IPO Update: Spice Communications Ltd.

Spice Telecom- Nothing Spicy about it !

Spice Comunications has entered the capital markets with an offer of equity shares worth Rs. 523 Crores at a price band of Rs. 41-46. Investment Guru is of the view that from fundamental perspective Spice telecom issue can be safely avoided. However, with the M&A activities getting hotter in the telecom sector, Spice Communication can be a takeover candidate as company's financial position would be a roadblock in its growth plans and it cannot take advantage of the booming telecom sector on it own. Investors can consider this issue for moderate listing gains in view of company's takeover story.

About Spice Telecom

• Spice Operates in the state of Punjab and Karnataka


• It is the second largest cellular services provider in Punjab and sixth largest cellular services provider in Karnataka with a market share of 11.95%


• The company has tie-ups with over 448 international operators across 208 countries


• The company is promoted by Dilip Modi (post issue stake 40.8%)


• Telecom Malaysia holds 39.2% (post issue) equity in the company.


• The issue proceeds would be utilised towards repayment of debt, payment of license fee for national (NLD) and international long distance (ILD) communication segments and payment to vendors for network equipments.

Positives for the Company

• The company operates in the Telecom Sector which is one of the fastest growing industry. The mobile subscriber base is expected to increase from current levels of 167 million to 200 million by end of 2007. It is expected to reach 500 million by year 2010.

• Telecom Malyasia's holding in the company provides the company with opportunity to leverage the operational and strategic expertise of a major regional telecommunications player.


• The company has advantage of operating in rich states as punjab has highest per capita income while the IT city of Bangalore in its Karnataka Circle provides a big mobile using mass.


• The company has applied for licences for an additional 20 circles throughout India to provide GSM cellular services on a pan India basis.


• The company has also received LOI for license for providing NLD and ILD services. This would be an adiitional revenue source with better margins.


• The company has been able to build a brand image for "Spice" in the circle it operates.

Negatives for the company

• The company has got stiff competition from big players in its own circles and even its pan India presence plans are not so exicitng given the fact that the company is not financialy sound and may not be able to compete effectively against the biggies like Bharti, reliance and Hutch.


• The company has incurred losses in 4 out of the last 6 years on account of higher operating costs and depreciation.


• The company had accumulated losses of Rs. 6,843.57 million as of December 31, 2006. which has completely eroded its networth. The company would have tough times continuing in such circustances and desparately needs to be taken over by a Big player.


• Company faces risk of higher customer churn rate which may adversely impacts its business.


• The company does not owns the trademark "SPICE" and has acquired the rights to use this trademark from associate company MCorp.


• The stock will be listed only on BSE as NSE has turned down the listing request in view of company's net worth erosion.

Valuations

The company is incurring losses , hence no questions of P/E here. The Return on networth had been negative. Competitors Bharti is currently quoting at a P/E of 39 while MTNL commands a P/E of 15. Reliance communication is trading at a P/E of 43.In Karnataka, Hutch is giving tough fight to Spice in terms of growth in Average Revenue per user (ARPU). For the Quarter ended Dec'06, Hutch registered a growth of 14 % against 10% growth of Spice. However Spice was the only operator in Punjab to maintaina APRU growth of 3% against negative growth by the competitors. For quarter ended Dec'06 the ARPU for Spice in Punjab was Rs.221 , lower than its competitors while in Karnataka it was 254, again lowest as compared to the competitors in the circle.

Issue Opens: 25-06-2007

Issue Closes: 27-06-2007

IPO Allotment Status: Spice Allotment Status

Registrar : Karvy Computer Share

Company Website: Spice Tele