Rediff.com Finally Sees Some Growth Catalysts

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Includes: BIDU, REDF, SINA, SOHU
by: Rash Menaria

Rediff.com (NASDAQ:REDF) is an extremely undervalued top Indian Internet portal. Just go through the following facts and you will realize it yourself:

  • Rediff.com is India’s leading web portal providing news, email and other services. According to alexa.com statistics, the site ranks 9th in terms visitors from India. Above it are only global competitors like yahoo, google, youtube, facebook etc. None of the other domestic portals come close, making it the undisputed leader in local content.

  • It has “zero” debt, 41 mn in cash and 57 mn market cap. So enterprise value (EV) of just 16 mn for an internet company with trailing 12 month sales of ~20 mn.

  • Further, company is witnessing positive YoY growth emerging from recession and has some good catalysts in near to mid term.

Damn! Why is it so undervalued?

In addition to the normal revenue decline caused by recession, one thing that hurt its advertising revenues was the decision to remove banner ads from the home page of the portal. Rediff’’s intention was to make its website more user friendly, particularly for India's nascent mobile market. Given the fact that Rediff is one of the top internet portals and its home page was a very hot property for advertisers, this decision (in 3Q 2009) led to substantial near term impact on Rediff’s topline. According to our estimate, it caused a hit of at least 5-6 mn per annum on the topline. Sans this Rediff would have been back to profitability by now!

Market rarely thinks long term and some decisions which may be good for business may hurt stock price in short term. This definitely is a good example.

What are the catalysts?

OK, enough of the Warren Buffett value pitch. We are from Steve’s line of thinking and have only one question: What’s the catalyst?

Here are a few of them:

- Search Deal: Rediff currently does not derive any significant amount of revenue from search. Management has given a mild signal on their recent conference call that one should expect a search deal "very" soon. According to my checks, it’s likely going to be for the local search with a player with excellent technology but limited reach. Local search is a big potential market and an unmet need in India with no major provider as of now.

- Return to Profitability: Company is likely to return to profitability in next couple of quarters. Advertising rates rose 26% YoY last quarter while overall revenue grew 16%.

- 3Q to witness highest YoY increase in revenues: Company is going to see easiest YoY comparisions in 3rd quarter. Last year, company discontinued advertising on Indian portal in 3Q and hence saw a revenue decline sequentially from 2Q2009 to 3Q2009. This year with trends improving, 3Q revenue is likely to be up from 2Q giving highest YoY % increase.

Q1

Q2

Q3

Q4

2011

4.96

5.18

5.39E

5.60E

YoY Growth

10.5%

4.4%

28.6%

18.5%

2010

4.49

4.96

4.19

4.73

Click to enlarge

- Newfound Aggression: One change which I noticed in Rediff’s site is its efforts to leverage its visitor base for new service offerings. I always wondered why they never did it before.

- Internet Penetration to increase significantly in India: No, I am not talking about long term India story here. I am talking near to mid term. In the recently concluded auctions for 3G and wireless broadband spectrum, telecom companies have bid and paid USD 22 billion as spectrum license fees. This is expected to be a harbinger of the growth of the broadband Internet market in India which is likely to benefit Rediff as a leading web portal. And if you really know any of the Indian telecom companies and their execution capabilities: expect fireworks in next 3-18 months!

(Just to give you a sense of Indian broadband “under” penetration:- According to comScore reports India just has approximately 40 million unique broadband users. Other estimates indicate it to be even less at just 10 million. This as compared with India’s total population of 1.14 bn.)

Valuations:

Anything below $3 is ridiculously undervalued. It means the company is not even getting EV/Sales of 2.

I am not talking about Price/Sales Chinese peers: 30+ for Baidu (NASDAQ:BIDU), 4+ for Sohu (NASDAQ:SOHU), 6+ for Sina (NASDAQ:SINA).

But a leading Indian internet company not even getting EV/Sales of 2 despite the fact that growth rate of internet penetration in India is expected to be much higher than China makes absolutely no sense!

Between $3 and $4 company is still deeply undervalued. At $4 one is just paying slightly over 3 times EV/sales. This for a company having depressed sales as it is currently not utilizing its total advertising potential. And I am not just talking about no advertising on the home page. Even on other pages number of advertisements is kept below their Indian peers just to ensure that user experience is not compromised.

I think as investor community start noticing management initiatives and some of the catalysts I mentioned, stock can easily go above $4 in a very short span of time. In medium term if any one of their initiatives proves to be successful, eg. my page becoming preferred, any progress targeting local search market etc. stock can move significantly higher than that. Given the market potential and company's positioning, you can yourself come up with your long term target.

What’s the risk?

Long term:

Tell me if you see any in the long term. What gives me comfort is at 57-58 mn market cap, you are just paying 16-17 mn as EV for the business.

In worst case scenario, let’s assume everything management is trying fails. It’s an internet company promoted by first generation entrepreneurs who have almost all of their net worth tied to this one stock! Only way for them to monetize its real brand value is by ensuring its selling off at right valuation. I don’t think $16-17 mn EV is a right valuation. Last time stock made a high $27.50 on speculation of acquisition by Google!

Short Term:

In short term, given the catalysts I have mentioned all near term pain is likely over. I don’t see this stock trading below $4 once the search deal is out.

Disclosure: Long and recommending it as a very strong buy to friends, family and clients.