Sify Technologies : Sidoti & Company LLC, April 2023

April 25, 2023 | Company Sponsored Research Morning Meeting Note	Sidoti & Company, LLC
Earnings Release	Member FINRA & SIPC

Sify Technologies Limited Sponsored ADR (SIFY)

4Q:F23 Revenue Beat, Profit Missed Our Forecast; Sify's Data Center Investments Will Be A Major Catalyst For Revenue Growth And Improved Profitability In F2024-F2025; Maintain $7 Target

	F2022	F2023		F2024E		F2025E
		OLD	NEW	OLD	NEW	OLD	NEW
June	$0.03	$0.02A		$0.01		$0.02	$0.01
Sep.	0.03	0.01A		0.02	0.01	0.03	0.02
Dec.	0.03	0.02A		0.02	0.01	0.04	0.02
Mar.	0.03	0.01	0.00A	0.02		0.06	0.05

EPS (FY)	$0.12	$0.07	$0.06	$0.07	$0.04	$0.14	$0.10
EPS (Cal.)	$0.08	$0.04	$0.02E	$0.08	$0.06
P/E (FY)			21.8x		32.8x		16.4x
P/E (Cal.)			65.5x		21.8x

Note: NR = Not Rated. Risk Ratings: H = High; M = Moderate. F2022-F2025E EPS estimates assume 178 million fully diluted 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.

Year	F2016	F2017	F2018	F2019	F2020	F2021	F2022	F2023	F2024E	F2025E
Rev.(Mil.)	$231.3	$283.6	$318.2	$331.5	$353.1	$374.1	$415.8	$513.9	$563.8	$681.4
GAAP EPS	$0.04	$0.06	$0.08	$0.09	$0.06	$0.09	$0.12	$0.07	$0.07	$0.10

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.

• Demand for Sify's services remained strong in 4Q:F23, with revenue rising 30% year over year to $136.3 million, topping our $127 million forecast.
• Although revenue topped our estimate, operating profit was below our expectation.
• All segments outperformed our expectations with Digital Services, Data Center Services and Network Services growing 63%, 37%, and 11% respectively.
• Revenue mix narrowed the gross margin in 4Q:23. Sify is also increasing spending to support its infrastructure and services investments. Increased interest and depreciation expense from its data center investments is further crimping Sify's profitability.
• The expansion of its Data Center capacity will be a major catalyst of growth for Sify. We expect profitability to improve as revenue from these investments begins to flow later this year.
• At the end of F2023, net debt was $270 million, or 2.2x TTM EBITDA.
• Data center investments are likely to result in free cash outflows in F2024-F2025, but given Kotak Advisors' recent investment, the balance sheet's modest leverage, and cash generated from operations we think Sify has access to sufficient capital to fund its growth.
• We maintain our $7 price target, based on 70x our F2025 EPS forecast of $0.10.
• Our moderate risk rating considers Sify's growth potential and modest leverage.

Sify ended F2023 on a strong note with all segments topping our revenue forecasts… Revenue in 4Q:F23 grew 30% to $136.3 million, topping our $127 million forecast. The beat was mostly driven by Sify's Digital Services segment where revenue increased 63% to $43 million, topping our $35.9 million forecast. This segment is comprised of Sify's Cloud and Managed services as well as its Technology Integration and Application Integration services and while it did top our expectations in 4Q:F23, Technology Integration services are very project-basedwhich can lead to large quarterly fluctuations depending on project timing. To a lesser extent, Sify's other segments also delivered better-than-expectgrowth with Network

NR

Price Target: $7

Price: $1.31

Risk Rating: M

Gregory Burns [phone] ([e-mail])

Key Statistics

Analysts Covering

1

Market Cap (Mil)

$240

Enterprise Value

$441

52-Week Range (NASDAQ)

3-1

5-Year EPS CAGR

20%

Avg. Daily Trading Volume

92,000

Shares Out (Mil)

182.742

Float Shares (Mil)

24.1

Insider Ownership

86%

Institutional Holdings

1%

Annualized Dividend

Nil

Dividend Yield

N/A

FCF Per Share (F2025E)

($0.09)

FCF Yield (F2025E)

-7.6%

Net Cash Per Share (F2025E)

($2.00)

Price to Book Value

1.3x

Return on Equity (F2025E)

7.4%

Total Debt to Capital

Nil

Interest Coverage Ratio

1.5x

Short Interest %

N/A%

Short Interest Days To Cover

0.2

Russell 2000

1,789

Russell 2000 - Last 12 Months

-10.0%

SIFY - Last 12 Months

-48.4%

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SIFY TECHNOLOGIES LIMITED SPONSORED ADR

Services revenue rising 11% to $54 million as compared with our $52.5 million forecast. Finally, Data Center Services revenue growth was slightly better than we forecast with revenue rising 37% to $39.3 million versus our $38.6 million estimate.

Profitability in 4Q:F23 was below our forecast. Gross margin declined to 35.5% from 40.1% a year ago, missing our 39.1% forecast. The EBITDA margin also declined 410 basis points to 18.5%, missing our 20.5% forecast. The gross margin varies depending on the revenue mix in a given quarter, with lower-margin project work in its Technology Integration Services typically driving quarterly variances. That was the case this quarter. Sify is also adding to its headcount to support its network investments and the growth of its Digital Services. In our view, management, has been prudent in controlling spending, and although margins (excluding the change in revenue mix) were a little lower than we projected, the company is still delivering profitable growth and we expect to see margins rebound as the company's network and data center investments begin generating more meaningful revenue. EBITDA grew just 6.6% to $25.2 million, missing our $26.1 million forecast. However, net income declined 90%, due to higher depreciation and interest expense tied to Sify's Data Center and network investments, leading to EPS of $0.00, which was below our $0.01 forecast.

We remain bullish on the long-term growth potential of Sify's Data Center Services. Given the strong secular trends driving data demand in India, the data center market there is on the cusp of major growth, with the number of third-partydata centers projected to grow from 138 with 737 megawatts of capacity as of March 2022 to 183 with 1,752 megawatts of capacity. Sify is going to be a major part of this expansion, in our opinion. The company operates 11 data centers with about 100 megawatts of capacity and plans to add six new data centers with an additional 150 megawatts of capacity over the next 18 months. Over the next 4-5years, Sify aims to more than quadruple its data center capacity to 25 units and 400-500megawatts. This capacity expansion will provide a long runway of growth for Sify.

Sify has financing in place to fund expansion. Last November Sify received a $135 million commitment from Kotak Advisors' Special Situations Fund in the form of Compulsory Convertible Debentures, the first $55 million of which was called by Sify in 2022 and the remaining $80 million of capital is callable between F2022 and F2025. In addition to this lower-cost source of capital, Sify ended F2023 with a net debt-to-TTM EBITDA ratio of 2.2x. We think the company has the capacity to tap the debt markets as needed. Also, because the Kotak converts are considered as equity by the banks, we think Sify can safely borrow at least as much as it took in from Kotak. This should also be easier and less costly now that the Indian government has given the data center industry infrastructure status. We also project Sify to average about $80 million of annual operating cash flow in F2024 and F2025, which will help fund a good portion of the $305 million of total capital spending we project in F2024-F2025.

Exhibit 1: Sify Technologies Variance Analysis

	4Q:F23E	4Q:F23A	Var	4Q:F22A	4Q:F23A	% Change
Total revenue	$127.0	136.3	9.3	$104.7	136.3	30.2%
Gross Profit	49.7	48.4	(1.3)	42.0	48.4	15.2%
(%)	39.1%	35.5%		40.1%	35.5%
EBITDA	26.1	25.2	(0.9)	23.7	25.2	6.6%
(%)	20.6%	18.5%		22.6%	18.5%
Diluted EPS	$0.01	$0.00	($0.01)	$0.03	$0.00	(100.0%)

Sources: Sidoti & Company, LLC estimates and company filings

Valuation

Key Risks

We maintain our $7 price target on SIFY. The pandemic curbed India's economic growth for a short period but did not change the long-term trajectory of digital transformation. We view Sify as a primary beneficiary of this transformation. With the stock trading at enterprise value of just 4x our F2024 EBITDA projection and 3x our F2025 forecast, SIFY is valued at a steep discount to peers in the India telecom and application and technology integration market players group, which trade 8x-12x EBITDA. Given Sify's track record of revenue and EBITDA growth and its potential for continued expansion, we see merit to the stock trading at the high- end of the peer range. Our $7 price target is based on 70x our F2024 EPS estimate of $0.10. This valuation equates to 10x our F2025 EBITDA estimate of $159 million, less projected net debt of $415 million, to yield $1.2 billion, or $6.75 per share. The company's growth potential and modest leverage support our moderate risk rating.

Foreign exchange

Concentrated ownership

Sidoti & Company, LLC

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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	F2022	Jun	Sep	Dec	Mar	F2023	JunE	SepE	DecE	MarE	F2024E	F2025E
Total revenue	99.2	107.5	104.4	104.7	415.8	118.6	122.1	136.9	136.3	513.9	129.7	134.1	141.1	158.8	563.8	681.4
COGS	60.1	64.6	60.5	62.7	247.9	75.5	76.7	88.7	87.9	328.9	77.7	80.5	84.6	96.6	339.4	401.2
Gross profit	39.2	42.8	43.9	42.0	167.9	43.1	45.4	48.1	48.4	185.0	52.0	53.6	56.6	62.2	224.3	280.2
SG&A	16.8	20.1	19.7	18.4	74.9	19.6	22.2	23.2	23.2	88.2	24.3	25.1	26.4	27.3	103.0	121.1
EBITDA	22.4	22.7	24.2	23.6	92.9	23.5	23.2	24.9	25.2	96.8	27.7	28.5	30.2	34.9	121.3	159.0
D&A	12.3	12.2	12.9	13.2	50.5	14.3	14.7	15.3	16.8	61.1	18.1	19.3	20.6	22.0	80.1	94.9
EBIT	10.0	10.6	11.4	10.5	42.4	9.2	8.5	9.6	8.4	35.7	9.7	9.2	9.5	12.9	41.2	64.2
Interest and other expense (income)	3.5	3.9	4.3	4.1	15.8	4.3	5.6	6.5	5.6	22.0	8.2	8.2	8.2	8.2	32.7	41.5
Other expense (income)	(0.2)	(0.4)	(0.3)	(0.9)	(1.8)	(1.2)	(0.4)	(0.4)	(0.0)	(2.0)	(0.5)	(0.5)	(0.5)	(0.5)	(2.2)	(2.2)
EBT	6.8	7.1	7.3	7.2	28.4	6.1	3.4	3.5	2.8	15.7	2.0	1.5	1.9	5.2	10.7	24.8
Taxes	1.7	1.6	2.0	2.2	7.6	1.9	1.7	(0.5)	2.2	5.3	0.6	0.5	0.6	1.6	3.2	7.4
Net income	5.1	5.5	5.3	5.0	20.8	4.2	1.7	4.0	0.5	10.4	1.4	1.1	1.3	3.7	7.5	17.4
EPS - diluted	$0.03	$0.03	$0.03	$0.03	$0.12	$0.02	$0.01	$0.02	$0.00	$0.06	$0.01	$0.01	$0.01	$0.02	$0.04	$0.10
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	39.5%	39.9%	42.0%	40.1%	40.4%	36.3%	37.2%	35.2%	35.5%	36.0%	40.1%	40.0%	40.1%	39.2%	39.8%	41.1%
EBITDA	22.5%	21.1%	23.2%	22.6%	22.3%	19.8%	19.0%	18.2%	18.5%	18.8%	21.4%	21.3%	21.4%	22.0%	21.5%	23.3%
Operating margin	10.1%	9.8%	10.9%	10.0%	10.2%	7.8%	7.0%	7.0%	6.2%	6.9%	7.5%	6.8%	6.7%	8.1%	7.3%	9.4%
Net margin	5.1%	5.1%	5.1%	4.8%	5.0%	3.5%	1.4%	2.9%	0.4%	2.0%	1.1%	0.8%	0.9%	2.3%	1.3%	2.6%
Growth YoY
YoY
Total revenue	22.7%	18.4%	7.6%	(0.8%)	11.1%	19.5%	13.6%	31.2%	30.2%	23.6%	9.4%	9.8%	3.1%	16.5%	9.7%	20.9%
Gross profit	18.0%	23.7%	20.6%	(4.1%)	13.4%	10.0%	5.9%	9.7%	15.3%	10.2%	20.7%	18.1%	17.5%	28.4%	21.3%	24.9%
EBITDA	26.1%	24.2%	21.9%	5.6%	18.8%	4.9%	2.2%	2.9%	6.6%	4.1%	18.2%	22.9%	21.1%	38.4%	25.3%	31.1%
EBIT	31.7%	31.6%	27.0%	4.3%	22.5%	(8.3%)	(19.5%)	(15.6%)	(19.8%)	(15.9%)	5.1%	7.8%	(0.7%)	53.4%	15.5%	55.7%
EPS	91.3%	38.5%	36.5%	(10.5%)	29.7%	(17.6%)	(68.5%)	(25.0%)	(89.5%)	(50.1%)	(65.9%)	(37.6%)	(66.9%)	598.8%	(28.1%)	132.7%

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

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

Sidoti & Company, LLC

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	SIFY TECHNOLOGIES LIMITED SPONSORED ADR
Table 2: Sify Technologies Ltd.. Cash Flow Statement
(Dollars in millions except where noted)
	F2022	F2023	F2024E	F2025E
Net income	$19.3	$10.4	$7.5	$17.4
D&A	50.7	62.4	80.1	94.9
Provision for doubtful accounts	6.7	-	-	-
Stock compensation	0.4	0.2	0.2	0.2
Net finance (income) / expense	15.8	-	-	-
Unrealized (gain) / loss on account of exchange differences	(0.2)	-	-	-
Amortization of leasehold prepayments	-	-	-	-
Accounts receivable	(62.8)	(14.9)	(22.4)	(52.9)
Inventory	(15.3)	0.9	(1.2)	(6.8)
Prepaid and other current assets	10.6	-	-	-
Accounts payable	21.0	39.4	6.8	40.1
Employee benefits	(1.1)	-	-	-
Deferred income	-	-	-	-
Income taxes (paid)/ refund received	(19.6)	-	-	-
Cash from operating activities	34.5	100.9	70.9	92.8
PPE	(104.6)	(203.4)	(197.3)	(109.0)
Intangible assets	-	-	-	-
Investments in debt securities	(4.1)	-	-	-
Finance income received	-	-	-	-
Cash from investing activities	(112.4)	(203.4)	(197.3)	(109.0)
Proceeds (purchase) of common stock	0.7	-	-	-
Debt	85.5	108.3	84.6	38.5
Finance expenses paid	(17.1)	-	-	-
Proceeds (repayment) finance lease liabilities	(4.9)	-	-	-
Dividend and distribution tax	-	-	-	-
Cash from financing activities	64.2	108.3	84.6	38.5
FX	-	-	-	-
Net change in cash	(13.7)	5.8	(41.8)	22.3
Cash at the beginning of period	84.3	70.6	76.4	34.7
Cash at the end of period	70.6	76.4	34.7	56.9
FCF	(70.1)	(102.5)	(126.4)	(16.2)
FCF / share	($0.39)	($0.58)	($0.71)	($0.09)

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

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

Sidoti & Company, LLC

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SIFY TECHNOLOGIES LIMITED SPONSORED ADR

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

	F2022	F2023	F2024E	F2025E
Cash	58.2	64.0	22.2	44.5
Restricted cash	12.2	12.2	12.2	12.2
Inventory	$37.0	$36.2	$37.3	$44.1
Accounts receivable	216.3	231.3	253.7	306.6
Prepaid expenses	14.8	14.8	14.8	14.8
Total current assets	338.6	358.4	340.3	422.3
PPE	256.8	384.4	501.6	515.8
Intangible assets	9.8	9.8	9.8	9.8
Lease payments	-	-	-	-
Other assets	32.9	32.9	32.9	32.9
Other investments	7.3	7.3	7.3	7.3
Total assets	645.4	792.8	891.9	988.0
Finance lease obligations	-	-	-	-
Borrowings	109.4	109.4	109.4	109.4
Bank overdraft	5.7	5.7	5.7	5.7
Accounts payable	174.4	213.8	220.6	260.8
Deferred income	-	-	-	-
Total current liabilities	324.7	364.1	370.9	411.0
Finance lease obligations	-	-	-	-
Long-term debt	119.5	174.0	258.6	297.1
Employee benefits	2.2	2.2	2.2	2.2
Other liabilities	55.0	55.0	55.0	55.0
Compulsory convertible debentures	-	53.8	53.8	53.8
Other	-	-	-	-
Other	-	-	-	-
Total liabilities	501.4	649.1	740.6	819.2
Share capital	28.3	28.5	28.6	28.8
Share premium	302.7	302.7	302.7	302.7
Share based payment reserve	5.4	5.4	5.4	5.4
Other components of equity	1.2	(9.6)	(9.6)	(9.6)
Accumulated defecit	(114.9)	(104.5)	(97.0)	(79.6)
Total stockholders' equity	222.7	222.4	230.1	247.6
Total liabilities and equity	724.1	871.5	970.6	1,066.7
ROE	10.7%	5.1%	3.4%	7.4%
Total Debt-to-capital	50.7%	56.0%	61.5%	62.1%
Net debt-to-TTM EBITDA	1.76x	2.20x	2.79x	2.23x
Cash (debt) per share	($0.92)	($1.20)	($1.91)	($2.00)

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

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

Sidoti & Company, LLC

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