I Would Not Sell Sify

On the face of it, there is a strong similarity between Rediff (REDF) and Sify (SIFY). Both have portal sites that offer a wide gamut of online services. But in Sify’s case the portal is just a small piece in a big jigsaw puzzle that together makes up the company’s operations.

In order to understand Sify as it is today, let’s take a peek at its past.

In the early Internet era the most visible dotcom presence was inevitably a website and all that goes into getting it up and running, namely domain name registration, web design, and hosting.

Satyam Computer Services of which Sify, then Satyam Infoway was a part, incorporated in December 1995, was pretty much into virtually every Internet related service. This meant that while new companies with nimble-footed ability forged ahead offering focused and clearly identifiable services, Satyam despite first-mover advantage, chose to become bloated and burdened by a widely divergent product portfolio, outsourced services being their primary money-making business.

Sify debuted on NASDAQ in October 1999 as Satyam Infoway Limited, being the first Indian Internet company to be listed there, ahead of Satyam’s listing on NYSE in May 2001. Sify was however not profitable, and in November 2005 Satyam divested its ownership to Infinity Capital, a Silicon Valley venture capital enterprise owned by Raju Vegesna. Infinity Capital and thus Raju Vegesna owns about 40% of Sify, which it bought last year from Satyam (SAY).

After Mr. Vegesna took over the reins of Sify in June 2006, the company posted maiden profits since its inception 10 years back.

Sify’s services broadly aim 3 categories of clients, Corporate, Consumer and International. If its operations are to be told in a nutshell, here they will be.

• Internet based virtual private networks for business/other enterprises.
• Broadband and dialup Internet access for businesses and homes.
• Franchised cybercafes offering public Internet access.
• Web hosting services for business and other enterprises, and
• Web portal, www.sify.com

In spite of its diverse range of products, Sify discloses in its latest SEC filing that a significant part of the company’s revenue is derived from Corporate Services, which include corporate connectivity, network and communications solutions, security, network management services, enterprise applications and hosting.

Sify’s Q1-07/08 results are due next week. As mentioned above, the company’s maiden profit came in the quarter ending December 2006 (Q3-06/07) when it made a net profit of just above a million USD (Rs.41.57 million) on total revenue of USD 34.5 million (Rs.1391 million). Expectedly, the net profit margin turned green in December quarter but with an unimpressive 2.99%.

Sify presently trades at USD 9.3 levels representing a market cap of USD 395 million.

Sify’s announced a tie-up up with Microsoft early this month to offer the latter’s products across its network targeting students, small business owners and job seekers. Most notably, it will work with Microsoft Corp. to help Indians gain access to the Internet and IT services, by offering cyber cafe subscribers the use of licensed Microsoft Office software.

Sify’s iWay cyber cafe chain has expanded to 153 cities with the addition of 58 new cities in the last one year. The company has added 836 new iWays during the year, at an average of more than two cafes a day. The Microsoft deal is a great way to leverage and monetize this asset. For those unfamiliar with India’s Consumer situation, Cyber Cafe’s are a key piece of the internet penetration equation in India, and will continue to remain so for the next decade, since PC/broadband costs are still not at a point where India’s vast population can afford them easily.

In many ways, Sify’s Cyber Cafe strategy represents a fantastic Micro Franchise opportunity that can take its iWay brand out to the thousands of smaller towns and villages in India. In so doing, Sify would position itself as a very powerful channel into these otherwise difficult-to-access markets/consumers.

While Corporate Connectivity may be the current bread-and-butter revenue generator for the company, I am far more excited about Sify’s Cyber Cafe strategy, as in the long run, Corporate Connectivity is a highly competitive, commodity business, whereas this Cyber-Cafe channel that Sify creates will become, if executed well, a supremely differentiated, high value platform, from which they can impart many applications, from Distance Learning to Tele-Medicine.

There is, meanwhile, a massive management overhaul in the company, and lots of buy-out speculation. I would not sell this company, if I were Raju Vegesna. I would, over time, streamline the operations, and focus in on the Cyber-Cafe centric Value-Added Services strategy I discussed above, and keep building it.

Sify could be a multi-billion dollar enterprise, and a great vehicle for India’s development.