Description

The Chinese internet companies have rallied tremendously this year and Rediff an India-based internet company has rallied along with them. The Chinese companies have shown tremendous growth and great potential and profitability, while Rediff hasn’t. Also much of Rediff’s revenue comes from traditional business that are low margin including publishing and phone cards.

Rediff’s Revenue from Q2 Ending September 2003

US Publishing $1.48
Phone Card $1.18
India Online $0.79

Total Revenue $3.43


The publishing business consists of India Abroad. India Abroad is an ethnic newspaper targeting the affluent Indian-American community in the United States. Indian Abroad was purchased May 2001 for $10 million. Revenue in 2003 declined slightly from 2002 number. In May 2001, India Abroad was valued as an extension of the internet and publishing was much more valuable. My best guess is that this asset is worth half the original purchase price, or about $5 million.

The phone card business is declining. Revenue is down 43% year over year, and the company is now evaluating if it can continue this business on their own or partner/sell the business. As this business is declining rapidly there isn’t much value here. Assume best case its worth $5 million (about 1x annual revenue)

Enterprise value $116 million
Phone Card $5 million
India Abroad $5 million

Implied Value of India Online $106 million
Estimated revenue of India Online is $3.2 million
Or 33.13x revenue.

India Online has many segments including mobile services, subscription services(e-mail/webhosting) and merchandising.

There are three Chinese Internet companies that I would consider partially comparable to the India online segment of Rediff are NetEase(NTES), Sohu.com(SOHU) and Sina (SINA).

Price/Shrs/MktCap/NetDebt/EntVal/2003Rev/2002Rev/RevGrowth/Price-RevRatio
NTES 40.48 34.5 1,396.6 92.0 1,304.6 64.0 26.7 140% 20.4
SOHU 30.65 42.0 1,287.3 71.6 1,215.7 81.3 28.7 183% 15.0
SINA 32.19 57.6 1,854.1 108.0 1,746.1 111.7 38.9 187% 15.6

All of these companies trade at 15-20x revenue and are growing at 100%+ over the last year and expected to grow by 40% and higher next year. While Rediff’s India Online segment only grew by 18% year over year. While the internet still has tremendous potential, Rediff so far isn’t executing well. It should be worth less than the comparable companies growing more rapidly. If Rediff’s India Online segment was valued at 10x revenue(which is still probably too high) it would be worth $32 million for a total company value of $42 million seeing potential for the stock to drop 66%.

Catalyst

Management has postponed profitability projections several times and haven’t made a new projection. Rediff will need to execute a secondary probably within the next year to raise more cash to fund their losses. They have $11 million in cash and are losing $1-2 million per quarter.