Equity Watch, Uncategorized

Spice Communication IPO WATCH Expect to list at Rs. 52-57

Spice Communications

­­­­­­­­­­­­­­­­­­­­­­­­­­­Neutral                                                                                Price Band – Rs.41-46

Issue Details

Objects to the issue

The current initial public offering (IPO) is to raise Rs 464 crore at the lower band (Rs 41) and Rs 520 crore at the upper band (Rs 46). The net proceeds from the issue are to be used for part repayment of long-term debt, for payment of NLD and ILD licence fee, for meeting related capital expenditures to set up base infrastructure for NLD/ILD amounting to Rs 63.60 crore, for paying vendor(s) for network equipment and other capital expenditure amounting to Rs 177.63 crore, and for general corporate purpose and public issue expenses. Spice Communications has issued 2.49 crore of equity shares at a price of Rs 45 to certain investors pre-IPO and raised Rs 111.93 crore.


Promoted by Dilip Modi of the B K Modi group, Spice Communications provides cellular services in Punjab and Karnataka. Telekom Malaysia will hold a 39.2% equity stake post-issue compared with 40.8% of the Modi group. The company was the second largest cellular services provider in Punjab and the fifth largest cellular services provider in Karnataka, measured by the total number of subscribers with a combined market share of 14.49% in these two states (Punjab: 23.9% and Karnataka: 7.5%) end March 2007. The subscriber base was 3 million (2.05 million in Punjab and 0.95 million in Karnataka) with network coverage of 537 towns in Punjab, covering approximately 55% of the state population, and 229 towns in Karnataka, covering 33% of the state population end May 2007.

Spice Communications has pending applications for licences to provide cellular services in additional 21 circles throughout India . The company was recently awarded a national long distance (NLD) licence and international long distance (ILD) licence by the Department of Telecommunications and it intends to initially set up base infrastructure for a capacity of 30 million minutes per month across 15 locations in India .

Investment Rationale

Brand equity to support growth

Ø       Has received NLD and ILD licences and proposes to offer data transmission services and voice transmission for calls originating and terminating on most of India’s and global telecom networks. It will be basically taking capacity on lease rather than setting up its own network. This will improve the operating profit margin.

Ø       One of the objects of the issue is to repay part of debt, which is likely to reduce the interest burden.

Ø       The Indian telecom industry is one of the fastest growing in the world adding nearly six million subscribers a month. The mobile subscribers base is estimated to increase to approx. 210 million by the year ending March 2008 (FY 2008), from the current level of 167.44 million subscribers end April 2007. Factors like falling handset costs, attractive tariffs and extensive reach have reduced the entry barriers for new subscribers and, thus, expanded the markets available to telecommunication service providers. The presence in the country’s richest state, Punjab , is likely to translate into volume growth.

Risks and Concerns

Ø       In the absence of pan-India presence like other integrated operators, unable to provide seamless roaming services and is forced to share its revenue with other operators with whom it has roaming arrangement for its subscribers. Though licences in other circles have been sought, the current state of financials will hamper expansion in other circles in a major way in foreseeable future.

Ø       Of the last five completed financial years, there were net losses in three years on account of low operating profit margin compared with the industry, high interest and depreciation. Losses have been incurred even in FY 2007. On account of continuous losses, the net worth has eroded. Accumulated losses stand at Rs 684 core (higher than the current issue size of around Rs 500 crore).

Financial Performance

In Rs. Cr.

Particulars 0206 (12) 0306 (12) 0406 (12) 0506 (12) 0606 (12) 0612 (6)
Revenue 501.70 494.26 536.34 606.57 661.49 385.11
OPM (%) 31.9 33.6 28.0 27.4 22.2 22.0
OP 160.04 166.02 150.41 166.48 146.56 84.61
Other Income 31.16 85.39 18.64 36.91 18.79 8.84
PBDIT 191.20 251.41 169.05 203.39 165.35 93.44
Interest 106.11 76.64 68.05 71.90 86.97 63.80
PBDT 85.09 174.77 101.00 131.49 78.38 29.64
Depreciation & Amortization 100.45 117.16 123.51 123.93 145.82 70.96
PBT -15.35 57.61 -22.51 7.56 -67.44 -41.31
Tax 0.00 0.00 0.00 0.18 1.30 0.49
PAT -15.35 57.61 -22.51 7.39 -68.74 -41.80


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