Sify Earnings Preview: Waiting For the Bad Debt Overhang To Disappear

Following is an excerpt from the note Sameet Sinha, Senior Equity Research Analyst at Kaufman Bros., sent to clients:

Preview of FY4Q07 Earnings

• Sify Limited (SIFY) is expected to announce fiscal 4Q07 earnings before the market opens tomorrow, followed by a conference call at 8:30 a.m.

• Estimates. Our estimates call for revenues of $32.2 million (up 11% Y/Y and 2.2% Q/Q), gross margins of 46.5%, adjusted EBITDA of $4.0 million (12.3% margin) and GAAP earnings per ADS [EPADS] of $0.03.

• Enterprise Services. We expect the Enterprise Services business to grow 4.8% Q/Q and 23% Y/Y to $19.3 million. During the quarter SIFY hired P. J. Nath as the Executive President of its Enterprise business. P. J. Nath used to be the Head of Sales at SIFY a few years back and left to join VSNL, a leading telecom and IT services firm as the Senior Vice President of its Enterprise business.

• Access Media. We expect Access Media to decline 24% Q/Q and 62% Y/Y to $10.2 million. We believe that this business is undergoing significant restructuring as cyber cafe operations are being rationalized and underperforming cafés are being closed or turned around. We expect the company to add 50 new cafés during the quarter and end the quarter with 218,000 broadband subs.

• Portals. We expect this business to grow 7% Q/Q and 62% Y/Y to $1.8 million. During the quarter, SIFY announced that it has appointed Big Bang Media as its Exclusive Internet Ad Sales company. Big Bang Media will manage the complete advertising sales of all of Sify.com’s internet properties. We believe that SIFY could benefit from generating more advertising through advertising agencies, rather than through a direct sales force.

• Expect another quarter of bad debt writeoffs. SIFy has been writing off receivables that have been on the books for some time now which relate primarily to the Enterprise and Access Media business. We believe that the new management team is in the process of cleaning up operations and financials to strengthen the company and we can expect another quarter or two of bad debt writeoffs.

•Our price target is $8. This utilizes a 10-year forecast of the company’s estimated unlevered free cash flow discounted at the cost of equity of 13.6%.

• Bottom line. We believe bad debt writeoffs at SIFY, along with slowing Y/Y growth has caused concern among investors. We believe that the new management team is in the process of restructuring the company both operationally and financially. New senior management executives are being put in place, new controls and systems are being instituted, the operational structure is being streamlined, employees are being retrained in preparation for growing the company. However, the bad debt writeoffs will persist at least another couple of quarters, which keeps us on the sidelines. We will wait for the bad debt overhang to disappear and the growth to come.

Disclosure: I am long SIFY.

SIFY 1-yr chart: