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Sify (SIFY) is an Indian company with a foothold in everything (I do mean everything) to do with the Internet in India.

According to the Internet & Mobile Association of India [IAMAI], at the end of 2005, India had about 38 million Internet users and the number is expected to rise to 100 million users by end of 2008. The current internet penetration in India is barely 5% and will only be 10% by 2008, when it reaches the 100 million mark.

Sify, so far, has been an underachieving company but there is hope for the future. Raju Vegesna (A Silicon Valley based investor and founder of ServerWorks, which was later sold to Broadcom (BRCM)) bought a majority stake (as well as became the chairman) in Sify late last year, igniting a run in the stock from about $5 to the mid teens. Raju Vegesna took over as the CEO in an announcement made on July 18, 2006 and Wall Street reacted negatively, pushing the stock down considerably in recent weeks.

I am however willing to give Raju Vegesna a chance to see if he can fulfill the potential of this company. Having a US-based CEO is a plus for Sify as it needs to expand internationally and find ways to make money overseas. This is exactly the number one priority of the new CEO. If he can gain leverage internationally there is a lot of potential for Sify in the short term, and the long-term prospects for this company are a no-brainer given the expected rise in Internet usage in India.

Sify has positioned itself to take advantage of this growth in a big way. Let us look at everything Sify is involved in:

1. Portals: Sify has one of the most popular portals in India (Sify.com) and recently launched India's first broadband portal SifyMax.com. One of its new initiatives is launching localized portals for major Indian cities. So far Sify has launched BangaloreLive.in and MumbaiLive.in, which are broadband portals with lots of local content for people living in those cities. This is a first in India and I see a lot of potential in this. Portals for other cities will be launched soon. The company recently bought a travel portal catering to the US - India travel segment called Globe-Travels.com. Portals are one area where Sify always underachieved but the recent initiatives are paying off. The portal business grew by 96% year-over-year when Sify reported results last quarter.

2. Cyber Cafes - Sify has about 3400 Internet cafes all over India (34 of these Cyber Cafes are company owned and the rest are franchisee owned). Most people in India cannot afford computers and their primary way of accessing the Internet is through Cyber Cafes. iWay also offers the following,

* VOIP - Sify iWay's offer cheap rates to call internationally and domestically.
* Internet training classes
* E-Ticketing, travel services and other eCommerce

3. GameDromes - Sify Gamedromes are specialized Internet gaming cafes. Gaming is still in its infancy in India, but like everything else, is growing at a tremendous rate.

4. MMORPG Gaming - Sify has teamed up with a South Korean company to customize its MMORPG game for Indian tastes. This game was recently launched so it is hard to measure its success.

5. Broadband - Sify has about 191,000 broadband cable subscribers. Sify is the third largest ISP overall and the biggest private player. In the recent quarterly earnings conference call they stated that they plan to have 350,000 subscribers by the end of this year.

6. Enterprise Services - Enterprise services provides the biggest chunk of revenues for Sify.

* VPN Services
* Hosting Services
* Application Services.
* Global Infrastructure Management Services (Huge potential here)

Competitors:

Portals: Rediff.com (REDF), IndiaTimes.com (Private), Yahoo (YHOO), Google (GOOG) and MSN (MSFT).
ISP: VSNL (VSL) and MTNL (MTE) and other local Indian outfits.
Sify also has several local competitors for its other business units.

The Good:

  • The new CEO, Raju Vegesna, has stated that focusing internationally is their number one priority.
  • Sify is focusing on content for its portal since it's very hard for Indian portals to compete with Yahoo and Google over services such as Email and Instant Messenger. This is the right strategy.
  • The new local portals for Indian cities.
  • Infrastructure Outsourcing - Sify won 2 US customers in Q4 that will generate revenues of $2 million each year for the next 5 years.
  • Gaming - Still very early in India but a huge market.
  • Online Travel - Another growing market but a lot of competition. Sify will have to leverage its portals and cyber cafes to promote the travel site.
  • Cyber Cafes - Lots and lots of potential here.
  • Potential buyout target - I have written about this in detail here.
  • The Bad:

  • Sify faces major competition in pretty much every field.
  • Sify has failed to take advantage of the mobile growth in India.
  • The stock is relatively unknown when compared to other Indian stocks even though it was the second Indian company to list on NASDAQ.
  • Competition and margins are tough in the ISP business.
  • The Numbers:

  • P/S 3.22
  • Cash $63.456 Million
  • P/E N/A
  • Long Term Debt $0.057 Million
  • SIFY 1-yr chart:


    Source: The Long and Short on Sify