India portal to break even next year; eyes Bombay listing

Rediff.com likes to see itself as the first among India's Web portals. It was the first to launch a Web site in India back in 1996, the first to accept international venture capital, the first to list on the Nasdaq and now, it expects to be the first to turn a profit.

But with a slowdown in global online advertising possibly putting a halt to those plans, the India-focused Net portal has put in place a strategy to ensure profitability by next year and beyond.

Rediff.com (REDF: news, msgs) chairman and CEO Ajit Balakrishnan told CBS.MarketWatch.com in an interview that revenues from e-commerce transactions will supplant advertising as its main revenue base in coming years and he expects other global portals to follow the same path in order to survive.

"Our transaction revenue was 8 percent last quarter and is about nine percent this quarter. Our share of transaction revenues is rising quarter to quarter. And we expect over the next five years, it'll be transactions that will form the majority of revenues," he said.

"I predict in 5 years, it will be 90 percent. All portals will be the same. That's the direction it's going."

The following is a transcript of the interview with Balakrishnan, who was in New York to attend an Indian technology conference sponsored by the New York Society of Security Analysts.

Highlights of the interview include Balakrishnan's belief that profitability could come by the end of next year and plans for a listing on the Bombay Stock Exchange.

Q. How has the advertising slowdown affected your company?

A. It hasn't. The slowdown is only in the U.S. Specifically in the United States, one can see sentiment towards online advertising is a little dim today because the growth in online advertising on a quarter to quarter basis is in the single digits, like 8 to 9 percent.

In many emerging markets like India, quarter on quarter growth in the online advertising market is 30 percent. This is only because it's in a lower base than the United States—India today is where the U.S. was in 1996. The base is small but the growth rate is phenomenal. There is absolutely no excuse for anybody in our kind of space to grow at less than 30 percent.

Q. But I would say it's not just the United States but more of a global trend. Look for example at the Chinese Web portals. They're all down quite a bit. If not an advertising slowdown, why has sentiment towards Web portals changed?

A. Six to nine months ago, most portals were being traded at 100 to 200 time next year earnings, that clearly is an unsustainable price to sales ratio quiet apart form price to earnings ratio. So what is really happening is that portals are coming down and in some ways, becoming more realistic and approaching the classical price to earnings ratio. It's important to note that in the next year to two years time, portal valuations will be pretty much like the valuations of other high-growth high technology companies. To expect 50 times earnings is very realistic compared to last year's exorbitant numbers.

Q. Let's talk about your financials. Yesterday, your company reported that revenues grew quarter to quarter, but losses continued to widen. When do you expect to turn a profit?

A. No, losses have come down. At the operating loss level we decreased it, but foreign exchange losses (contributed to the overall loss). Analysts have all predicted that we will break even in the October to December 2001 quarter. And we are very comfortable with that.

Q. You're listed on the Nasdaq but not in India. Aren't you taking a risk considering the volatility of the Nasdaq, where dot-coms have been falling like flies?

A. You haven't seen the Indian market, which is even more volatile. Actually, listing in India is a priority for us; definitely it's only a question of time. I can't tell you the time, but our advisers will tell us. We're looking at the Bombay Stock Exchange.

Q. How do you differentiate yourself form the other Indian portals? Who are your main competitors?

A. We have three different classes of competitors. One is the international portal, which are Yahoo (YHOO: news. msgs), MSN and Lycos (LCOS: news. msgs) Domestically there are three listed on the Nasdaq. And Indiatimes.com and the newspaper portals.

We are technologically deep, the services we provide like email and instant messaging lead the market. Our e-commerce platform is the most sophisticated platform you can find. Our brand is a very pervasive brand. Plus, we were early in the market. We've been there since 1996.

We're the leading portals based on page views, registered users and reach. Any of these measures. We have 250 million page views in December, I think.

Q. Internet penetration is crucial to what you do. How has the government helped or hindered that process? Are there restrictions like those in China that are inhibiting the growth?

A. The main driver of growth in emerging markets isn't really the government, but that government stays out of the way. Our government, which normally interferes a lot in business, had the foresight to stay out of all this and Internet growth in India is being driven by entrepreneurs. There is a tremendous amount of investment made as I speak in infrastructure, investment in backbones to connect major cities, investment in Cybercafe chains, investment in gateways. It's a good thing that the government isn't making the investment, they are staying out of the way and making sure the rules governing investment are being liberalized.

Q. Do you have any deals, mergers or acquisition in the pipeline?

A. We have a three-man team actively looking to grow our business in the international area. When we did our IPO, we stated it was a goal of ours. The reason we did an IPO is to have an acquisition currency and a cash to grow our business in a worldwide basis. There are millions of Indians who live outside of India who are affluent. In the United States, UK, Singapore and so on. We are avidly creating sites to ensure we provide local services and information to the Indian community that is an important part of our strategy. Our M&A team is looking to see where they can, make acquisitions.

Q. That's very general...

A. We are looking especially at the young portals in the U.K., U.S. and Singapore that have good management teams. They can't be very large, and we like to enter into partnerships or joint ventures with them. There's nothing else I can announce at this moment.