Stock: Sify Technologies
Stock Rating: BUY
Price Target: 3.50 +47.6% Upside
Market Price: $2.37
Research Publication Date: 1/22/21
We are initiating coverage on Sify Technologies (SIFY) ahead
of quarterly earnings, as we anticipate that the worst days are behind the
company, and the best days are ahead. We anticipate that Sify’s long-term
revenue growth will start to normalize over the next couple quarters where we anticipate
meaningful revenue acceleration. In terms of near-term events, the company continues
to ramp-up its cloud-based business, and with its native experience in the
Indian market along with its competitive roadmap, we anticipate a sustained
path to dil. EPS expansion and stock price appreciation.
Sify isn’t as risky as other small cap tech stocks, and its
uniquely positioned to expand its cloud, and hybrid-cloud based business model.
We anticipate that the company will communicate strengthened outlook in the
upcoming quarterly earnings calls though the business environment creates some
uncertainty. Even so, the risk/reward seems compelling, which is why we
initiate coverage with a buy rating.
Earnings Preview: We estimate that Sify will report revenue of $93.77M, and Dil. EPS of $0.02 for Q3’21, which compares to consensus estimates of $92.4M and dil. EPS of $0.02. We are in line with consensus on dil. EPS, but above revenue estimates by +$1.3M.
We initiate coverage at BUY with a $3.50 PT.
From prior management calls towards the mid-point of the Calendar Year or prior to Q1’21 results, there was some contract run-off that was anticipated from the Cloud and Managed Services Integration Services with the bulk of the contracts locked-in for a number of years. However, as indicated in the prior quarterly, the company reported a -37% decline in the segment. That being said, the company was able to offset some of this with Data Center Centric IT Services (basically cloud and cloud migration services similar to AWS), which grew revenue by +12% where we anticipate the bulk of the growth to flow through over the next 5-10 years.
Hence, the company has made further investments in data
centers where they anticipate heightened adoption for its various 3rd-party
Cloud Suites (Azure, Oracle, SAP). Sify also provides the hardware (IaaS),
which is why they opened additional data centers in Hyderabad and Kolkata in March
We continue to encourage this investment into data centers to
keep pace with cloud migration, and data growth over the next 5-years where
various third-party estimates that the data center market will grow to $1.5 billion
in 2022 from $1 billion in 2018, according to Cushman and Wakefield. However,
other estimates suggest that the market opportunity is much bigger at $4.5
billion in 2020 according to Research and Markets.
The data center market is smaller than the United States but given the scope of Sify’s revenue from the cloud, hybrid-cloud, and cloud-integration segments its estimated that in 2019 they held 28% market share in the Indian market, according to CSI Markets. This implies that some of the growth is contingent on emerging data trends, and the migration towards cloud, which is expected to grow at an 20% CAGR until 2025 whereas other estimates are more conservative with a 12% growth CAGR. According to ETech, the data center outsourcing market is expected to grow at a 25% CAGR from $2 Billion – $5 Billion between FY’19-FY’24. This implies that the numbers are really all over the place, which is why we hinge the bulk of our growth estimates on the historical revenue growth figure to keep our estimates more conservative with consolidated revenue growth of +1.2% in FY’21, and +11.17% in FY’22, respectively.
Keep in mind, what is limiting some of our long-term revenue
growth ties into some of the legacy business models like the Voice Business (-36%
y/y) and product-mix. Meanwhile, the ICT (integrated cloud technology) Sector
in India is expected to grow to $24 Billion between 2018-2023 according to
GlobalData, which is basically referred to as cloud/hybrid migration in the IT
This is where third parties such as Sify Technologies helps
with migrating workloads to the cloud while also partitioning sensitive data on-premises
on behalf of its clients (basically hybrid-cloud integration services). Hence, ICT
segment is where they provide infrastructure, consulting, and migration
services while leaving certain workloads on-premises. This tends to be
important in the financial sector where banks would want to maintain some data sovereignty
while also offloading workloads with less-sensitive data requirements. This
also applies to other sectors like advanced research institutions, government,
Overall, we are confident that the growth will return on a top-line basis, and we anticipate that profitability metrics will gradually improve. We’re not expecting every quarter to be a slam dunk, but we anticipate that within a couple quarters the revenue growth will start to accelerate despite the longer-lead times for enterprise sales/contracts.
Financial Model Overview
Figure 1. Financial Model
Source: Cho Research
We are forecasting revenue of $357M and $397M for FY’21 and FY’22, respectively. We anticipate revenue to ramp-up over the next couple quarters, which translates to +1.2% y/y growth, and +11.17% y/y growth, respectively. We anticipate Q3’21 and Q4’21 acceleration with some seasonal impact, but continued growth momentum heading into FY’22. We capture some of the seasonal impact, and ramp-up of IT investments for the duration of the year. Furthermore, we anticipate that our estimates are mostly conservative on sales, as we anticipate some pull-forward demand due to the depressed IT spending environment in FY’21.
We also anticipate gross profit expansion, though a very modest amount over the next 12-months appx. 100 basis points, though much of this is driven by product mix-shift to higher margin categories, which is also offset by capitalization expense tied to datacenter roll out. We also anticipate that with some revenue growth/gross margin expansion that profit metrics should flow through at higher expense levels, but with higher revenue contribution we anticipate that dil. EPS metrics will accelerate in FY’22 +37.5% growth.
Figure 2. Valuation Estimate
Source: Cho Research
We are assigning a PT of $3.50 after valuing the company based on its 4-year mean PE ratio, growth comps, and a forward earnings discount of 3.92% based on the firms WACC (weighted average cost of capital). We anticipate that the stock could surprise to the upside assuming a major contract win, or assuming profit metrics improve better than expected. Though, it’s worth noting that SIFY conservatively manages expenses ramp, so we anticipate that bottom line beats will be more common than top line growth over the next couple years.
When pertaining to sales growth the company would have to take considerable market share, or the investment cycle would have to improve considerably. Notwithstanding, we think the stock is still undervalued, and that it will outperform benchmark returns, as investors are slow to recognize the IT opportunity in the India market, and with limited news flow.
Price Momentum Rather Sudden
The stock recently gapped higher driven by retail fueled buying,
though it is worth noting that the stock has a rather limited float. We think
the momentum will continue however following the quarterly earnings report, as
we provided very conservative/beatable estimates. That being said, investors/traders
in various chatrooms and Twitter have been hyping the stock lately, but for
good reason, as the stock was so heavily undervalued, and has substantial room
Figure 3. Sify Price Chart
We believe the stock is struggling with resistance at the $2.50 level, but will likely break the resistance level, as the underlying fundamentals of the business are attractive, and still undervalued based on our financial estimates. However, we do not anticipate this parabolic run to continue unabated and would anticipate the stock to hover within a $3.50 – $4.00 price range until business fundamentals start to provide further support for a higher stock price.
We initiate coverage at BUY and assign a $3.50 price target on the stock. We think this hidden IT play in the Indian market is heavily underappreciated and doesn’t generate enough awareness or attention, which is why there’s still room for further price momentum following the Q3’21 earnings report.
Sify is expected to report earnings on Jan. 28th, 2021. We think revenue guidance, and on-going commentary on the cloud ramp are the keys to watch for, whereas the softness in some of the legacy businesses is already priced in. There is a decent likelihood of an earnings beat though we are not certain which expense levers will translate to the bottom-line beat.
Disclosure: Cho Research was not compensated by Sify Technologies to publish “Sify Technologies Price Target Starts at $3.50 A Hidden Gem from India” Though Cho Research does use the research dollars it generates from other clients of our research service to fund market research
reports such as this along with advertising. Cho Research may at its sole discretion enter into a position following the publication of this report. This document is not produced in conjunction with a security offering and is not an offering to purchase securities. This report
does not consider individual circumstances and does not take into consideration
individual investor preferences. Recipients of this report should consult
professionals around their personal situation, including taxation. Statements
within this report may constitute forward-looking statements, these statements
involve many risk factors and general uncertainties around the business,
industry, and macroeconomic environment. Investors need to be aware of the high
degree of risk in micro capitalization equities, cryptocurrencies, crypto assets.
Independent equity research isn’t regulated by the SEC and
operates separately from more conventional sell-side equity research.
The publication of independent equity research is unregulated and rules
pertaining to published independent equity research are covered under
“freedom of the press” with legal case precedent taken
all the way to the N.Y. Supreme Court to guard against libel based
claims or claims of loss relating to the publication of a report on a
company. Any copyright claim relating to infringement is covered under fair use of copyrighted materials.
Since the use of material was derived into a separate form of analysis
without any substantial content derived from any third-party no
copyright claim can be pursued under common law. To discuss investment
risk or to consider the risks pertaining to any securities it is
recommended to consult a registered financial advisor. To understand
independent research it’s encouraged to read this published article on
independent equity research to become more familiar with industry
standard practices and the relative value of independent equity research
versus brokerage research and news media.Cho Research, its
subsidiaries, and employees may open along/short equity position at
future date from the data of publication of the report. The price per
share and trading volume of subject company and companies referenced in
this report may fluctuate and Cho Research is not liable for these
inherent market fluctuations. The past performance of this investment is
not indicative of the future performance, no returns are guaranteed,
and a loss of capital may occur. Certain transactions, such as those
involving futures,options, and other derivatives, can result in
substantial risk and are not suitable for all investors