Embarrassing Execution but $24 Million Enterprise Value Is Attractive

| About: India (REDF)

Excerpts from Gilford Securities analyst Ashish R. Thadhani's recent note to clients on (NASDAQ:REDF):

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Investment Conclusion. Based on disturbingly weak ad spending in an economic downturn – particularly across the financial services, recruitment and travel sectors – only partially offset by planned expense cuts, we are sharply reducing our estimates as follows: fiscal 2009 non- GAAP diluted EPADS to $0.00 on revenue of $29 million (-10% YoY growth) from $0.17 on revenue of $39 million; and fiscal 2010 non- GAAP diluted EPADS to $0.00 on revenue of $30 million (+2% YoY growth) from $0.27 on revenue of $49 million. Pending evidence of sustainable growth (including monetization of traffic and recent investments) and a return to operating profitability, we are resetting our target price from $10 to $3.50. In 12-months, this would imply 1) net cash unchanged at $1.65 per ADS; plus 2) a valuation for the underlying business of $55 million ($1.85 per ADS), or 1.7x forward revenue. The current valuation – translating into 0.9x depressed revenue and a discount to tangible book value – should draw support from desirable assets: an active base of 9.5 million Indian Internet users, the popular iShare platform (a category leader with 100K Indian songs/videos) and leadership in the Personal Finance category in India (MoneyWiz boasts more unique visitors than Yahoo! Finance).

2Q09 Results. Non-GAAP diluted EPADS of ($0.01) vs. $0.05 a year ago on revenue of $7.3 million (-7% YoY) missed our $0.04 estimate on revenue of $9.1 million by a wide margin. A large revenue shortfall (-$1.8 million attributed equally to client spending cutbacks and steep rupee depreciation) was only partially offset by lower-than-projected operating costs (+$0.6 million variance). Results reflect a 19% QoQ drop in the India online advertising segment (55% of revenue) vs. our +10% estimate. Consequently, Rediff recorded an operating deficit of $1.6 million (-21.6% margin), its worst in recent years and wider than our –$0.5 million estimate (-5.0% margin). Cash stood at $49.1 million. Visitor traffic rose 8.6% per month vs. 4.8% for the broader industry, accompanied by stable pricing. However, revenue growth is not expected to recover in 3Q. New developments include the launch of an open platform initiative enabling external applications to enrich and leverage the Rediff user community; and MobileRediff, an application extending the reach of popular Rediff services to non-PC users.

Business Model. Rediff generates core revenue from the sale of advertising space on its site. Online advertisements comprise banners, links and event sponsorships. The company targets India’s top-200 corporate advertisers across key consumer categories through ~100 sales and marketing professionals. Clients include Citibank, Hewlett Packard, Hindustan Lever, ICICI, Microsoft, Monster,, Pepsi, and others. Rediff charges a fixed fee for a given time period or guaranteed number of impressions (CPM model); or a variable fee based on click-throughs (suitable for SME clients with limited ad budgets). Consumer offerings consist of e-mail (in 11 Indian languages), news, search and an online marketplace. Through an editorial staff, contract journalists and syndication/aggregation from multiple sources, provides content on popular subjects: news, business and personal finance, movies, sports, health, food, books, games, astrology, contests, lifestyle, etc. Fee-based services include e-mail; wireless messaging (revenue is shared with major operators) and ring-tone/game downloads; matchmaking and astrology subscriptions; and commissions from independent electronics, apparel, jewelry, flower and other merchants. The U.S. publishing business (non-core) includes a weekly newspaper catering to the Indian community. Rediff derives revenue from classified advertisements and subscriptions.

Investment Overview. REDF is the largest India Internet play listed in the U.S. Using a portal interface, it provides a comprehensive spectrum of services/content geared to online advertisers and the Indian community worldwide.

Rediff is positioned to benefit from rising online ad spending (1% of the online/offline total), overall Internet usage (~5% penetration at present) and new consumer e-commerce services (pending a more reliable payment/fulfillment infrastructure). Upfront bandwidth and marketing investments should be rewarded, over time, with rising ad revenue from a strengthened online platform.

Attractive attributes include a strong brand (management believes that Rediff holds a 25-33% share of the online advertising market in India and clients include virtually all major advertisers); leading site traffic (note 70+ million online users – driven by the e-mail offering); a business model with significant operating leverage; experienced management (CEO Ajit Balakrishnan has a background spanning IIM and three decades in the advertising industry); and meaningful insider ownership (48%).

To attract users and advertising clients, Rediff is developing a range of innovative offerings: web-based e-mail with enhanced features and mobile phone access; VOIP-enabled Instant Messenger also available on mobile phones; search/comparison tools covering popular categories such as shopping, travel, jobs, matrimony and ring-tones; social networking, content sharing and auction platforms; and online classified listings targeting the under-penetrated SME segment. Branding initiatives comprise direct, indirect and online marketing plus a nationwide TV campaign.

The online advertising model is inherently scalable and we note that Rediff turned profitable in September 2005 on quarterly revenue of $4.4 million. Rediff completed its $57 million IPO in June 2000 at $12.00 per ADS. The balance sheet was strengthened by a $44 million follow-on offering in November 2005 at $15.86 per ADS. Although management has dismissed recent takeover speculation, we believe that Rediff could command a premium from a strategic suitor in the future, e.g., Google, Yahoo!, Microsoft or – proponents of wireless/Internet convergence may argue – local heavyweights Bharti Airtel and Reliance Communications.

Principal risks include the following:

  • Competition from Google (NASDAQ:GOOG), Yahoo! (NASDAQ:YHOO), MSN and AOL could require stepped-up investments and pressure future profitability – or result in the loss of major clients.
  • REDF is vulnerable to a correction in the U.S. markets.
  • Insiders have the ability to exercise significant control over all matters requiring shareholder approval.


I, Ashish Thadhani, certify that all the views expressed in this research report accurately reflect my personal views of the subject companies. I certify that I have not and will not receive compensation with respect to the issuance of this report.