Sify to Enter Long-Distance Marketplace - How Will It Fare?

Sify Ltd. (SIFY) announced last week that its subsidiary, SifyComm, received licenses from Department of Telecommunications to offer National Long Distance [NLD] and International Long Distance [ILD]. The licenses will enable SifyComm to offer Domestic Leased Circuits [DLCs] and International Private Leased Circuits [IPLCs] in addition to Long Distance Subscriber Telephony services. Sify is a leader in VPN services in India and this will enable it to broaden its offerings.

On the one hand it would seem that the market reacted positively to this news as well as the recent CFO departure and thus caused the run-up in the stock price the last few days. But I am not so sure. You see the run up in the recent stock price has coincided with the run-up in Rediff’s (REDF) stock price as well. We will have to see the pattern the next few days.

What does the deal mean for Sify?

First of all, Sify only has a 74% stake in SifyComm as the rest of the stake is held by Infinity Satcom Universal [P] Ltd, which coincidentally is owned by Mr Anand Raju, the brother of CEO Raju Vegesna. The reason is that the existing regulations stipulate that not more than 74 per cent of the issued, allotted, subscribed, and outstanding share capital of the company shall be held by Non-Resident Indian’s [NRIs].

How does it affect the bottom line?

I am not sure how it affects the bottom line. Sify’s VPN marketshare has been decreasing the last few quarters as competition has increased. Recently, AT&T (T) also received the licenses for NLD and ILD. I also read about British Telecom (BT) applying for licenses. All of these international players as well domestic companies want a piece of the VPN business.

According to this article, the NLD market in India is estimated to be around Rs 4,000 crore or $870 million. Also, according to the linked article, ILD market was around Rs 4,346 crore in 2003-2004 and I am sure is much bigger now. I am sure the increasing call center traffic play a role as well.

The opportunity here is huge but the competition is also huge. Will Sify be able to take advantage?

Disclosure: I am long SIFY