An Indian dotcom's Nasdaq listing

By C.R.L. Narasimhan

When Rediff.com listed on the Nasdaq on June 14, it set to establish many points. A few of those have significance far beyond the company. However, even in a limited financial sense there are a few messages. Rediff.com raised $55.2 million by selling 4.6 million American Depository Shares (ADS) becoming in the process the second Indian dotcom to access the American stock exchanges.

Satyam Infoway was the first, but its close links with the cash- rich and highly profitable Satyam Computers places it in a different category. For investors in the domestic capital market, the Satyam name is already familiar. So are the names of Infosys and Silverline Technologies, information technology companies which have gone in for an American listing and also have visibility in India.

Unfamiliar business

The last point has to be understood in its correct perspective. The business which Rediff.com is in is unfamiliar to a large section of the American investing community. The controversy over the viability of the dotcom operation - its business model as it is called - has by no means been resolved even in the developed markets.

Within India no dotcom has yet been listed and the Securities and Exchange Board of India has just appointed a panel to give a value to the dotcom operation. Currently there have been big question marks over the future of even entities such as Amazon.com in the U.S., which have been stock market favourites until now.

Analysts from influential investment banks have, after trying to superimpose the dotcom model on more conventional business parameters, found gaping holes in the former. However, dotcoms still have their supporters, although admittedly their numbers are shrinking by the day.Technology stocks in general have been viewed with greater circumspection than before since the great Nasdaq correction of March but then one is still not sure as to what their correct price levels are.

And the timing is bad too

At another level of course there is an overgrowing need to understand and categorise the IT industry in terms of its segments - hardware, software, dotcoms and so on. In India, there are problems with even a few software companies' valuations, which unlike dotcoms show regular and auditor-certified income streams.

Even if one does not want to question their accounting procedures, are their high price-earnings multiples justified? For dotcoms it has been said that the P/Es hardly matter. Their market quotations have had no correlation to their earnings, which have invariably been negative.

Rediff.com's role in tapping the American capital market will be closely watched by the innumerable dotcoms that have proliferated in the country.

A derived question: will ordinary investors understand the dotcom business model and be confident enough to put their money in it? At the moment, dotcoms are surviving with venture capital. Hopefully a public offering will follow at some future date. The latter route for raising capital can be particularly tricky as perceptions of dotcoms change dramatically.

Logically speaking, even for risk-taking venture capitalists, the exit route is through an IPO. If that gets blocked, funding the enterprise will be doubly affected. In India especially there seems little chance of any dotcom making a public offer in the near future.

For venture capitalists and other investors, the only way to make money is to merge or sell the enterprise. Indeed mergers and acquisitions are happening on a grand scale. If there had been a reasonable access to retail funds, some of them would have certainly retained their identities.

Rediff.com has incurred a loss of almost $6.7 million as on March 31,2000 up from $985,000 a year earlier. During the same period revenues (from advertising and E commerce) have grown but only from $855,000 to $1.9 million. This obviously means that the expenses growth have far outstripped the earnings stream. Total operating expenses have increased from $1.5 million to $7.8 million.

Sales and marketing costs (for instance) have jumped from $389,000 during 1999 to $5.27 million last year. As far as Rediff.com is concerned this rather extraordinary chasm between income and expenses can be explained as the logical outcome of the special circumstances of last year: the need to build the brand, the internet infrastructure and promote the share issue. The most intriguing question ,not only for Rediff.com but for all dotcoms is when they will generate earnings in the conventional sense?

When and from where the cash will come?

According to Rediff.com's prospectus, the expectation is that net losses will grow. Operating cash flows are also expected to be negative in the foreseeable future. ``Although our revenues have grown in recent quarters, our expenses have grown even faster ......Accordingly we will need to generate significant additional revenues, while controlling our expenses.'' Being a pioneer Rediff.com has the advantage of a prime mover. In e commerce area, this is supposed to have a value that could compensate the dismal financial numbers. Again, an assumption that will be tested.

In short, what is at stake is the business model of a dotcom. Rediff.com has managed a listing, a direct consequence of which has been the disclosure of the details relating to the dotcom business as a whole. At this stage it will be difficult to say how many of the other dotcoms can emulate Rediff.com in raising capital. Before that, of course, they have to survive.

Send this article to Friends by E-Mail

Section  : Business
Previous : IP Rings pays 10 p.c final