Ashish R. Thadhani (Gilford Securities) recently sent a note to clients on Indian internet portal and services provider Rediff.com India Limited's (REDF) successful recent quarter (conference call available). In it, Thadhani upgrades his rating and price target on Rediff.com shares. Excerpts follow:
REDF: Rousing Results; Upgrading Rating to Buy
• Investment Conclusion. After factoring in accelerated revenue momentum combined with higher underlying profitability, we are raising our estimates as follows: fiscal 2007 GAAP diluted EPADS to $0.22 on revenue of $28 million (52% YoY growth) from $0.21 on revenue of $27 million; fiscal 2008 GAAP diluted EPADS to $0.28 on revenue of $45 million (57% YoY growth) from $0.23 on revenue of $38 million; and fiscal 2009 GAAP diluted EPADS to $0.42 on revenue of $67 million (51% YoY growth) from $0.35 on revenue of $52 million. Our estimates imply 55%/40% compound revenue/EPADS growth in calendar 2006-08. We project that EBITDA per ADS should advance 72% annually during this period. On the strength of our revised estimates plus a valuation upgrade, we are raising our target price from $13 to $23. In 12-months, this would correspond to 60x forward GAAP diluted EPADS of $0.38 – or a PEG of 1.5x – and a discount to the prevailing valuation (73x forward GAAP diluted EPADS). We are upgrading our rating from HOLD to BUY.
• 3Q07 Results. GAAP diluted EPADS of $0.05 on revenue of $7.7 million (54% YoY growth) beat our estimate of $0.04 on revenue of $7.2 million. A non-operating forex/translation loss of $0.5 million held back EPADS by $0.02. Non-GAAP diluted EPADS of $0.08 surpassed our $0.05 estimate. Operating results were driven by the core India Online Advertising segment, where revenue jumped 103% YoY and 25% QoQ to 58% of the total. Effective performance-based advertising contributed 45% of this segment total vs. 31% a year ago while annualized revenue per advertiser advanced 85% YoY to $111K. Operating income of $1.1 million (13.7% margin) comfortably exceeded our estimate of $0.4 million (4.9% margin) – with positive variances in core revenue and all major expense categories (e.g., S&M = 460 bps!). Rediff noted continuing traction across key sectors – online employment, financial services, shopping, matrimony, IT products and travel; as well as a stable pricing and competitive environment. Cash stood at $53.2 million (~$1.80 per ADS) compared with $51.4 million on September 30. Management dismissed recent takeover speculation and declared that Rediff is not entertaining offers.
• Investment Overview. REDF is the largest India Internet “pure play” listed in the U.S. Using a portal interface (www.rediff.com), it provides a comprehensive spectrum of services and content catering to the Indian community worldwide.
• Rediff derives revenue from online advertising clients. It 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 systems infrastructure).
• Attractive attributes include a strong brand (the India Online Advertising segment holds ~30% market share and clients include virtually all of the major advertisers); leading site traffic (note 50+ million online users – driven by the e-mail offering); a business model with inherent operating leverage (we estimate operating margin expansion of 450 bps during calendar 2006-08); experienced management (CEO Ajit Balakrishnan has a background spanning three decades in the advertising industry); and meaningful insider ownership (30%).
• To attract users and advertising clients, Rediff is developing a broad range of offerings: web-based e-mail with enhanced features and mobile phone access; VOIP-enabled Instant Messenger that is also available on mobile phones; search/comparison tools covering popular categories such as shopping, travel, jobs, matrimony and ring-tones; social networking 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.
• Rediff has been profitable since September 2005 on quarterly revenue of $4.4 million. The balance sheet was strengthened by a $45 million follow-on offering in November 2005 at $15.86 per ADS. Rediff completed its IPO in June 2000 at $12.00 per ADS. We believe that the company could command a premium from a large/strategic suitor.
In our opinion, principal risks include the following:
• Less established “dot-com” clients contribute one-half of advertising revenue.
• The current valuation renders REDF vulnerable to a correction in the U.S. markets.