INSIGHT: Rediff’s second coming; ICICI Bank slips

INSIGHT

Rediff’s second coming

Rediff.com, the country’s top internet site, has got a re-rating of sorts lately. Its market capitalisation has risen 170% in the past five months. Two things have worked in the company’s favour. First, it has turned profitable at the post-tax level for the first time in its history. Second, deals in the internet space this year - for instance, Google acquiring Baidu.com and Yahoo buying a stake in Alibaba.com - have triggered fresh interest in internet shares.

In the case of Rediff.com, both these factors have fallen in place at the right time. Rediff’s American depository shares (ADSs) now trade at about $19 apiece, almost exactly at the same level at which they listed  five years ago in the US.

Based on market capitalisation, Rediff’s value is now about 11% higher at $ 550 million compared to when it first listed. This is because the number of shares outstanding has increased by a similar amount after the company made a secondary ADS offering in November this year.

At current levels, the company trades at about 30 times annual revenues, which is a 34% premium to Google, which trades at a price-to-sales multiple of 22. Yahoo trades at 11 times sales.

Looking at the price-earnings (PE) multiple does not, however, make sense, since Rediff has turned profitable only this year and the absolute profits are very low. (For perspective, Rediff trades at a PE that is 680 times annualised earnings for the six months ended September, 2005.) Rediff’s operating profit margin has improved at a dramatic rate, from -139% in financial year 2003 to -34% in 2004, to -14% in 2005 and a positive 8.4% in the first six months of the current fiscal. Google’s operating margins are at 34% currently, which means there’s ample room for improvement.

Rediff’s core India Online business has been driving growth, with revenues rising 100% in the first half. The US publishing business has remained flat. The change in product-mix is welcome, since the India Online business, which comprises online advertising and fee-based services, enjoys much higher margins compared to the US publishing business, which includes India Abroad, a weekly news publication, and Rediff USA online.

Going forward, the India Online business should continue to drive growth for the company, given the lower penetration in the Indian market. While profit levels are expected to increase rapidly as a result, the fact that the company already trades at valuation multiples higher than Google means that the upside going forward could be limited.

ICICI Bank slips past SBI

India’s No 2 bank is now No 1 in value. Thanks to its recent issue of fresh equity, including an ADS issue, ICICI Bank overtook the State Bank of India (SBI) in terms of market capitalisation on December 19, the day the new shares were listed. Following the listing of 11.65 crore new shares (7.93 crore shares from the domestic issue and 3.72 crore as underlying ADSs), ICICI Bank’s market-cap jumped from Rs 43,557 crore to Rs 50,140 crore, surpassing SBI’s Rs 49,577 crore.

At Thursday’s closing price of Rs 573.40, ICICI Bank’s market-cap is at Rs 49,172 crore as against SBI’s Rs 47,912 crore. The gap has widened because SBI’s share price fell by 3.36% from Rs 942 on December 19 to Rs 910.35 on December 22. During the same period, ICICI Bank’s price dropped by a lower percentage of 1.95% from Rs 584.80 to Rs 573.40.

But what does this new No 1 status mean for ICICI Bank? Primarily, it means the bank now has the ability to scale up globally using its market value as currency for acquisitions. SBI, given the limitation that the government’s holding (held through the RBI) cannot fall below 55%, will have to fund acquisitions only through internal cash flows or borrowings. Which is why it has made only minor global acquisitions so far. If this handicap remains, ICICI Bank can close the gap with SBI in terms of overall assets faster than it could have earlier.

(Contributed by Mobis Philipose & Kishor Kadam)