Indian Internet Companies: Turning the Corner

As the Internet penetration levels in India reach a critical mass and
e-commerce takes off, the years of patient wait for profits among Indian
Internet companies seems to be over. Of course, with every successful company in
the Internet space, there are hundreds of failures attached. As the Internet
markets bustle with activity, we believe that once again there will be quite a
few new start-ups. However, this time around, we may not see the same level of
activity as seen in the past, as both investors and entrepreneurs have been
chastened by the dotcom crash.

Among the leading players, two companies that are shining bright in the
Indian Internet space are the Nasdaq listed Sify and Rediff. The two will
benefit from the exponential growth in the Indian Internet space in the coming
years.

SIFY

Sify is a leading player in consumer Internet and enterprise services in
India and provides integrated Internet, networking and electronic commerce
services. Formerly known as Satyam Infoway, the company was founded in 1995.
Sify is headquartered in Chennai. R Ramaraj was the co-founder of Satyam
Computers as well as Sify and drew upon his previous experience to develop Sify
as one of the leading Internet Companies. Raju Vegesna as the MD and CEO of Sify
has recently replaced him.

The company reported revenues of $28.7 mn for the first quarter ended June
30, 2006, 29.1% higher than the quarter ended June 30, 2005. Revenues grew
approximately 17% on a sequential basis and 96% over the same quarter last year,
driven by advertising, sponsorships and e-commerce. This includes revenues from
the Globe Travels' acquisition amounting to $0.13 mn. Net profit for the
quarter under the US GAAP was $1.3 mn compared to a net loss of $2.1 mn in the
first quarter of the previous fiscal year. EBITDA terms, for the quarter was $4
mn, an increase of $3.7 mn compared to the same quarter last year. Sify ended
the quarter with a cash balance of $55.2 mn after capital expenditures of $6.7
mn and the acquisition of Globe Travels, during the fourth quarter. 

During the last quarter, Sify invested in a new data center
in Bangalore to meet growing demand. It also completed the acquisition of Globe
Travels, to enhance revenue-earning opportunities for its portals and the iWay
Cyber Cafe chain.

Sify acquired Globe Travels, an Iowa based organization engaged in the
business of online travel and travel related business in the US-India segment,
in a deal that includes cash of $2.5 mn, stock options and performance pay outs.
Online travel is the fastest growing and highest revenue generating category in
the e-commerce space in India. Sify expects to leverage its large NRI audience
on samachar.com, and the distribution reach of its iWays' Cyber Cafe chain, to
grow the online travel business through this acquisition on both the
international and domestic fronts.

The company has recently partnered with Kolkata based Ananda Bazaar Patrika
to power its online store.

REDIFF

Ajit Balakrishnan founded Rediff.com India in 1996. Balakrishnan has been
the director in the company ever since its inception. Rediff is headquartered in
Mumbai, with offices in New Delhi and New York.

Rediff's product and service offering consists of India Online business and
the US publishing business. Its Rediff.com India website consists of
information, communication and content services, free and paid community
features and products, including e-commerce and mobile services. The company
also publishes two weekly newspapers aimed at the Indian-American community
based in the US and Canada. 

Revenues for the first quarter ended June 30, 2006 increased by 37% to $5.7
mn, as compared to $4.2 mn in the same quarter last fiscal year. Revenues from
India Online, which comprised online advertising and fee-based services,
increased by 52% to $4.1 mn during the quarter ended June 30, 2006 compared to
$2.6 mn during the same quarter last fiscal year. This showed an increase in
gross margins to 78% from 69% last year and helped earnings this quarter.
Revenues from the US publishing for quarter ended June 30, 2006 increased by 12%
to $1.7 mn from $1.5 mn during the quarter ended June 30, 2005. Its profit in
the fiscal's first quarter increased nearly forty times due to strong growth
in advertising revenue from the India Online division. Operating expenses
increased by 33% to $3.6 mn for the quarter ended June 30, 2006, compared to
$2.7 mn for the same quarter last fiscal year. This is primarily due to higher
product development, advertising and marketing costs.

The company saw 20% growth in registered users compared with last year. Apart
from this, in India, the factors that corroborated to a spur in the results were
decrease in broadband cost, penetration and higher PC sales. The number of
advertisers on the company's site for the quarter ended June 30, 2006 totaled
165 brands, an increase of 24% over the number of advertisers during the same
period in the prior fiscal year. For the quarter ended June 30, 2006, the top 10
advertisers contributed approximately 55% of advertising revenue for the India
online business, compared to 53% during the same period in the prior fiscal
year.