Sify Technologies : Sidoti Oct 2020

October 23, 2020 | Company Sponsored Research Morning Meeting Note	Sidoti & Company, LLC
Earnings Release	Member FINRA & SIPC

Sify Technologies Limited Sponsored ADR (SIFY)

2Q:F21 Revenue, EBITDA Beat Our Forecasts; Demand For Sify's Data Center Centric Services Remains Strong As Pandemic Accelerates India's Digital Transformation; Maintain $4 Target

	F2019	F2020		F2021E		F2022E			NR
		OLD	NEW	OLD	NEW	OLD	NEW		Price Target: $4
June	$0.02	$0.02		$0.01A		$0.02	$0.01
			Price: $1.09
Sep.	0.02	0.02		0.01	0.02A	0.02
Dec.	0.03	0.01		0.02		0.02				Risk Rating: M
Mar.	0.03	0.01		0.02		0.03
EPS (FY)	$0.09	$0.06		$0.06	$0.07	$0.09				Gregory Burns
EPS (Cal.)	$0.08	$0.06	$0.07	$0.08
					[phone]
P/E (FY)					15.6x	12.1x				([e-mail])
		15.6x	13.6x
P/E (Cal.)

EBITDA (mil)	$48.00	$62.70	$70.10	$72.40	$75.10	$76.90
EV / EBITDA				4.5x		4.2x

Note: NR = Not Rated. Risk Ratings: H = Highly risky; M = Moderately risky. F2019-F2022E EPS estimates assume a fully diluted share count of 178 million 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. *EPS including amortization expense.

Year	F2013	F2014	F2015	F2016	F2017	F2018	F2019	F2020	F2021E	F2022E
Rev.(Mil.)	$131.9	$160.9	$197.9	$231.3	$283.6	$318.2	$331.5	$353.1	$359.2	$389.0
GAAP EPS	$0.04	$0.03	$0.03	$0.04	$0.06	$0.08	$0.09	$0.06	$0.07	$0.09

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.

• Revenue in 2Q:F21 increased 1.6%, year over year, to $90.8 million, topping our $85 million estimate as steady growth in Sify's Data Center and Cloud services were complemented by a strong rebound in the company's Technology Integration services.
• Continued spending discipline led to a 12% gain in EBITDA to $18.3 million, which also beat our $16.4 million estimate. Lower interest expense resulted in net income increasing 35% and EPS of $0.02, as compared with our $0.01 estimate.
• The pandemic is still pressuring portions of Sify's business, which in turn, mask the strong growth from the company's Data Center Centric IT services.
• We think this is where investor attention should remain focused as, in our view, Sify's integrated Data Center, Cloud and Network services will make it a primary beneficiary of India's digital transformation.
• Sify is managing its liquidity well and generated strong cash flow in 2Q:F21, ending the quarter with cash of $65 million, up from $55 million at the end of 1Q:F21.
• SIFY stock trades at just 4.2x our new F2022 EBITDA estimate, a significant discount to the peer group range of 8x-12x estimated 12-month forward EBITDA.

Key Statistics

	Analysts Covering			1
	Market Cap (Mil)			$200
	Enterprise Value			$326
	52-Week Range (NASDAQ)			1-1
	5-Year EPS CAGR			20%
				127,000
	Avg. Daily Trading Volume
				178.514
	Shares Out (Mil)
				24.1
	Float Shares (Mil)
				86%
	Insider Ownership
				1%
	Institutional Holdings

Annualized Dividend	Nil
Dividend Yield	N/A
FCF Per Share (F2022E)	$0.06
FCF Yield (F2022E)	5.5%
Net Cash Per Share (F2022E)	($0.50)

			1.4x
Price to Book Value
			8.2%
Return on Equity (F2022E)
			40%
Total Debt to Capital
			2.1x
Interest Coverage Ratio

Short Interest %	N/A%
Short Interest Days To Cover	1.3

Russell 2000		1,626
		5.1%
Russell 2000 - Last 12 Months
		-14.6%
SIFY - Last 12 Months

• The $4 price target is based on 12x our F2022 EBITDA estimate of $77 million, less projected net debt of $130 million. The $4 price target implies 44x our new F2022 EPS estimate of $0.09.

• Given the company's growth potential and modest leverage of 1.25x net debt-to-

TTM EBITDA, we maintain our Moderately Risky rating.

Demand for Sify's Data Center Centric services remains strong as 2Q:F21 revenue topped our forecast. The pandemic is still impacting certain areas of Sify's business, but after taking a step back in the June quarter, the company returned to revenue growth in

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SIFY TECHNOLOGIES LIMITED SPONSORED ADR

2Q:F21, increasing 1.6% to $90.8 million, beating our $85 million estimate. We think the pandemic is driving demand for Sify's infrastructure and cloud services, as it is accelerating the digital transformation and cloud adoption of businesses in India. The company's results in 2Q:F21 bear this out with revenue from Data Center Centric IT services increasing 12%. By business line, Sify's Data Center, Cloud and Technology Integration Services grew 36%, 9% and 22% respectively. While Data Center and Cloud grew in line with our expectations, we estimated Technology Integration Services to decline 40%, in line with 1Q:F21. This project-based part of Sify's business saw a sharp decline in activity at the onset of the pandemic, but it appears businesses are now starting to move forward with their digital transformation and optimization plans, a positive sign, in our view, for the future demand for Sify's Data Center, Cloud, and Network services. However, two areas of Sify's business continue to be pressured by the pandemic: the Network services, which declined 8% as the pandemic reduced consumption of low-margin voice services and Application Integration Services, where the pandemic led to a steep reduction in Sify's iTest services. The declines in these two areas are somewhat masking the strong growth of Sify Data Center and Cloud services, but we expect the company's true growth to become more evident as the pandemic-related challenges subside.

EBITDA in 2Q:F21 also came in above our expectations. The gross margin widened 110 basis points to 38.2% owing to a favorable revenue mix, with higher-margin Data Center and Cloud Services making up a greater percentage of revenue. Management is also effectively managing spending during the pandemic, with operating expenses declining $0.5 million from a year ago, coming in slightly below our forecast. As a result, EBITDA increased 12% to $18.3 million, topping our $16.4 million estimate. Net income increased 35% due mainly to a reduction in interest expense. However, rounding resulted in EPS of $0.02, which topped our $0.01 estimate but was in line with 2Q:F20.

Valuation

Key Risks

We maintain a $4 price target. While the COVID-19 virus is curbing economic growth in the near term, it does not change the long-term digital transformation of India's economy. We think Sify will be a primary beneficiary of this transformation. With the stock trading at 4.2x our projections on a F2022 EV/EBITDA basis, SIFY is valued at a significant discount to peers in the India Telecom and application and technology integration markets, that trade in a range of 8x-12x EV/EBITDA. Given Sify's growth potential, we think the stock deserves to trade at the high-end of the peer group range. Thus, we base the $4 price target on 12x our F2022 EBITDA estimate of $77 million, less projected net debt of $130 million, to yield $795 million, or $4.50 on a per share basis. Given the company's growth potential and modest leverage of 1.25x net debt-to- TTM EBITDA, we maintain a Moderately Risky rating.

Foreign exchange

Concentrated ownership

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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		JunA	SepA	DecE	MarE		JunE	SepE	DecE	MarE
	F2019	F2020	F2021E	F2022E
Total revenue	331.5	84.9	89.3	90.6	88.2	353.1	80.9	90.8	92.4	95.1	359.2	91.3	95.2	99.5	103.1	389.0
COGS	209.8	54.6	56.2	57.4	53.3	221.4	47.7	56.1	57.4	59.1	220.4	56.2	58.8	61.5	63.9	240.5
Gross profit	121.7	30.3	33.2	33.3	34.9	131.7	33.2	34.6	35.0	36.0	138.8	35.1	36.4	37.9	39.1	148.6
SG&A	73.7	16.8	16.9	16.3	19.0	69.0	15.4	16.4	17.1	17.6	66.5	17.6	17.8	17.9	18.3	71.7
EBITDA	48.0	13.4	16.3	17.0	16.0	62.7	17.7	18.3	17.9	18.4	72.4	17.5	18.6	20.0	20.8	76.9
D&A	23.6	7.8	8.1	9.3	10.1	35.2	10.1	10.3	10.2	10.1	40.7	10.2	10.2	10.3	10.3	41.0
EBIT	24.4	5.7	8.2	7.7	5.9	27.5	7.6	8.0	7.7	8.3	31.7	7.2	8.4	9.7	10.5	35.9
Interest and other expense (income)	10.5	1.0	4.0	3.9	4.3	13.2	3.6	2.2	4.1	4.1	14.0	4.1	4.1	4.1	4.1	16.4
Other expense (income)	(2.6)	(0.2)	(0.1)	(0.1)	(1.0)	(1.4)	(0.1)	(0.5)	(0.5)	(0.5)	(1.7)	(0.5)	(0.5)	(0.5)	(0.5)	(2.2)
EBT	16.5	4.9	4.3	3.8	2.6	15.7	4.1	6.4	4.2	4.7	19.4	3.7	4.9	6.2	7.0	21.7
Taxes	-	1.6	1.4	1.3	0.6	4.8	1.4	2.4	1.3	1.4	6.5	1.1	1.5	1.9	2.1	6.5
Net income	16.5	3.3	2.9	2.5	2.1	10.8	2.6	4.0	2.9	3.3	12.8	2.6	3.4	4.3	4.9	15.2
EPS - diluted	$0.09	$0.02	$0.02	$0.01	$0.01	$0.06	$0.01	$0.02	$0.02	$0.02	$0.07	$0.01	$0.02	$0.02	$0.03	$0.09
Dividend	$0.02	-	-	-	-	$0.02	-	-	-	-	$0.02	-	-	-	-	$0.02
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	36.7%	35.7%	37.1%	36.7%	39.6%	37.3%	41.0%	38.2%	37.9%	37.8%	38.7%	38.4%	38.2%	38.1%	38.0%	38.2%
EBITDA	14.5%	15.8%	18.3%	18.7%	18.1%	17.8%	21.9%	20.2%	19.4%	19.3%	20.1%	19.1%	19.5%	20.1%	20.2%	19.8%
Operating margin	7.4%	6.7%	9.2%	8.5%	6.7%	7.8%	9.4%	8.8%	8.4%	8.7%	8.8%	7.9%	8.9%	9.8%	10.2%	9.2%
Net margin	5.0%	3.9%	3.3%	2.8%	2.3%	3.1%	3.3%	4.4%	3.2%	3.5%	3.6%	2.8%	3.6%	4.4%	4.7%	3.9%
Growth YoY
YoY
Total revenue	4.2%	17.8%	5.4%	2.8%	2.0%	6.5%	(4.7%)	1.6%	2.0%	7.8%	1.7%	12.8%	4.9%	7.6%	8.3%	8.3%
Gross profit	8.8%	7.1%	5.8%	10.5%	9.3%	8.2%	9.6%	4.4%	5.3%	3.0%	5.5%	5.8%	5.1%	8.3%	8.7%	7.0%
EBITDA	9.3%	17.9%	37.6%	40.0%	26.3%	30.6%	31.9%	12.1%	5.7%	15.2%	15.4%	(1.5%)	1.7%	11.8%	13.0%	6.3%
EBIT	9.3%	17.9%	37.6%	40.0%	26.3%	30.6%	31.9%	12.1%	5.7%	15.2%	15.4%	(1.5%)	1.7%	11.8%	13.0%	6.3%
EPS	16.2%	7.5%	(24.5%)	(47.4%)	(56.2%)	(34.2%)	(20.4%)	34.6%	16.3%	60.1%	18.3%	(2.7%)	(13.7%)	47.7%	47.8%	18.4%

Note: Historical results and estimates assume constant currency USD/INR exchange rate of 65

Sources: Sidoti & Company, LLC. estimates and company reports

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SIFY TECHNOLOGIES LIMITED SPONSORED ADR

Table 2: Sify Technologies Ltd.. Cash Flow Statement(Dollars in millions except where noted)

	F2019	F2020	F2021E	F2022E
Net income	$16.5	$10.8	$12.8	$15.2
D&A	23.6	32.4	39.9	41.0
Provision for doubtful accounts	8.3	-	-	-
Stock compensation	0.1	0.2	0.2	0.2
Net finance (income) / expense	10.5	-	-	-
Unrealized (gain) / loss on account of exchange differences	1.0	-	-	-
Amortization of leasehold prepayments	0.3	-	-	-
Accounts receivable	(33.6)	0.1	(3.3)	(16.4)
Inventory	(16.5)	4.2	0.1	(2.0)
Prepaid and other current assets	1.9	-	-	-
Accounts payable	18.5	(1.4)	(0.6)	11.2
Employee benefits	0.4	-	-	-
Deferred income	-	-	-	-
Income taxes (paid)/ refund received	(8.7)	-	-	-
Cash from operating activities	22.2	46.3	49.0	49.1
PPE	(58.4)	(63.6)	(35.9)	(38.9)
Intangible assets	(2.7)	-	-	-
Investments in debt securities	(0.6)	-	-	-
Finance income received	0.4	-	-	-
Cash from investing activities	(61.1)	(63.6)	(35.9)	(38.9)
Proceeds (purchase) of common stock	14.4	-	-	-
Debt	48.2	16.5	-	-
Finance expenses paid	(10.9)	-	-	-
Proceeds (repayment) finance lease liabilities	(1.4)	-	-	-
Dividend and distribution tax	(3.4)	(2.6)	-	-
Cash from financing activities	47.0	13.9	-	-
FX	-	-	-	-
Net change in cash	8.1	(3.4)	13.1	10.2
Cash at the beginning of period	2.2	10.3	7.0	20.0
Cash at the end of period	10.3	7.0	20.0	30.2
FCF	(36.2)	(17.3)	13.1	10.2
FCF / share	($0.20)	($0.10)	$0.07	$0.06

Note: Historical results and estimates assume constant currency USD/INR exchange rate of 65

Sources: Sidoti & Company, LLC. estimates and company reports

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SIFY TECHNOLOGIES LIMITED SPONSORED ADR

Table 3: Sify Technologies Ltd., Balance Sheet(Dollars in millions except where noted)

	F2019	F2020	F2021E	F2022E
Cash	29.8	7.3	39.5	49.7
Restricted cash	4.8	4.8	4.8	4.8
Inventory	$26.4	$22.1	$22.0	$24.0
Accounts receivable	194.3	194.2	197.5	214.0
Prepaid expenses	6.2	6.2	6.2	6.2
Total current assets	261.4	234.7	270.0	298.7
PPE	132.9	164.1	160.1	158.0
Intangible assets	8.9	8.9	8.9	8.9
Lease payments	20.3	20.3	20.3	20.3
Other assets	28.2	28.2	28.2	28.2
Other investments	3.0	3.0	3.0	3.0
Total assets	454.7	459.1	490.5	517.1
Finance lease obligations	1.1	1.1	1.1	1.1
Borrowings	51.2	67.8	67.8	67.8
Bank overdraft	23.9	23.9	23.9	23.9
Accounts payable	125.4	124.0	123.4	134.7
Deferred income	-	-	-	-
Total current liabilities	222.1	250.1	249.5	260.7
Finance lease obligations	0.4	0.4	0.4	0.4
Long-term debt	51.2	51.2	51.2	51.2
Employee benefits	2.6	2.6	2.6	2.6
Other liabilities	18.4	18.4	18.4	18.4
Total liabilities	294.7	322.7	322.1	333.3
Share capital	27.8	27.9	28.1	28.2
Share premium	297.7	297.7	297.7	297.7
Share based payment reserve	4.7	4.7	4.7	4.7
Other components of equity	0.8	(31.1)	(12.0)	(12.0)
Accumulated defecit	(165.2)	(157.0)	(144.2)	(129.0)
Total stockholders' equity	165.8	142.3	174.3	189.6
Total liabilities and equity	460.6	465.0	496.4	523.0
ROE	10.9%	7.7%	7.6%	8.2%
Total Debt-to-capital	38.2%	45.5%	40.6%	38.6%
Net debt-to-TTM EBITDA	1.91x	2.08x	1.36x	1.15x
Cash (debt) per share	($0.52)	($0.73)	($0.55)	($0.50)

Note: Historical results and estimates assume constant currency USD/INR exchange rate of 65

Sources: Sidoti & Company, LLC. estimates and company reports

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Appendix

Required Disclosures

Required Disclosures

Sify Technologies Limited Sponsored ADR (SIFY-$1.09) NR Price Target: $4 Risk Rating: M

Rating and Price Target History Table

Action	Date	Px	Rating PT Risk Rating
Initiation	11/27/17	1.7	NR	3	H
Risk Rating 4/17/18	2.1			M
PT	7/13/18	2		4

Valuation

Key Risks

We maintain a $4 price target. While the COVID-19 virus is curbing economic growth in the near term, it does not change the long-term digital transformation of India's economy. We think Sify will be a primary beneficiary of this transformation. With the stock trading at 4.2x our projections on a F2022 EV/EBITDA basis, SIFY is valued at a significant discount to peers in the India Telecom and application and technology integration markets, that trade in a range of 8x-12x EV/EBITDA. Given Sify's growth potential, we think the stock deserves to trade at the high-end of the peer group range. Thus, we base the $4 price target on 12x our F2022 EBITDA estimate of $77 million, less projected net debt of $130 million, to yield $795 million, or $4.50 on a per share basis. Given the company's growth potential and modest leverage of 1.25x net debt-to- TTM EBITDA, we maintain a Moderately Risky rating.

Foreign exchange

Concentrated ownership

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the report in the next 12 months. Of securities rated in other Sidoti Company Sponsored Research reports, Sidoti has received investment banking income from 0 companies (0%) in the past 12 months. Investment banking services, as defined under FINRA Rule 2241, include, among other things, acting as an underwriter in, or as a member of the selling group in, a securities underwriting. Sidoti's role in any issuer's investment banking transaction can be viewed in that issuer's filings at www.sec.gov.

Sidoti has non-research employees who will seek compensation for brokerage commission revenue in connection with market trading the securities of this company. Sidoti & Company, LLC has received compensation for non-investment banking services on the Small-Cap Universe, and expects to receive additional compensation for non-investment banking services on the Small- Cap Universe, paid by issuers of securities covered by Sidoti & Company, LLC analysts. These non-investment banking services include investor relations services and software, financial database analysis, advertising services, brokerage services, advisory services, investment research, investment management, non-deal road shows, and attendance fees for conferences sponsored or co-sponsored by Sidoti & Company, LLC. This company has paid a fee to Sidoti & Company, LLC to present at the September 2020 Virtual Investor Conference.

Sidoti Analysts. Sidoti policy does not allow an analyst or a member of their household (i) to own, trade, or have any beneficial interest in any securities of any company that analyst covers, or (ii) serve as an officer or director of a covered company. Sidoti employees, including research analysts, receive compensation that is based in part upon the overall performance of the firm, including revenues generated by Sidoti's investment banking and brokerage activities, but compensation is not directly related to investment banking or brokerage revenues.

Sidoti maintains and enforces written policies and procedures reasonably designed to prevent any controlling persons, officers (or persons performing similar functions), or employees of Sidoti from influencing the activities of research analysts and the content of research reports prepared by the research analyst. Sidoti research analysts seek to have management of their covered companies meet with investors during non-deal road shows. Analysts' compensation may be related to their success in scheduling non-deal road shows. This approach could be viewed as presenting potential conflicts of interest.

Reprints of Sidoti & Company, LLC reports are prohibited without permission. Additional information is available upon request. For any further questions, please contact the Chief Compliance Officer at Sidoti.

Analyst Certification. Gregory Burns certifies that this report accurately reflects his/her personal views about the subject securities and issuers and that none of the research analyst's compensation was, is or will be, directly or indirectly, related to the analyst's specific recommendations or views contained in this research report.

Source

Key Statistics data is sourced from FactSet Research Systems

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