BOMBAY, Feb 5 (Reuters) - Merrill Lynch has picked leading India-focused Internet portal Rediff.com as its third-top Asian Internet recommendation and expects it will become the first Asian portal to break even.

In its weekly Internet-sector research report, Merrill analysts Matei Mihalca and David Cui cited Rediff's better than expected October-December results, its strong cash position, a growing Indian online advertising market and cheaper Internet access as reasons for the selection.

Korea's Internet Auction <43790.KQ> and Hong Kong-based China dotcom are its top two recommendations in the Asia-Pacific region excluding Japan and Australia.

"Growing lower fee and even fee-free Internet access in India favour Rediff, as they bring more people online," the report said.

India's advertising market is also in better shape than most global markets, with TV broadcasters reporting 15-20 percent year-on-year growth, it said. The share of online advertising from consumer goods, automobiles and insurance companies was also on the rise in India, it said.

Rediff's page views soared to 670 million in the October-December period, up 69 percent from the previous quarter. Net revenue rose 31 percent to $1.75 million, while the proportion from dotcoms declined to 30 percent from 47 percent. Its operating loss narrowed to $1.5 million from $2.09 million in the previous quarter.

Rediff also has $57 million in cash which Merrill expects will last for over seven years.

Merrill is bullish about Rediff's plans to increase non-advertising income and estimates its revenue to grow at 22 percent quarter-on-quarter to $2.15 million in the January-March quarter and $2.62 million in the next.

"Even on our current conservative numbers, Rediff would be the first Asian portal to achieve breakeven by end-2001 (significantly ahead of NetEase.com and Sina.com)," it said. NetEase and Sina are leading China Internet portals.

Indian internet sector mixed

Merrill feels India, along with China and Korea, are Asia's most important Internet markets in the long-term. It estimates the number of Internet users in India to rise seven-fold to 44 million by 2003, up from 5.5 million now.

But trends in the Internet market augur for mixed forecasts for India's Nasdaq-listed Internet companies Rediff.com and Satyam Infoway , it said.

Satyam Infoway, majority owned by India's fourth-largest software exporter Satyam Computer Services , is India's second-largest Internet Service Provider and also runs a portal, besides offering web solutions.

While Merrill remains bullish about Satyam Infoway's portal and web solutions prospects, it is worried about the impact of lower Internet access pricing on its revenue.

"We believed that as venture capital funding dropped and brash new entrants suffered, pricing power would return to leading private players such as Satyam Infoway," Merrill said.

But increasing competition from state-monopoly Videsh Sanchar Nigam Ltd , India's largest Internet Service Provider which now has a national licence and is offering free night-time access, does not augur well for access pricing, it said.

Merrill has lowered Satyam Infoway's revenue estimate for the current financial year by 17.7 percent and for the next year by 15.1 percent. And it has pushed back Satyam's EBITDA (earnings before interest, tax, depreciation and amortisation) breakeven point by two quarters to October-December 2001.

Lower access pricing should benefit Rediff.com, Merrill said.