Sify Posts Another Weak Quarter: So Far, CEO Raju Vegesna Has Failed

I realize that Raju Vegesna (pictured) only took over as the CEO in July of 2006 but so far he has failed to turn Sify Limited (SIFY) around. The fact is he bought the majority stake in Sify back in November of 2005 so he as been with the company as its chairman for over a year now. I wrote positively about Raju Vegesna for making the right moves back in September 2006 but it seems like the turnaround will take a long time if it does materialize.

Let’s look at the third quarter numbers: (ended December 31st)

• Sify posted revenues of $31.5 million - 15.8% YoY and 1.0% QoQ.
• Net profit of $0.94 million compared to a net loss of $0.24 million.
• Revenue declined considerably in the Retail Internet Services division both QoQ and YoY.
• No triple digit growth in the Portals division.

As you would expect the stock went down almost 14% yesterday.

Some more things that worry me:

• The management team used the excuse that they were focused with the restructuring during the quarter.
• I am not sure if Raju Vegesna had a vision for Sify when he bought the majority stake in the company. I haven’t seen any major signs as of yet. I will give him the benefit of the doubt for now that some new initiatives might be in the pipeline.
• There was no mention of the National Long Distance [NLD] and International Long Distance [ILD] licenses Sify’s subsidiary recently received.
• After the launch of Bangalorelive.in and Mumbailive.in we still haven’t seen a new city specific site launched. Mumbailive.in was launched back in June 2006 and Bangalorelive.in was launched even before that. How come no new city specific site has been launched since then? Is the local portal idea not working? I thought this would be a good idea but they obviously haven’t worked if you look at the portal revenues. Sify has several sites and all of them combined bring in less revenue than Rediff.com (REDF). How about showing the revenues from each site?
• What was the growth in broadband subscribers? Any plans for Wimax?
• Conference call showed how little interest there is in Sify. The only question asked was from the lone Analyst covering Sify.
• How about some user generated content for its web portals. Sify obviously needs someone from Rediff to show them how to make money from there portals.

I think Sify is dead money for now unless they announce something huge or there is a buyout. Management claimed it will take until the end of this year to turn this thing around. Internet in India still hasn’t boomed so there is still time for this company to turn around.

As for me, I sold one-third of my holdings after last quarters disappointing earnings came out and didn’t add anything this quarter. My average is in the 6s so at this point I am going to wait it out. After all of this, I think this could still be a good long-term opportunity if management can turn this around. I am willing to give Raju and his team until the end of this year to turn this thing around. By the way, Asif Suria of Sinletter.com made a good call earlier this month to sell Sify from his model portfolio with a gain of 18.81%

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Meanwhile, Sameet Sinha, Senior Equity Research Analyst, at Kaufman Bros. downgraded the stock to a ‘Hold’ from a ‘Buy.’ The price target was lowered to $8 from $13.

Following is an excerpt from the note he sent to clients:

• Complete overhaul under progress. In Enterprise services, management is working on a complete operational overhaul of sales and support teams to improve efficiency and customer interface. For Access Media, management is looking to increase the revenue growth and profitability of the cyber cafes. All this is happening with a team that is relatively new and looking to install the right systems. We believe that until a permanent CFO is put into place, it will be difficult to coalesce this strategy.
• Bad debt expense clouds the picture. As part of the clean up process, bad debt, which had been maintained on the books, is now being expensed. The team is taking a conservative view on this item, while negotiations are on with the customers about the concerned payments. We believe that this cleanup will also continue for some time.
• We have tweaked our estimates. Our new fiscal 2007 revenue estimate is $122.5 million, up from $122.1 million and adjusted EBITDA is $16.2 million, down from our previous estimate of $17.6 million. Our fiscal 2008 revenue estimate is $144.7 million, down from $144.9 million and adjusted EBITDA is $20.5 million, down from $28.8 million.
• We have reduced our price target to $8 from $13. This utilizes a 10-year forecast of the company’s estimated unlevered free cash flow discounted at the cost of equity of 13.6%.
• Risks for Sify are: competition, presence in nascent markets and uncertainty due to recent management changes.
• Bottom line. We believe the long term opportunity for SIFY is intact but in the near term we have reduced visibility of operations and financials. Raju Vegesna and his new management team is changing the profile of the company (to create a streamlined and synergistic business), which is not a easy process and is affecting revenues and expenses. The changes needed are much more deep rooted than we had anticipated and the lack of a CFO further increases the uncertainty. We do not foresee any catalysts until the overhaul is complete and are downgrading the stock to a HOLD.

Disclosure: author is long Sify.

SIFY 1-yr chart: