The Rush For Indian Tech Stocks

With the Indian internet community growing, significant interest has sprung up in Indian tech stocks.

As early as 2005, StockRumors.com reported Rediff.com (REDF) as a takeover target. Sify Limited (SIFY) takeover rumors, however, have been more recent.

Rediff.com (REDF)

With roughly $53M in liquid assets and a market cap of $530M and ever increasing revenue, there has been speculation that REDF is a takeover target. REDF's business model consists of communication services [i.e. e-mail and instant messaging], news, community features, search engines, and mobile and online marketplace services tailored for the global Indian community. Many of the users of Rediff.com are not in India, but have significant connection to the Indian community.

Growth in revenue for Rediff.com has been substantial, with an increase of over 50% from the third quarter in 2005, and an increase in profit margin of 10%. The number of registered users in September 2006 was over 47M. Rediff.com has a Google Page Rank [PR] of 7, and is ranked 68 on Alexa for web traffic.

Sify Limited (SIFY)

SIFY currently has a market cap of about $420M and about $63M in liquid assets. Sify deals more specifically with internet, network and electronic commerce services in India. Where Rediff.com could be compared to Yahoo (YHOO), Sify is comparable to an internet backbone, somewhat similar to Qwest (Q), providing internet access to Indian people and businesses. While this article focuses more on a possible REDF takeover, many of the same principles and commentary apply to SIFY.

The Untapped Indian Internet Market

The Times of India has stated:

Google's chief executive Eric Schmidt has predicted that India and not China will become the worlds biggest Internet market in "about five or ten years from now, based on current trends."

And what's more, Schmidt's other futurist view is that Hindi, not Hispanic, could become one of the world's three Internet languages, in conjunction with English and Chinese.

Also, according to joint research by the Internet and Mobile Association of India and market research firm IMRB International, the number of internet users in just the second quarter of this year has increased 4 million to 37 million. India has a population of about 1.1 Billion, so while the internet users increased 10% in one quarter, the growth represents only 0.36% of the population - where only 3.3% are internet users.

Compare this with 205 million internet users in the United States - whose population is only 298 million. That means that growth in the United States internet users is currently limited to 93 million [which includes infants] or about 50% from where it currently is, whereas growth in India over the next few years could still exceed 900 Million or over 2,400%.

As we have seen with Baidu.com (BIDU) in the Chinese market, timing is crucial. Baidu is dominating the Chinese search market, owning well over 50% of the internet searches. The dominance of Baidu.com is increasing with time, as more and more users are switching away from Google and Yahoo in China to Baidu [See our in-depth analysis of BIDU rumors].

Leveraged Buyout [LBO]

Neither SIFY nor REDF have more than 20% of their market cap in liquid assets. Because of this a leveraged buyout may be less likely. However, where the future growth in India looks so promising they could definitely be a target of a buyout. Buying SIFY or REDF right now would create one of the greatest opportunities for growth in the internet sector. $500 million would not be extremely difficult for several of the private investment firms out there.

Yahoo (YHOO)

Yahoo has been trying to compete in India. In October, they released plug-ins that allow users to chat on Yahoo Messenger in key Indian languages. Also, Yahoo recently received permission from the Indian government to offer Internet telephony services from the country. This clearance will enable Yahoo to offer voice services for users in India of its instant messenger.

Yahoo is trying to establish its presence in India before it is too late. Yahoo has about $3B to spend and the purchase of REDF for $500M would almost secure their future position by owning the top sites in India. Investors are tired with Yahoo's slow growth, and by securing growth in India [and China by buying BIDU] there would be a whole new Yahoo created in the eyes of investors - one with significant potential growth.

Yahoo! India has a page rank of 7, comparable to that of Rediff.com.

Google (GOOG)

Google has also been trying to get established in India, and has been doing a decent job. Their Google Page Rank [biased perhaps?] is 8, beating that of Rediff.com. Google has always been innovative and has positioned itself in the internet market to keep itself on the cutting edge. Google's acquisitions have been frequent. An all cash acquisition of Rediff.com certainly wouldn't hurt, and wouldn't even dent their $12B in liquid assets. It would further secure their position in India, and help keep them in markets where growth is sustainable.

Microsoft (MSFT)

Microsoft has been trying to get market share for Windows in India by releasing versions of Windows XP at cheaper prices in Indian Languages. Microsoft has gone on record saying that internet services will play a very important role for them moving forward, and has stated that they will be spending around $1B throughout 2007 getting MSN up to par.

MSN's home page in India has picked up popularity very slowly having a Google Page Rank of 3 [even StockRumors.com has a PR of 4!]. An acquisition of Rediff.com would help them further in their conquest of India, giving them an upper-hand in the competition with Google and Yahoo.

Analysis of a REDF or SIFY takeover: The Indian internet market is ripe for the picking. It is only a matter of time before the internet market in India surpasses that of the US and China. A takeover of an already established and growing part of that market for $500M now could be extremely attractive to many tech companies and investment firms.