RealMoney Silver - Show Me, Sify

Show Me, Sify
By Jay Somaney
RealMoney.com Contributor
9/4/2007 2:31 PM EDT

As India gets online, there's huge growth in store for its Internet service providers. That's an attractive investment for U.S. investors, but right now, only two of India's ISPs trade exclusively on U.S. exchanges. (The rest are ADRs.) Sify (SIFY) is one of them (Rediff (REDF) is the other; more on that in an upcoming column), but I can't say I'd rush to buy it at current levels. I'd rather wait for management to show me it can capitalize on the opportunities that lie ahead.

In addition to its ISP business, Sify also provides network management and electronic commerce services in India. On the enterprise side the company provides network and data services including IP-based VPN (virtual private network) services such as intranets, extranets and remote access applications.

Sify shares currently trade around $7.68 and the company has a market capitalization of $325 million. At the current price, Sify isn't exactly cheap; it's trading around 85.3 times estimated 2007 earnings of 9 cents a share and at 34.9 times estimated earnings of 22 cents a share for 2008. Compare that to peer Rediff, which trades for around 34 times estimated earnings of 45 cents a share for the year ending March 2009.

That's especially true if you look at the top-line growth rates, which are not much to write home about at the moment: Analysts expect Sify to earn 1 cent a share on revenue of $35.3 million for the September quarter. For 2007, the Street consensus is earnings of 9 cents a share on revenue of $144.4 million. For 2008, estimates move up to earnings of 22 cents a share on revenue of $157 million.

In the just-completed June quarter, the company showed strong growth in its enterprise segment. Revenue came in at $21.9 million, up 33% year over year and up 12.3% quarter over quarter. This is the business that is growing nicely for Sify at the moment.

The access media business was flat year over year and down quarter over quarter to $10.18 million. This segment is where the greatest potential and the greatest risk for the company lie going forward.

Unfortunately, Sify's ISP business is declining as it faces more competition from the likes of Mahanagar Telephone Nigam (MTE) , Videsh Sanchar Nigam Limited (VSL) , Bharti Telecom, et al. Sify must find a way to grab market share away from its competitors; more and more Indians will be coming online in the near future.

If the company can grab a larger piece of the pie, it could see growth that would dwarf what we're seeing from the Chinese companies that score so much investor interest at the moment because of their scorching revenue and earnings growth rates.

Sify also saw its advertising revenue decline by 24% year over year and 37.5% quarter over quarter to $1.09 million -- mainly because Sify outsourced its ad sales to Big Bang Media. Sify's management team has revised that strategy and going forward is building its internal sales team. The company plans to hire 300 to 400 people in sales and marketing over the next year or so, both overseas and in India.

That's just the start of Sify's plans to ramp up capital expenditures. Management has indicated that capex for 2007 will be $14 million; for 2008, the capex budget is $36 million. The company is spending that money on new office space in Bombay, expanding its network, buying equipment and expanding its data center in Bombay in order to meet the exploding demand from the enterprise segment.

Sify also is establishing a new model for its chain of cyber cafes. Newer cafes offer ATMs, snack and coffee bars and flat-panel televisions. The cost of these new model cafes will be borne by franchisees. I like that strategy. It will bring incremental revenue (currently, this segment accounts for $10 million to $11 million per quarter) to Sify at a minimal cost. Because these locations are pretty spread out, I don't expect the new cyber cafes to cannibalize the old ones.

There's a tremendous market opportunity for Sify going forward, and its new management team, led by CEO Raju Vegesna, is certainly not be underestimated. Vegesna's a seasoned pro and a venture capitalist, having bought and sold a few of his companies to bigger IT firms.

However, until we see the company start to harness that opportunity, call me Sideline Sam. Sify must show better traction in its broadband initiatives and reduce the churn rate in that segment -- these are key to its success. India's Internet penetration is very low at the moment but like wireless cellular technology, which also started very slowly and then kicked in incredibly fast, this sector is critically important for Sify. Management needs to show that it's able to withstand competition from the telcos, not an easy task given that at present, the telcos control access to the homes.

Until the next time, happy investing.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Sify and Rediff.com to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.