Business context and reporting period
Sify Technologies Limited filed this annual report on Form 20-F for the fiscal year ended March 31, 2018—not a standalone 2017 Q4 report. The company provides integrated ICT services in India, including telecom and network connectivity, data centers, cloud and managed services, technology integration, and applications integration. Financial statements are prepared under IFRS and presented in Indian rupees; dollar equivalents are convenience translations.
Key financial metrics
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | ₹20,686 million | ₹18,432 million | +12% |
| Operating profit | ₹1,291 million | ₹958 million | +35% |
| Profit before tax | ₹924 million | ₹643 million | +44% |
| Net profit | ₹923 million | ₹642 million | +44% |
| Basic / diluted EPS | ₹6.14 / ₹6.11 | ₹4.45 / ₹4.45 | Higher |
| Operating margin | 6.24% | 5.20% | +1.04 percentage points |
| Net margin | 4.46% | 3.48% | +0.98 percentage points |
| Operating cash flow | ₹2,121 million | ₹1,748 million | +21% |
| Investing cash flow | (₹1,794 million) | (₹1,610 million) | Greater outflow |
| Financing cash flow | (₹1,048 million) | (₹258 million) | Greater outflow |
Revenue was approximately US$318 million at the filing’s stated exchange rate. Cost of goods sold and services rendered rose 13% to ₹13,435 million, or 64.95% of revenue. Finance expense increased 14% to ₹497 million; net finance expense was ₹367 million. The reported income tax expense was just ₹0.194 million.
Balance sheet and liquidity
At March 31, 2018, total assets were ₹24,462 million, equity ₹9,005 million and total liabilities ₹15,457 million. The company reported ₹2,288 million of cash and cash equivalents including restricted cash; this includes ₹296 million restricted. A separate cash-flow presentation shows cash and cash equivalents of ₹167 million after deducting a ₹2,122 million bank overdraft. Net current assets were ₹1,851 million. Management said operating cash, credit lines and potential promoter-group capital were expected to meet liquidity needs.
Management reported borrowings of ₹5,793 million, with ₹3,946 million due within 12 months, and expected next-year interest outflow of ₹454 million. The filing also reports ₹815 million of unused non-fund facilities; working-capital facilities were substantially utilized. These amounts use different presentations of borrowings and cash, so investors should reconcile them to the audited notes. Capital expenditure was ₹1,475 million in FY2018; purchase commitments for property, plant and equipment were approximately ₹1,033 million.
Material changes versus the prior year
- Revenue growth was led by Applications Integration Services (+45% to ₹3,868 million), Technology Integration Services (+28% to ₹3,445 million) and Data Center Services (+23% to ₹2,435 million). Cloud and Managed Services grew 4% to ₹957 million.
- Telecom Services revenue fell 2% to ₹9,982 million. Connectivity revenue rose, but voice revenue declined, including lower international long-distance volumes; hubbing partially offset the decline.
- Profitability improved despite higher overall delivery costs. Management attributed the higher operating margin mainly to lower selling and distribution expenses and lower depreciation as a percentage of revenue, partly offset by higher cost of services.
- Operating cash flow rose, but growth in trade and other receivables reduced cash conversion: receivables increased by ₹2,221 million during the year. Cash flow from financing was more negative, reflecting lease repayments, finance costs and dividends.
- Customer concentration remains notable: the largest customer generated 10.94% of FY2018 revenue and the five largest generated 22.26%.
Outlook, risks, contingencies and unusual items
Management expects further FY2019 capital expenditure to strengthen infrastructure but gives no amount or earnings guidance. It is pursuing growth in data centers, cloud and managed services, and higher-value integration offerings. Management said adoption of IFRS 15, effective April 1, 2018, was not expected to have a significant profit-and-loss effect; the impact of IFRS 16 leases was still under evaluation.
- Competitive and execution risks: Management cites intense pricing pressure, falling connectivity and voice realizations, infrastructure utilization risk, lengthy sales cycles, and the substantial capital needs of data-center expansion. Power costs, capacity utilization and customer retention may affect margins.
- Foreign exchange and financing: Foreign-currency revenues and loans expose results and cash flows to rupee movements; hedges may not fully offset exposure. Borrowings increased to fund planned data-center projects and working capital.
- Regulatory and legal matters: DoT license-fee demands relate to whether non-telecom income is subject to fees; a court interim order restrained collection on non-telecom activities, and a tribunal stay addressed fees on pure Internet services. The filing states maximum exposure for other ordinary-course legal actions of ₹91 million; separate tax and service-tax claims include ₹469 million of service-tax claims. These matters remain subject to legal outcomes.
- Export-promotion obligations: The company held 48 EPCG licenses with export obligations totaling approximately ₹3,926 million. Failure to meet the obligations could require repayment of duty benefits with interest; management expects to comply.
- Online examination investigation: After a February 2018 question-paper technical glitch and re-examination, CBI investigated the matter in May 2018, including visits to four Sify premises. The filing says Sify was not a party to proceedings, cooperated with the investigation, and that individuals including one Sify employee and third-party personnel were named. Potential reputational or business consequences are not quantified.
- Governance and ownership: CEO and Chairman Raju Vegesna-affiliated entities beneficially owned approximately 86.22% of equity shares; 125 million promoter-group shares were partly paid and carried proportionate voting rights. Following an independent director’s June 4, 2018 resignation, the company disclosed non-compliance with certain Nasdaq board and audit committee independence requirements and intended to appoint a replacement.
- Dividend: The Board recommended a 12% cash dividend (₹1.20 per fully paid ₹10 share), subject to shareholder approval. Dividend payments are discretionary and depend on profits and approvals.
The independent auditor issued an unqualified opinion on the IFRS financial statements and an unqualified opinion that internal control over financial reporting was effective as of March 31, 2018.
Important facts for investors to verify
- Reconcile the reported cash, overdraft, working-capital position and ₹5,793 million borrowing figure with the audited balance-sheet and debt-note classifications, including near-term maturities.
- Track collections and aging of receivables, which rose materially, and test whether FY2018 operating cash flow is sustainable.
- Assess segment economics and whether growth in assessment and integration work can offset telecom revenue declines without further margin pressure.
- Review outcomes and potential financial consequences of DoT license-fee matters, tax/service-tax claims, EPCG export obligations and the CBI examination investigation.
- Confirm the dividend approval and payment, planned FY2019 capital spending and financing sources, IFRS 16 effects, and restoration of Nasdaq governance compliance.