Spice Telecom IPO

Name of the Company: Spice Telecom
Sector/Industry: Mobile Service Provider
Issue Size: 11.3 crore shares (Of Rs. 10/- Each Share)
Issue Price: Rs 42 - 46
Issue Opens: Monday, June 25, 2007
Issue Closes: Wednesday, June 27, 2007
Promoters: B.K.Modi and Telekom Malaysia (TM)
Company Website: www.spiceindia.com
Book Running Lead Manager: UBS Securities India and ENAM Financial Consultants Private Limited.
Registrar: Karvy Computershare Private Limited.
Draft Red Herring Prospectus: www.sebi.gov.in/dp/spicecom.pdf


About the Company: Incorporated in 1997, Spice Communications Limited (or Spice Telecom) is a cellular services provider in the states of Punjab and Karnataka in India. At present Spice Telecom has customer base of 0.3 crores.

Objectives of the issue:
Fees for NLD (National Long Distance) and ILD (International Long Distance) licenses (64 crores).
To purchase network equipment (178 crores).
Repayment of debt.

Strengths:

Strong Foreign Investor in TM: TM is a leading telecommunications company based in Malaysia, with a strong presence in the Asia-Pacific region, including strategic investments in Sri Lanka, Bangladesh, Indonesia, Cambodia, Singapore and Pakistan. TM’s experience and track record in expanding its business throughout the region will be helpful in the implementation of pan-India expansion strategy and that relationship with TM may also give access to additional technical and marketing expertise and economies of scale.

Value Added Services: Voice revenues are highly commoditized and it is crystal clear that voice tariffs are going to get cheaper day by day. Hence mobile service providers need to look for different revenue streams. Value added services (VAS) provide this opportunity. Convergence of technologies will open up lot of VAS opportunity. Already in Western countries, VAS accounts for 50% of the revenues. Spice is doing good at VAS. Cellebrum.com Private Limited, an affiliate company, creates value-added services for Spice, to help them stay ahead of competitors. Additionally TM, will also help Spice to develop innovative value-added services designed to appeal specifically to different market segments


Potential pan India presence: Currently Spice operates in two circles only. Spice
has applied for licenses to provide cellular services in an additional 20 circles throughout India. Spice has also applied to obtain NLD and ILD licenses.


Weakness:

Management: According to me, Modi management is not dynamic. Spice has not capitalized on the early mover advantage.

Size: At present, Spice is too small. Getting pan India licenses involves lot of regulatory hurdles and as such there is huge artificial shortage (India Army has occupied loads of bandwidth which it does not use) of spectrum in India.

Financial Information:

In the three years ended June 30, 2004, 2005 and 2006, total income was Rs. 554.4 crores, Rs. 643.0 crores and Rs. 680 crores, respectively, and earnings before income, tax, depreciation and amortization (“EBITDA”) was Rs. 168 crores, Rs. 202 crores and Rs. 164 crores, respectively. For the quarter ended September 30, 2006 total income was Rs. 184.33 crores and EBITDA was Rs. 42.2 crores.

Spice is loss making company. Spice Telecom’s accumulated losses are the tune of Rs 642.54 crore as on June 30, 2006. Also, it further continued to post negative net worth of Rs 684.35 crore as on December 31, 2006. This is the reason it has been denied listing at NSE. Making losses for few years is common among telecom companies because of long gestation period. Idea was also loss making company and has turned to black in this year.


Valuation:

Since Spice is loss making company, traditional method of ‘P/E’ does not work. As an alternative I have compared Spice with Airtel (which commands highest valuation), in terms of ratio of market capitalization to number of subscribers.

For Airtel, the ratio of market capitalization (1, 50,000 crores) to number of subscribers (4 crores) is 37500. Similarly for Spice, the ratio of market capitalization (3750 crores )
to number of subscribers (0.3 crores) is 12500. Other players like Idea and Hutch have the ratio 21500 and 30000 respectively. These figures gave an impression that Spice is damn cheap, but hang on and read the fine print.

We are comparing Spice with integrated telecom and national level players. Apart from mobile services, Airtel provides landlines, fixed wireless and bandwidth and the major point is Airtel, Idea and Hutch are all profit making companies. Hence we need to discount all these factors in Spice’s valuation.

Even if we value Spice at 50% discount to Airtel, then we still have approx 50% listing gains on the table. My call for Spice is ‘Apply’

Spice has done pre-IPO placement of 2.5 crore shares @ Rs 45 to Lehman Brothers and other investors.

One example how big money makes bigger money. In March 2006, Telekom Malaysia had picked 49 % stake in Spice for 1000 crores and today the same stake is 2000 crores on conservative. Seriously big money.

BEML and HDIL are the latest entrants on the IPO bandwagon…Watch out for reviews on this page..


Inputs From:
Spice DRHP