RealMoney Silver - India Web Portal Not Worth Jumping Into Yet

India Web Portal Not Worth Jumping Into Yet
By Jay Somaney
RealMoney.com Contributor
9/5/2007 3:36 PM EDT

I promised in Tuesday's column on Sify (SIFY) to cover its peer, Rediff.com (REDF) . Together they are the two Indian pure-play portals that trade exclusively on the Nasdaq. And as with Sify, I see tremendous potential for Rediff -- but not a reason to buy in just yet.

Before I get to why I wouldn't buy in now, let me tell you what makes this an appealing story.

Rediff provides online news, information, entertainment and shopping through its flagship site, Rediff.com. Besides it portal sites, the company also publishes two weekly newspapers, one each in America and Canada. The company is headquartered in Bombay, India.

Rediff is cheaper than Sify on a current-year basis, but it's more expensive on a year-out basis. REDF shares trade around $15.78, with a market capitalization of $461 million. At current price levels, Rediff trades at 75 times estimated earnings of 21 cents a share for the fiscal year ending March 2008 (compared to 85.3 times for Sify) and at 58 times estimated earnings of 27 cents a share for the fiscal year ending March 2009 (compared to 34 times for Sify).

I believe earnings estimates are on the low side, especially for the year ending March 2009. Only one analyst currently follows Rediff, and he expects Rediff to earn 3 cents a share on revenue of $7.80 million for the September quarter. For the year ending March 2008, he expects earnings of 21 cents a share on revenue of $33.90 million. For the following year, ending March 2009, he expects the company to earn 27 cents a share on revenue of $46.7 million.

Rediff delivered in the June quarter, when revenue came in at $6.8 million, up 18% over the same quarter last year. Online revenue was $4.6 million, up 14% year over year, and North American publishing revenue was up 27% year over year to $2.18 million. Net income was $2.12 million or $0.0726 a share vs. $1.98 million or $0.068 a share a year ago. As more and more Indians come online, these numbers will get substantially and meaningfully larger.

Approximately 172 companies advertise on Rediff's Web site, up from 166 a year ago. Employment, finance, matrimonial, travel and IT products categories account for about 53% of Rediff's revenue. The company's top 10 advertisers account for 42% of ad revenue, compared to 55% a year ago. That's evidence that Rediff is attracting a broader base of advertisers.

The company also said that its registered users grew 26% year over year to 56.6 million. At the end of July, there were 2.47 million broadband subscribers (defined as those that have equal to or greater than 256 kpbs download capabilities) in India, up from 1.35 million in March 2006. India is currently adding about 65,000 broadband subscribers per month but that number is growing larger with each passing month.

I expect broadband growth to follow a growth pattern similar to what we've seen with wireless telephones.

In March 2006, wireless telephone subscribers in India numbered 98.78 million. At the end of July that number stood at 193 million. When wireless services were first launched in India, growth rates were paltry at best, averaging less than 50,000 new wireless additions per month. Now India is adding about 8 million wireless subscribers each and every month. Already India's subscriber base of about 200 million (estimating another 8 million subscriber additions in August) dwarfs the populations of most countries around the globe.

As PCs and Internet access get cheaper, more and more people will be wired through broadband -- and therein lies the incredible opportunity for both Rediff and SIFY.

Unlike Sify, Rediff management has shown that it can deliver on the incredible growth opportunities that lie ahead. However, at current levels, the shares are fully valued.

Admittedly, Rediff is cheaper than Sofy looking at a year out, but what I am looking for in terms of a single catalyst is the number of broadband subscriber additions starting to ramp up much faster than the current rate. That will be a clear (and the best possible) signal to jump into both Sify and Rediff. Another catalyst would be if these stocks come in another 10%-15% from current levels.

Also, please be aware that both Rediff and Sify are frequently mentioned as takeover targets. Takeovers can't be forecast. But it makes perfect sense to me that a Google (GOOG) or Yahoo! (YHOO) would pursue one of these major Indian Net companies. However, I have been saying that for a while now. Hasn't happened yet!

Until the next time, happy investing.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Rediff and Sify to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.