Rediff.com: In-Line Operating Results, Core Segment Up 18.5%

Excerpts from Gilford Securities analyst Ashish R. Thadhani's recent update to clients on Rediff.com India Limited (REDF):

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Operating Results Meet Est., Core Segment Up 18.5% QoQ

Investment Conclusion. Based on modestly higher revenue in the core India Online advertising segment – offset by short-term softness in the U.S. business – we are fine-tuning our estimates: fiscal 2009 non- GAAP diluted EPADS remains at $0.27 on revenue of $42 million (31% YoY growth); while fiscal 2010 non-GAAP diluted EPADS stays unchanged at $0.37 on revenue of $53 million (26% YoY growth). Our estimates imply compound revenue/EBITDA/EPS growth of 26%/48%/24% in calendar 2007-09. We are maintaining our $13 target price. In 12-months, this would correspond to 35x forward EPS. The current $165 million enterprise value – translating into 3.9x forward revenue, 21x EBITDA and 29x EPS – should draw support from key strategic assets, i.e., the iShare video distribution platform (trails only YouTube in India) plus access to a base of 66 million registered Internet users.

4Q08 Results. Non-GAAP diluted EPADS of $0.05 vs. $0.09 a year ago on revenue of $9.1 million (up 7% YoY) narrowly missed our $0.06 estimate on revenue of $9.3 million. A shortfall in U.S. Publishing revenue was offset by lower-than-projected operating costs. Results show an encouraging recovery in the India Online advertising segment (60% of revenue), which recorded 18.5% QoQ growth vs. our 15% expectation. Rediff posted an operating deficit of $0.3 million (-3.1% margin) – right in line with our -$0.3 million estimate (-2.9% margin). Cash stood at $59.0 million (or $2.00 per ADS) compared with $59.6 million on December 31. Rediff has noted intense competition in the nascent but highly promising Indian Internet market. It is responding with an expanded range of video, train fare, regional language content, job, car and other search offerings – and currently trails only Google and Yahoo! in the search category; the popular iShare video platform, whose media partners include leading video/audio entertainment providers; and leadership in the Personal Finance segment (more unique visitors than Yahoo! Finance and Moneycontrol, an affiliate of CNBC). Calibrated upfront bandwidth/marketing investments should be rewarded, over time, with rising ad revenue from a strengthened online platform.

Business Model. Rediff generates core revenue from the sale of advertising space on its www.rediff.com 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, Naukri.com, Pepsi, Shaadi.com 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, Rediff.com 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).
• 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 60+ million online users – driven by the e-mail offering); a business model with inherent 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 (GOOG), Yahoo! (YHOO), MSN (MSFT) and AOL (TWX) could require stepped-up investments and pressure future profitability – or result in the loss of a major client.
• The current valuation renders REDF vulnerable to a correction in the U.S. markets. In our view, this is explained by the vast market opportunity, room for upside surprises, scarcity value and an embedded longer term takeover premium.
• Insiders have the ability to exercise significant control over all matters requiring shareholder approval.

ANALYST CERTIFICATION

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.

Comments

[internetstocks]

I am not sure if the company will even exist 3-5 years from now It is becoming increasingly irrelevant - the world is becoming small and the game is really going to be played between Microsoft, Yahoo and Google. It seems the management is not competent enough in taking the company to the next level and not willing to sell the company for some kind of false pride - and the right time to sell the company was last year.In my calculation this should be under $5 and soon will be there sooner or later, in my opinion.The earnings calls lasted 17 minutes and there was not a single question afterwards - that speaks volumes about what the Street thinks of Rediff.