Ashish R. Thadhani (Gilford Securities) recently sent a note to clients on Indian internet portal and services provider Rediff.com India Limited's (NASDAQ: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.