Formerly known as Sify Limited, Sify Technologies Limited (SIFY - Get Rating) offers integrated ICT solutions and services in India and internationally. The COVID-19-pandemic-driven demand for networking and data center capacity, which is driving a  rapid digitalization trend, has helped the stock gain 150% year-to-date.

Blackstone Group has been considering taking a minority stake in the Indian tech stock, according to a Bloomberg report. However, there is uncertainty in the air  regarding the investment because no official statements on the supposed investment have been made by either party. Hence, we think it is  highly likely that the stock will remain volatile until concrete information about the deal is available.

In addition to this uncertainty, SIFY’s weak financials and lower profitability do not justify its stocks’ lofty valuation. This backdrop, we believe,  makes SIFY’s  growth prospects uncertain.

Here is what we think could influence SIFY’s performance in the near term:

Uncertainty About a Potential Investment

According to a recently released Bloomberg article, Blackstone Group Inc. is in talks to acquire a minority stake in SIFY. Since nothing has been  announced  by either  company, the investment remains in doubt. So, in the absence of relevant concrete information,  about the deal, SIFY could remain volatile.

Favorable Analyst Estimates

Analysts expect SIFY’s EPS to rise 60% in the current year, and 25% next year. A consensus revenue estimate for fiscal 2021 represents  a 13.3% improvement year-over-year.

Unimpressive Financials

SIFY’s revenue increased 7% from its  year-ago value to INR6301 million in the third quarter, ended December 31, 2020. However, the company’s profit for the period declined 2% sequentially to INR252 million. Its net finance expenses increased 52.8% sequentially to INR217 million, while its income tax expense rose 74.1% from the prior-year quarter to INR148 million.

Lower Profitability

The company’s trailing-12-month gross profit margin of 39% is 23% lower than the industry average  50.6%. In fact, its EBITDA margin also compares unfavorably with the industry average. SIFY’s cash from operations in the trailing-12-months is 83.6% lower than the industry average.

Stretched Valuation

In terms of forward p/e, SIFY is currently trading at 49.25x, which is 139.7% higher than the industry average  20.54x. Its trailing-12-month ev/ebit  of 24.16x is 24% higher than the industry average  19.48x. Also, its trailing-12-month price-to-book of 4.37x is 58.8% higher than the industry average  2.75x.

POWR Ratings Indicate Mixed Prospects

SIFY has an overall rating of C, which equates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. Among these categories, SIFY has a grade of B for Sentiment, which is consistent with the analysts’ expectations about revenue and EPS growth.

However, it has a C grade for Value and Quality, given its lofty valuation and lower profitability.

SIFY is currently ranked #24 of 68 stocks in the D-rated Internet industry. In addition to the grades I’ve highlighted, you can check out SIFY’s POWR Ratings for Growth, Stability, and Momentum here.

If you’re looking for better stocks in the Internet industry, with an Overall POWR Rating of A or B, you can access them here.

Bottom Line

Despite SIFY’s impressive gains year-to-date based on rapid digital spending, accelerated by remote working models amid the pandemic and the growing demand for data-centric IT services, its weak financials and uncertainty surrounding the recent investment deal could make investors anxious. Also, SIFY’s lofty valuation is not justified given its lower-than-industry profitability. Hence, we believe investors should wait for better entry points in the stock.

Click here to check out our Software Industry Report for 2021

Want More Great Investing Ideas?

9 “MUST OWN” Growth Stocks for 2021

How to Ride the 2021 Stock Market Bubble

5 WINNING Stocks Chart Patterns

K.I.S.S. for the March Stock Market

SIFY shares were trading at $3.47 per share on Tuesday morning, up $0.24 (+7.43%). Year-to-date, SIFY has gained 173.23%, versus a 3.86% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

More Resources for the Stocks in this Article