Monday, January 30, 2006

The hype on Rediff

Disclaimer: This is not investment advice. Consult your investment advisor before making a decision.This could be factually incorrect. Author does not hold position in the stock, but could have a vested interest in seeing the publication of this article. This represents the author's fair opinion of the company, which might be completely incorrect. Author might not have any financial, accounting or valuation background. Again, contact your investment advisor.

These days if Jim Kramer as much breathes the name of a stock on Mad Money (CNBC) - the stock runs (or tanks) depending which side Kramer is on. He mentioned Rediff earlier this week, as a play on India, on Jan 24. Not surprisingly, the stock has jumped - about 35% since that day. So is Kramer speaking out of his hat, or is there some sane reason behind his bullishness?

Rediff was first (or amongst the first portals) that were launched in India in the late-90s. Most of them, such as, flamed out with the dot-com bust. Amongst the survivors, Rediff and Indiatimes are the biggest Indian portals. Rediff enjoys a very strong brand recognition amongst Indians - this writer has lived in US for 3 years and still visits Rediff, as do almost any other Indian that he knows. This has been achieved without heavy advertising spending - in contrast to Indiatimes. Indiatimes, owned by Bennett and Coleman (publishers of Times of India - the largest read Indian English daily), has been "cross-promoted" on an entire page in the Times of India every day for the past 7 years. And still, it lags Rediff in rankings.

On Alexa, is ranked globally as the 132nd most visited web site.〈=none&page=2#. Rediff is the top-ranked Indian website - ahead of Google India (though there are a large number of Indians who go directly to Google US) and it closest competitor Indiatimes (ranked at 301). Yahoo India does not get ranked seperately. Does that smell gold? Not necessarily. Rediff ranks ahead of such websites as Monster, Best Buy and Netflix. Mere high internet rankings are not enough to translate into a high market cap or oodles of cash flow.

Rediff's ADS trade under the ticker symbol REDF. Each ADS is equal to 1/2 share.

Basic Shares outstanding - 14.39 million
Shares underlying Options - 520.8K equity shares at weighted average price of $8.29, or $8.29/2=$4.15 per ADS (As each ADS = 1/2 equity share). This adds another 261K share, at current price of $19.78 per ADS.

So, Diluted shares outstanding - 14.65 million

Current REDF ADS price - $19.78
Equivalent REDF share price = $19.78*2 = $39.56

Market Capitalization = $39.56 * 14.65 million = $580 million. The company has essentially no debt, so its Enterprise value (EV) is $580 million

Besides a web portal, Rediff also publishes two weekly newspapers: Rediff USA and India Abroad. Of the $12.6 mn revenues reported in 2004, $6.6 mn. were from the portal, while $6.0 mn. were from the newspapers. The Online business grew 53% each year over the last 2 years, while the publishing business remained essentially flat.

This year, the online business has accelerated. If we annualize the revenues reported in first 2 quarters of 2005 (Rediff has a March year end), the online business is set to show a 75% increases in revenues, from $6.6 million in 2004 to approximately $11.5 million in 2005. If it grows at 75% next year, we are looking at a revenue of $20 million for the web business in 2006. Add $6 million in publishing revenue (assumed flat), and total sales in 2006 will be $26 million.

Rediff has consistently made losses. This year, it will barely be profitable. As such, we use an Enterprise Value/Sales ratio to get a sense of Rediff's valuation. Rediff is trading at EV/06E Sales multiple of 22x ($580/$26) - which is expensive. Note that this multiple is on sales - 25% of which will come from a no-growth publishing business. Could this steep multiple be justified?

If one recalls the euphoria surrounding Chinese Internet stocks (Baidu, Sina, Alibaba etc) over the past two years, it would seem logical to get bullish on Rediff - the biggest Indian Internet portal. But Baidu and Sina are the top 10 ranked sites globally - Rediff is 132. is expected to have $237 million in revenue in 2006. The company has a current market cap of 1.23 billion. Currently, it has a net cash position of $188 million. So it trades at an EV/Sales ratio of 4.4x. Besides, the company is profitable - 06E consensus EPS is $1.07 for a P/E ratio of 21.7x.

Maybe Rediff has a much brighter growth curve ahead of it than Sina. And then, News Corp acquired Myspace for $580 million when it had piffling revenues. Yahoo, Google and other big media companies are aggressively buying web properties. Rediff targets a particular demographic - and an increasingly important one at that. It might be a good acquisition target. But will any acquirer be willing to pay $580 million?

Lets look at Myspace. Myspace was the fifth most trafficked site in the US when News Corp bought it, and is the 13th most trafficked site globally. Its growth has been explosive, from a virtually nothing 2 years ago, to over 13 billion page views per month today. Rediff, on the other hand has merely increased from 400 million page views to 600 million page views over the same time period. Over this time, Rediff has constantly ranked below 100 in the list of most trafficked properties, indicating that a lot of the growth has come simply due to the widening reach of the Internet.

And this is perplexing. The biggest Indian portal is not showing any explosive growth in its page views. This company, which has been existence for close to a decade, will barely touch merely $20 million in revenue in 2006. Over this decade, Rediff's management has done a few acquisitions, including the publishing assets, a calling card business (which was sold - why did a Internet portal invest in a calling card business in 2001 when lond distance prices were in free fall is mysterious, only to sell it off in 2 years at a mere 16% of the price paid?) etc. In the meantime, other India focused websites - such as privately held - have been able to monetize their product more effectively.

One would argue that Internet penetration in India is rising exponentially, which might justify Rediff's valuation. But we do not see it in Rediff's numbers. Quarter-over-Quarter in 2005, growth in Online revenue is flat. There are still not enough users in India to cause massive shift of ad dollars to the Internet. Maybe they will come in 2 years, in which case the stock is 2 years ahead of its time.

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