in three specific lines that target the type of client they provide services to, the operations are conducted in a single operations segment that brings together its more than 3,500 employees. Through the same segment, the company manages the online network that currently covers more than 1,600 cities globally. This segment grouped three segments which were previously divided into digital solutions, storage center services, and centralized network services.
With 5 distribution centers in India and 11 other storage centers internationally, Sify expands its operational capacity year after year, and aims to continue focusing on the international expansion strategy, setting up a diversified business model with regard to clients from global reach, clients from regional markets, local, and individual clients.
I decided to write another article about Sify Technologies considering the new information delivered by management. Besides, I believe that investors may want to know that the company appears right now undervalued again as in the last report. In January 2023, the company reported a valuation of close to $1.4 per share, and it increased to close to $3 per share in August 2023. Right now, it is trading again at close to $1.3 per share.
Beneficial Market Expectations That Include Net Sales Growth And EBITDA Growth
I did check the numbers of other analysts to design my DCF model. With this in mind, I believe that having a look at the market expectations makes sense. 2025 net sales are expected to be close to $676 million, with 2025 EBITDA of $148 million, 2025 EBIT of $55 million, and 2025 net income of about $9.4 million.
The recent numbers delivered about 2023 are not far from the expectations of other analysts. Data center services revenue grows at close to 7%, and network services growth is close to 5%. With that, digital services revenue growth reports sales growth of about 25%. I believe that sufficient further investments in digital services may bring double digit growth.
New FCF Catalysts: There Are New Figures About The Growth Of Indian 5G Market
The combination of organic and inorganic growth has given Syfy positive results, reaching historical revenue records in 2022. At present, at the local level, Sify will likely seek to position itself as one of the developers of the 5G infrastructure plan that the Indian government established and is carrying out. It is expected that there will be more than 500 million users connected to this network in 2025, with an average use of 50 gigabytes of network per device, detrimental to 4G users. Local positioning is the center of Sify's current strategy, being a service provider for the 5 largest companies in the country in terms of cellular telephony.
Recent ESG Efforts Could Bring Demand For The Stock
Sify Technologies recently included new efforts with respect to ESG and materiality reporting. The company noted that customer delight, data privacy, and IT security are among the most important aspects for stakeholders. In my view, further information and efforts in this regard will most likely bring investors interested in ESG investments.
It is worth noting that many experts are expecting double digit growth in the ESG arena in the coming years. If the company knows how to communicate its improvements and efforts, I believe that we may see significant stock demand in the coming years.
With a projected compound annual growth rate of 12.9%, ESG assets are on pace to constitute 21.5% of total global AuM in less than 5 years. It represents a dramatic and continuing shift in the asset and wealth management industry according to PwC's Asset and Wealth Management Revolution 2022 report. Source: ESG-focused institutional investment seen soaring 84% to US$33.9 trillion in 2026, making up 21.5% of assets under management: PwC report
Further Investments In Capacity Announced And Further Adoption Of AI Models May Bring Further Net Sales Growth
In the most recent quarterly release, Sify Technologies noted substantial investments in capacity and incoming new IT services opportunities to help digital transformation of clients. The depreciation of new capital expenditures as well as new services offered to clients will most likely bring FCF growth.
We continue to make substantial investment in capacity creation and people to build skill sets for IT services opportunities we foresee, given the digital transformation engagements that India Inc. is actively pursuing. This has led to the accompanying depreciation and interest cost, reflecting on our net profit. Source: Quarterly Release
It is also worth noting that new AI models necessary in the new digitalization era require new infrastructures. As a result, management noted that the demand for its technologies could increase, which may bring net sales growth.
As Enterprises pursue their digital transformation and digitalization objectives, they are also re-calibrating their digital infrastructure across hybrid cloud, network, security, and edge infrastructures. Customer experience, business continuity, cyber security, application modernization, and the overall adoption of AI models are the prime drivers for this recalibration. Source: Quarterly Release.
Balance Sheet
The most recent balance sheet reported in 2023 includes total assets worth $698 million, property, plant, and equipment close to $271 million, right of use assets worth $69 million, and total non-current assets of about $426 million. The asset/liability ratio is larger than 1x. I do believe that the balance sheet appears quite stable.
Inventories are equal to $23 million, with trade and other receivables of close to $177 million, restricted cash of $14 million, and cash and cash equivalents of about $44 million. Total current assets are equal to $271 million, and the current ratio is larger than 1x, so I believe that liquidity does not really seem a problem here.
With regards to the list of liabilities, I do not really think that most investors would be worried. Long term borrowings include $168 million, with lease liabilities close to $22 million, short term of borrowings worth $69 million, and bank overdraft worth $11 million. Total liabilities stood at $489 million.
Financial leverage stands at close to 1.9x-2x , which I do not think is worrying. With that, I studied a bit the interest rates obtained by Sify Technologies in order to assess the cost of debt and cost of capital. In the last annual report, the company noted interest rates ranging from 7.20% to 10.84%, but also 6%. With these numbers in mind, I decided to run a sensitivity analysis with different interest rates.
The term loans bear interest rate ranging from 7.20% to 10.84% repayable in quarterly instalments within a tenor of 3 to 6 years after moratorium period ranging from 6 months to 2 years in certain cases.
During the financial year 2021-22, Kotak Special Situations Fund (KSSF) subscribed to 2,00,00,000 (two crore) Series 1 Compulsorily Convertible Debentures (CCDs) with face value of ? 100 each amounting to ? 2,000 Million and 1% of 2,00,00,000 (two crore) Series 2 Compulsorily Convertible Debentures with face value of ? 100 each amounting to ? 200. These CCD's carry a coupon rate of 6% payable half-yearly. Source: 20-F
My New FCF Model Indicates That The Company Appears Undervalued
In my previous DCF analysis, I used a WACC of 14%, which was quite conservative, and a terminal multiple close to 14x. In the light of the previous new assumptions, FCF catalysts, and recent information from Sify, I lowered the cost of capital and the terminal exit multiple. I used multiples that were closer to that of competitors.
My cash flow model expectations include 2034 profit for the year of close to INR4577 million, depreciation and amortization and impairment of goodwill of about INR2552 million, and stock compensation expense worth INR135 million. I did not include any gain or loss on sale of property, plant, and equipment, loss on account of exchange differences, or loss on amortization of leasehold prepayments. I do not think that they are part of the regular business of Sify Technologies.
My cash flow model expectations also include tax expenses of about -INR1616 million, changes in trade and other receivables close to INR12345 million, changes in inventories worth INR2318 million, and changes in contract assets of close to INR104 million.
Additionally, with change in contract costs of close to -INR233 million, change in contract liabilities worth -INR5102 million, and change in other assets of about INR3136 million, 2034 CFO would be close to INR9021 million. Finally, with 2034 acquisition of property, plant, and equipment of -INR2656 million, 2034 FCF would be about INR6366 million.
With the previous cash flow statement projections, a WACC between 7% and 13%, and an EV/FCF multiple of 6x-10x, the implied valuation would be around $1-$2.9 per share. Note that the sector is currently trading at close to 6.89x FCF. I believe that my exit multiple appears quite reasonable.
With that, it is worth noting that the median price forecast would most likely be close to $1.52-$2.08 per share. The median IRR would be between -2%, and close to 12%. In my view, even making changes in the assumptions or making less conservative assumptions than my figures, Sify Technologies does seem undervalued.
Competitors
The market for digital infrastructure solutions is highly broad and highly fragmented since there are a large number of participants that offer specific services compared to a concentration of large companies that offer an anti-diversified portfolio for this type of solutions.
In any case, at the local level, it is undoubtedly the reference company within this type of market for being the pioneer in development and for the positioning it currently maintains. At an international level, however, the market is captured by technology companies from other regions such as the United States and Japan, which have historically led the way in this type of development.
Risks
Due to the positioning that this company has and the growth forecasts that exist in India and specifically in the digital and connectivity markets in this country, it is difficult to imagine a series of significant risks in the short term. In this sense, a radical disruption in the local digital environment, a deep economic crisis that prevents consumers from accessing payment for new technologies, or the development of digital businesses in general can compromise the projections on which the company is based for its future actions.
In the same way and due to the breadth that the particular Indian market offers, an increase in competition is to be expected due to the arrival of foreign companies in this market, although, as I pointed out, it is difficult to imagine that it means a large displacement in the portion that is currently captured by Sify Technologies.
Conclusion
Sify Technologies recently delivered new information about new ESG efforts, and announced further investments in capacity and demand from clients using new AI models. With beneficial expectations from other market participants and investing in markets like 5G in India, which grows at a double digit, Sify Technologies may deliver significant net sales growth in the coming years. I do see risks from competition, lower growth than expected, or total amount of debt, however the company does look undervalued at this point in time.
For further details see:
Sify: 5G, ESG Efforts, And Still Undervalued