SIFY Meeting Note for 1/28/2021
Raise Target To $5 (From $4)
3Q: F21 Revenue, EBITDA Beat Our Forecasts As Demand For Sify’s Data Center Centric Services Remains Strong
Sify is managing its liquidity well and generated strong cash flow in 2Q: F21, ending the quarter with cash of $68 million, up from $65 million at the end of 2Q: F21, and debt of $138 so the company remains lightly leveraged.
SIFY stock trades at just 6x our new F2023 EBITDA estimate, a significant discount to the peer group range of 8x-12x estimated 12-month forward EBITDA.
We raise our price target to $5 (from $4), which is based on 12x our F2023 EBITDA estimate of $91.5 million, less projected net debt of $127 million. The $5 price target implies 42x our new F2023 EPS estimate of $0.12.
Given the company’s growth potential and modest leverage of 1.0x net debt-to-TTM EBITDA, we maintain our Moderately Risky rating.
Demand for Sify’s Data Center Centric services remains strong as 3Q: F21 revenue topped our forecast. The pandemic is still pressuring some areas of Sify’s business, mainly its Network and Application integration services, but growth in the company’s Data Center Centric services has remained strong through the pandemic and more than offset declines in these other two segments. Revenue growth accelerated in 3Q: F21 relative to the 1.6% growth Sify delivered in 2Q: F21, with sales rising 7% to $96.9. This topped our $92.4 million estimates. The pandemic is accelerating the digital transformation and cloud adoption of businesses in India which in turn is driving demand for Sify’s services as was evident this quarter where revenue from Data Center Centric IT services increased 21%. By business line, Sify’s Data Center, Cloud, and Technology Integration Services grew 46%, 26%, and 13% respectively. While Cloud and Technology Integration grew in line with our expectations, Data Center revenue growth was stronger than the 30% we projected. Given the strong demand, Sify will continue to add data center capacity this year, so the outlook for the continued growth of its Data Center and Cloud services remains strong. The two areas of Sify’s business that continue to be pressured by the pandemic are the Network Services and Applications Integration Services segments, which declined 5% and 21% respectively; both were in line with our expectations.
EBITDA in 3Q: F21 also came in above our expectations. The gross margin widened 80 basis points to 37.5% 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 staying roughly flat from a year ago. As a result, EBITDA increased 17% to $19.9 million, topping our $18.3 million estimates. Net income increased 56%, aided by a reduction in interest expense. As a result, EPS increased to $0.02 from $0.01 a year ago, but this was still in line with our estimate due mainly to rounding.
We raise our price target to $5 (from $4) on SIFY shares.
While the pandemic 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 likely be a primary beneficiary of this transformation. With the stock trading at 6.0x our projections on an F2023 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. We thus raise our price target to $5 (from $4), based on an unchanged 12x our F2023 EBITDA estimate of $91.5 million, less projected net debt of $127 million, to yield $970 million, or $5.40 on a per-share basis. Given the company’s growth potential and modest leverage, we maintain a Moderately Risky rating.
Gregory Burns (212) 894-3317
Sidoti & Company, LLC