Sify Technologies Limited (NASDAQ:SIFY) latest quarterly results can be described as mixed. Despite a net loss and top-line weakness, the bigger story was impressive growth in the company’s data center services segment. We can highlight an ongoing shift in the revenue mix toward high-margin and value-added opportunities set to support stronger profitability going forward.
We last covered Sify back in 2021 noting the company was set to benefit from strong trends in cloud adoption as a leading provider of information and communications technology (ICT) services out of India. While many of those trends did play out, a lot has happened over the period including a disappointing stock price performance.
That being said, we remain bullish on the long-term prospects for SIFY eyeing an improving outlook and new operational tailwinds. Indeed, comments by management cite a boost in demand for digital infrastructure solutions including interest in artificial intelligence. Ultimately, we see value in the stock at the current level.
SIFY Earnings Recap
SIFY reported Q3 fiscal 2024 revenue of $INR 8.7 billion, approximately $104 million, down -2.7% year-over-year. While a net loss of $INR 14 million, reversed a profit of $INR 258 million in the period last year, adjusted EBITDA favorably climbed by 4.3% y/y. The adjusted EBITDA margin of 19.5% climbed from 18.2% in Q3 last year.
We mentioned the shifting sales mix. In this case, “Data Center Services” posted a 13% increase in revenue, partially balancing a -22% decline in “Digital Services”.
Management explained during the earnings conference call that some of that weakness reflected the timing of some large projects in the period last year, as well as a broader theme of selectivity in terms of “consciously” taking on projects that have a longer-term recurring sales component and can generate higher value over time. There is also an expectation for a rebound in this segment over the next few quarters.
As it relates to data centers, Sify has currently deployed 100 megawatts across 6 cities and 11 facilities. The outlook is for a new site to go online in January with 38 megawatts of capacity and another 52 through fiscal 2025 under construction.
While not offering official financial guidance, the expectation here is for stronger trends over the next several quarters.
Sify ended the quarter with a cash position of $INR 6.0 billion, or $72 million, against $INR 23 billion in total debt. Considering the annualized adjusted EBITDA run rate of around $INR 6.8 billion, the net debt to EBITDA leverage ratio of 2.5x is stable in our opinion.
What’s Next For SIFY?
With a current market value of just under $300 million, SIFY is an interesting small-cap given its positioning within tech and exposure to the Indian economy. With GDP growth expected above 6% this year, India has largely outperformed expectations, rivaling China as an emerging market growth engine.
The attraction here is a sense that the country still has some catching up to do in terms of digitalization converging with more developed markets. These include high-level drivers across cloud computing, 5G wireless, the Internet of Things, cybersecurity, and AI.
The company notes that spending by Indian enterprises still trails global benchmarks but has accelerated in recent years. The opportunity for SIFY is to help companies integrate more modern platforms. CEO Mr. Kamal Nath summarized the signs of this demand building as the focus point of the company’s broader strategy. From the earnings press release:
As Enterprises pursue their digital transformation and digitalization objectives, they are also re-calibrating their digital infrastructure across hybrid cloud, network, security and edge infrastructures. Customer experience, business continuity, cyber security, application modernization, and overall adoption of AI models are the prime drivers for this recalibration.
We continue to invest in bringing more Data Center capacity to the market, extending our network footprint and skilling our people on new tools. These investments are being made ahead of the curve and will reflect on our net profit for the near future
Overall, we believe this backdrop supports a runway for SIFY to build and consolidate its market share. According to consensus estimates, the outlook here is for 15% revenue growth through fiscal 2025, and 12% in 2026. EPS should also leverage high from the $0.01 forecast this year pending final Q4 results to $0.06 by fiscal 2026.
The bullish case is that SIFY can generate even more profitable momentum and outperform estimates as margins firm with the shifting services strategy. On the side of valuation, the figure that stands out is an EV to EBITDA multiple of around just 5x.
While a discount is warranted given the recently “mixed” results and top-line weakness, the level here may be underpricing SIFY’s long-term growth potential.
There’s a lot to like about SIFY as an emerging markets tech leader well-positioned to capture secular tailwinds in the Indian economy. We can keep shares in a higher-risk category considering the FX exposure and volatile earnings, but the latest trends support a positive outlook in our opinion.
A deterioration of the macro scenario or weaker-than-expected results over the next few quarters would likely open the door for a deeper selloff. Monitoring points here include cash flow trends, the adjusted EBITDA margin, as well as the momentum in the data centers segment.