Sify Seeks Own Identity

The Indian Internet firm is thinking outside the portal.
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Though it's often lumped in with

Rediff

(REDF)

(dubbed the Indian

Google

(GOOG) - Get Report

), the other Indian Internet company trading on the

Nasdaq

,

Sify

(SIFY) - Get Report

is thinking outside the portal.

It's understandable that the companies are usually paired in media coverage, being the only Indian Internet stocks available to U.S. investors. But Sify's business is threefold: In addition to its Web portal, the company boasts a chunk of the country's Net connectivity business and sells technology services to enterprise customers.

"If we want to invest and bring state-of-the-art technology, then we have to use it across the board in as many areas as possible," Sify CFO Durgesh Mehta told the JP Morgan Global Internet Conference on Tuesday.

Half the company's business is enterprise-related and half is on the consumer side, Mehta said. Within the consumer side, about 80% is access and about 15% is related to the portal.

U.S. investors, eager to get in on the burgeoning Indian market, have gobbled up the stock. Shares of Sify have climbed from $11.19 at the beginning of the year to hit $13.40 last week, a jump of nearly 20%. And analysts like what they see, too.

"Central to its strategy is to develop multiple revenue streams leveraging a common network infrastructure. With the enterprise business as the cash cow, the emerging businesses are growing toward critical mass and there is significant leverage potential from these opportunities, especially Internet-related businesses," Sameet Sinha of Kaufman Brothers Equity Research wrote in a recent note.

Sinha rates the company buy and has a price target of $17. The analyst expects to see strong revenue and EBITDA growth over the next few years.

"Sify is an opportunity to participate in broad economic growth in India; domestic investment in tech services and trend in outsourcing in international markets; growth in consumer services as disposable income escalates; and growth in Internet services and content, which is in its early stages," Sinha said. Kaufman makes a market in Sify.

Sify also seems poised for profitability. Excluding certain items, the company fell short of break-even for the quarter ended December 2005 by about $300,000. But CEO R. Ramaraj has indicated that the company is likely to turn its first profit for the quarter ending in March.

"We have modeled a break-even quarter for March 2006," said George Mihalos, vice president of research at Gilford Securities, which rates the company buy and has a $13 target price on the stock. Gilford Securities does not have an investment banking relationship with Sify. "We think it's possible that they will have modest profitability in the quarter."

Sinha projects a profitable quarter in the first quarter; Mihalos' model has the company turning a profit for the second quarter ending in September.

Sify's access business includes broadband to the home and a chain of public cybercafes on the consumer side. On the corporate side, Sify has about 45 % of the IP/VPN market in India, Mehta said.

The Indian market has a huge potential for growth, to be sure. But of the country's 1 billion people, only about 40 million people use the Internet, and moving people online in India is a different ballgame altogether when compared with the U.S. The level of PC penetration is less than 5%, Mehta said, and even assuming the 30 % annual growth rate continues, as has been the trend, it's unlikely that more than 12 million homes will have a computer by 2010.

"However, the number of Internet users is expected to grow to 100 million, so there is a huge opportunity in the public Internet access area," he said.

Sify has capitalized on the burgeoning number of Net users with its franchise Internet cafes, called "iways." The company has opened more than 3,100 of these broadband-connected cybercafes in India in 149 cities, at the rate of more than two cafes opening a day.

"Having the cybercafe presence allows them to cross-sell a lot of services," Mihalos said, like online advertising and services. Sify's focus is on online entertainment (it is the broadband partner for

Indian Idol

, yes, the counterpart to the U.S. version), education and e-commerce. Iways can also act as shops for those who don't have credit cards and thus cannot pay online, like buying railroad tickets, for instance.

"We are betting on broadband and betting on youth and that is the basis on which we are developing our content business," Mehta said.

In the enterprise sector, Sify offers application and network management. It also sells managed data centers and security services. The company has more than 1,200 clients in its enterprise business.

Still, could Sify be spreading itself too thin by trying to manage so many moving parts?

Mihalos said that has been a concern for investors, but Sify is better prepared to manage the challenge after recently restructuring the management team, with a dedicated executive in charge of each of the three business units.

"It does increase execution risks," Mihalos said. "There are so many different areas and so many different competitors. The same guys you're competing with on the portal front are not the same as those you're competing with on the corporate side."

But "I think they've made good progress in addressing these concerns," he said.