Sify Technologies Limited
Q4 2021 Earnings Call Transcript

Published: 7 May 2021

[Operator:]

Good day, ladies and gentlemen, and welcome to the Sify Technologies' Financial Results for Fiscal Year 2020 to 2021. . It is now my pleasure to turn the floor over to your host, Shiwei Yin. Sir, the floor is yours.

[Shiwei Yin:]

Thank you, Kate. I would like to extend a warm welcome to all of our participants on behalf of Sify Technologies Limited. I'm joined on the call today by Raju Vegesna, Chairman; Kamal Nath, Chief Executive Officer; and M. P. Vijay Kumar, Chief Financial Officer of Sify Technologies. Following their comments on the results, there will be an opportunity for questions. If you do not have a copy of our press release, please let us know and we will have one sent to you. Alternatively, you may obtain a copy of the release at the Investor Information section on the company's corporate website at www.sifycorp.com/investors.

[Raju Vegesna:]

Thank you, Shiwei. Good morning, trust, you and your family are staying safe. Thank you for joining us on the call. As you know, India is in the risk of the second wave of the COVID pandemic. Our governments are reintroduced lockdown to deal with the situation. The first wave was a wakeup call for large companies to increase their investments in digital transformation. And that has helped us insulate them to a large measure this time around. Now, that the merit of the digital transformation has been firmly established, we should see more midsize businesses adopt automation aggressively. The new normal as then between blurred the lines between the work and the home environment, calling for businesses to invest in a security of their data or public networks. The challenge is ensuring the public network as a secure and resilient as a corporate network. That said we wish the situation will be over soon. And so the people and the livelihoods can be returned to the old normal.

[Kamal Nath:]

Yes, thank you, Raju. A year into the pandemic all the industries cutting across small, medium and large have accelerated their digital transformation. And cloud adoption right to be able to sustain and grow their businesses in a change environment. Work from anywhere movement to hybrid cloud platform, gendering of disaster recovery plans to enable business continuity, application modernization all these market trends find a natural solution in cities cloud at the core model and offerings. The other important highlight is the growth of hyper-scale cloud service providers and OTT players in India, which on one hand is accelerating our data center colocation business and on the other hand, strengthening our hybrid cloud offerings. Overall, we are on the right side of the trend curve. I would now like to expand on the business highlights and our growth drivers. Revenue from Data Center centric IT services grew by 22% over last year. Segment wise revenue from Data Center services grew by 45%. Cloud and Managed services grew by 21% and Technology Integration Services grew by 19%. While Application Integration services fell by 19% over last year. Revenue from Network Centric services fell by 7% over last year. Segment wise revenue from data and managed services grew by 4% and voice business fell by 35% over last year. Let me now expand upon the growth drivers. The pandemic has accelerated the primary growth drivers in the market for cloud adoption, led by digital initiatives and transformation. This trend is triggering movement of workloads from on-premise data centers to hyper-scale public cloud, and hosted Private Cloud in varying degrees based on the digital objectives of enterprises. These results in transformation of the traditional network architecture and transformation at the edge which connects the end user. The needs for digital services like analytics, data lakes, IoT, et cetera, shifting the balance to adoption of hybrid and public cloud versus private cloud. Collectively, these trends are generating opportunities for full scale cloud, data center and network services, network service providers with digital services skills. Let me summarize the categories of customers who are signing up with Sify. Customers choosing Sify for migration of their on-premise data center to multi-cloud platforms like Cloudinfinit, AWS, Azure and Oracle. They also entrusted Sify with management and security. Customers choosing Sify as their data center hosting partners as they embrace hybrid cloud strategy. Customers choosing Sify, as their multi-service digital transformation partner and customers choosing Sify as their network transformation and management partner as they migrate to Cloud-ready networks.

[Vijay Kumar:]

Thank you, Kamal. Good morning, everyone. Let me sum up the performance for the financial year 2021. Revenue for the year was INR 24,320 million, an increase of 6% over the last financial year. EBITDA for the year was INR 5085 million, an increase of 25% over the last year. Profit before tax for the year was INR 1599 million, an increase of 57% over last year. Net profit for the year was INR 1585 million. Deferred tax asset of INR 600 million has been recognized at the end of the year, based on assessment of reasonable certainty of future taxable income in the individual entities of the group. In future tax expense comprising current tax and deferred tax is expected to be in line with the effective tax rate. Capital expenditure for the year was INR 3483 million. Cash balance at the end of the year was INR 5438 million. We continue to show steady growth through 2021, despite the challenges that the pandemic has post. The healthy EBITDA growth has increased our confidence to spend on investing in both people and tools to increase our digital transformation service capabilities. We expect contracts to take slightly longer to conclude as clients take time to regain momentum. Our focus is on insulating the organization as they carefully manage our costs while ensuring that there is no lag in services delivery and customer experience. We are firm on our commitment to our data center, cloud and network centric expansion plan and will exercise due caution in terms of both timing and cost structure of these projects. Considering the resurgent pandemic and the uncertainty on pace of economy recovery, the Board of Directors did not recommend the payment of dividends this year and instead advised that the capital be conserved and put to use for capital assets expansion. Following shareholders’ approval, we have given effective business transfer agreements entered into during the quarter for the transfer of data center business and digital services business to wholly-owned subsidiary companies. I will now hand over to our Chairman for his closing remarks. Chairman?

[Raju Vegesna:]

Thank you, Vijay. A good number of the enterprises still didn't transform themselves during the first phase of the pandemic as began exhibiting renewed enthusiasm towards the adopting of automation, digital transformation and cloud adoption. Many of them are seeking to outsource the complete IT to play like us who can provide the data centers, hybrid-cloud and the network.

[Operator:]

And our first question today is coming from Greg Burns at Sidoti & Company, your line is live.

[Greg Burns:]

Good morning. Can you just talk about the business transfer agreement for the data centers? What the rationale for that is or what that means for business perspective.

[Raju Vegesna:]

Greg the rational is because people maintaining their own server rooms, their own data centers is very hard to keep up with the kind of manpower it required and the resources required to run tier three or what are the high level redundancy, high level running up SLAs for the data center. So instead of building their own living in their own server rooms, or having their own data centers, they're adopting more of an outsourcing that their data centers. So that is where we are seeing a lot of the data center usage. Second, hyper-scalars, so we have all the major hyperscalers are in India and the people started using the cloud adoption and hyperscalers with their scale. So we are seeing exponential growth in the cloud adoption, and which is helpful for the hyperscalers. And at the same time, people not completely 100% committed to hyperscalers, where people are creating hybrid solutions, which with the CP Cloudinfinit, one of the platform, we created intellectual property, which can create a hybrid model with hyperscalers. So, that is where we see the adoption across the data center, and hyperscalers and the hybrid cloud model.

[Greg Burns:]

Okay, thanks. Thanks for that color on the demand. I was more asking about the business transfer agreement you mentioned or Vijay mentioned, you're moving to data centers to wholly-owned subsidiaries. Could you just help me understand what that means rationale there?

[Vijay Kumar:]

Greg, given the fact that the data center businesses are scaling, and as you know, they are capital intensive. And in contrast, the digital services business is more IP LED and involves people and tools. So to bring in more customer focus, and given the different delivery mechanism, we believe that it is time that we should create independent companies for these two businesses, both of which are wholly-owned subsidiaries. So at a consolidated level, they don't mean any different, but organizationally, they help the companies to grow at a faster pace and become larger businesses overtime.

[Greg Burns:]

Okay, great. Thanks. In terms of the investments you mentioned for next year. What is your projection for CapEx for the full year, for the next fiscal year?

[Vijay Kumar:]

We expected to be little more than what we had invested last year, the year which went by we spent about INR 3483 million assuming pandemic does not disturb much of capacity creation, we should be able to invest much more than what we had done in the previous year.

[Greg Burns:]

Okay. And then relative to you also mentioned investing in or spending a little bit more maybe on people and tools to help your digital service transformation capabilities. How should we think about the EBITDA margin for next year? Expecting it to contract maybe a little bit given the spending or how should we think about that?

[Kamal Nath:]

I don't want to sound much on forward-looking. But as far as our current visibility growth, we should be able to maintain the EBITDA margin unless the pandemic becomes so extreme has a different implication. But as we see now, we should only get better with scale. And you have witnessed over a period of time that the EBITDA margins have been gradually improving year-on-year and we have had a nonlinear growth in EBITDA with revenue.

[Greg Burns:]

Okay. And then in terms of the -- I lost my train of thought. So, in terms of the data centers, can you just maybe give us an update on your existing network capacity utilization is there and your plans for bringing on additional capacity throughout the year?

[Kamal Nath:]

That said being with the current COVID situation, we cannot give completely picture. We have a great plan to bring this year as much as what we have, today we have 10 data centers, and we are planning we are in the process of building four more data centers this year and the next 18 months, and those things will continue because we started and only the thing is depending upon this lockdown situations could change our readiness for operation.

[Greg Burns:]

Okay. All right. And then in terms of how COVID is impacting your business, is it more like you mentioned project cycle times extending. So is that going to maybe more start to impact the technology integration services side of the business or do you see maybe its slowing growth, a little bit on data centers, and cloud until maybe businesses are some lockdown measures are relieved?

[Raju Vegesna:]

These are projects that will slow down a little bit. But in general, the overall lockdown will slow down the business. But hoping this thing will over soon. But at the same time, they need also digital transformation to keep up with this lockdown situation. Because the organization still running and they're moving more into the digital way operate, the banks are still working. So one way, they maybe adopt the new technologies to make it as a digital company, since stuff, you need to be present physically kind of thing. So overall we see it as a growth, but what is the COVID challenges is not clear to us at this point.

[Greg Burns:]

All right, great. Thank you.

[Operator:]

Thank you. Our next question today is coming from Jon Atkin at RBC. Your line is live.

[Jon Atkin:]

Thanks. So maybe continuing the data center theme, just interested in the mix of demand that you're seeing between Indian and enterprises and hyperscalers? How is that shifting and is there any kind of change in the activity level in terms of either procuring capacity, or moving in equipment on the part of the International hyperscalers in India? Thanks.

[Raju Vegesna:]

So Jon, I think, we are seeing the same demand, what was there before the hyperscalers, growing very well, and the adoption of the hyperscalers that means the public clouds, by Indian enterprises are accelerating every month-on-month. Similarly, at the same time, adoption of the hybrid also increasing. So we are seeing the nice growth, and probably 70-30 or 80-20 kind of adoption, and I think we will continuously we’ll grow in that adoption. And we don't see maybe it may slow down a couple of months because of this COVID. But we don't see that formula, that equation changing between the hyperscalers and public clouds versus the private and hybrid cloud. I think that adoption we’ll continue. As that adoption will continue and demand for the data centers will grow continuously, we see the demand for the data centers continuously growing, because the India still is in the very early stages of the adoption of the digital transformation, which is the data centers is the backbone for the digital transformation, and hybrid cloud.

[Jon Atkin:]

Okay and couple of weeks ago, or maybe months at this point, but there is the announcement with AMS-IX. And I just wondered how that benefits your business? Is it kind of like a marketing benefit, or does it specifically benefit the network business? Or does it create more of an attraction for your data center services or how do we think about the economic impact? Or is it too early to really assess that?

[Vijay Kumar:]

It's too early to assess what is the numbers point of view, but the benefits what you said is, it's all above, so marketing. How do you market our data centers versus the people who provide just a data center? Second is our network, integrated solutions and connecting with our data centers. So, overall, it gives us a -- see the way I look at is, cloud is not just a data center, cloud means, data center plus network. So overall with our strategy going with the data centers, plus the network, that is a unique position for Sify to offer integrating both the data centers and the network. So we are going to bring those kind of technologies more and more to make it like I said, we want to be an integrated player, instead of just providing register for the Indian enterprise, just a poll or service, vanilla service.

[Jon Atkin:]

And then finally, just wanted to ask you about partnerships, there has been some recent ones, I think, even since the last earnings call, with international partners, partnering with Indian conglomerates to develop data center businesses, and given how capital intensive these projects can be. How do you think about that as a possible option for Sify?

[Raju Vegesna:]

There is always partnership opportunities are coming. So far as the Sify has good financial statements, as Vijay Kumar mentioned, we are going to continuously invest what is the CapEx is required. And we also don't have any challenge procuring the loans. And we are looking for -- we always look for the data center a partner who is required, brings the value to our current value proposition. So, we are open, and we're continuously people come and engage with us. So, we are looking for right partners in this kind of game. And so far we are doing, because we are established player in the data centers, some of the new players coming, they're trying to validate themselves could be a data center provider, but we are serving the data centers for the last 20 years, we are the first data center tier three data center provider in India, and we have 10 data centers, and we are serving three hyperscalers in India. And so we have -- and we are servicing most of the banks and insurance companies in India. So for us, we don't need an international brand to validate our data center business. So that's what is different compared to the some of the new players trying to validate themselves as a data center player.

[Jon Atkin:]

Thank you very much.

[Operator:]

Thank you. We have no further questions in the queue at this time. Do you have any closing comments you would like to finish with?

[Raju Vegesna:]

Thank you. The entire Sify family, offer its condolences to people who have lost dear ones during the pandemic. Please continue to wear mask up and protect yourself and everyone else. Thank you for your time.

[Operator:]

Thank you, ladies and gentlemen, this does conclude today's event. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.