Saturday, April 16, 2011

An Tiny Internet Company Poised For Long-Term Growth

Ten years ago India had a population of 1.015 billion, and only 5 million internet users. Today it is the second most populous country in the world with 1.17 billion people, and 81 million citizens use the internet.
That is an astounding internet use growth rate of 1,520 percent over ten years. If you think this growth creates opportunities for investment, you're on the right track.
Right now, India accounts for over 15% of the world’s population, but still only 4% of internet users. That number is sure to expand as the country's population, and infrastructure, grows.
There are companies operating in India that are well positioned to benefit from internet based growth in that country. Find these companies now, keep a close eye on them, and buy shares when the timing is right and you'll likely profit from this trend.
Take a quick look at this chart - it shows worldwide internet user growth over the past 15 years. The trend depicted in this chart is as strong a trend as you’re likely to ever find - a steady climb from 16 million users in 1995 to 1.65 billion in 2010.
The punch line is that investors who don’t have access to internet growth in some shape or form are missing out.  
We're all well aware of the investment thesis for putting money to work in emerging markets like India; that these countries are growing far faster than developed markets so the right investment exposure could vastly outperform developed market investments.
The trick, as always, is to find the right investment exposure. I highlighted India's population growth and its exponentially faster growing internet penetration. The chart above shows growth in internet use on a global scale.
Now let's take a quick look at one Indian company that has exposure to these trends.
As the first private Internet service provider (ISP) in India, SIFY Technology (Nasdaq: SIFY) is now India’s largest broadband service provider. The company provides internet and extranet services, website hosting and design, search engine optimization and security solutions - all the typical things you would expect from an ISP
The macro-trend here is that rapid real GDP growth of around 9 percent for the past five years, coupled with growing internet use, means a bigger pie for ISPs like SIFY.
Shares of the stock skyrocketed last week after the company announced a new partnership with Saudi telecom. The press release indicated that SIFY will provide ICT services to the Middle East's largest telecom carrier.
As you can see from the chart below shares of the Indian-based internet and network services firm have doubled over the past four months.
Even after this rally this company only has a market cap of $232 million. But while the company has posted positive EBITDA (earnings before interest, taxes, deprecation and amortization) margins in the last few quarters, it is still not a profitable business. Net loss in the last quarter was $2.09 million.
In the third quarter of 2010 the company brought in $38.7 million in revenue, and during the preceding nine months generated $3.56 million in cash from operations. With a young company like this we want to keep an eye out for improvements in gross margins, profitability, and reliable cash flows - these improvements will lead to higher share prices in the future and make for an attractive investment.
As infrastructure expands and broadband use inevitably rises among India's population, SIFY will be worth keeping an eye on. With a population of roughly 1.2 billion and only 6 percent currently using the internet you can quickly see the growth potential that lies ahead in this dynamic market.
Also, India has a burgeoning middle class and income levels are expected to increase 300 percent by 2025. That means businesses and citizens will have more money available to spend on internet services, like those offered by SIFY.
A financially improving consumer and enormous room for e-commerce expansion make SIFY a compelling growth stock in a fast growing market. That said, I haven't yet completed the in-depth due diligence that I would do before buying shares, so please consider this a jumping off point for further research.

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