Spice Telecom IPO Analysis

Just hang up!
Sandeep Singh Posted online: Monday , June 25, 2007 at 1420 IST
Updated: Wednesday, June 29, 2005 at 1257 hours IST

Brand ambassador Priyanka Chopra gives Spice Communications, a mobile services provider in Punjab and Karnataka, star value. If you’re a fan, soak in the star appeal. But if you’re thinking of becoming a shareholder of this telecom company by subscribing to its initial public offer (IPO), be concerned, as this company’s star appeal starts and ends with the starlet. On no count does the company appeal as an investment. Okay, maybe one, but we’ll come to that.


Missed callsSpice, which is owned by Dilip Modi and Telekom Malaysia, started mobile operations in Punjab and Karnataka in 1997. Going by the numbers it has added over the past decade, it’s evident the company has failed to capitalise on the early-mover advantage.
As on May 31, Spice had 2.05 million subscribers in Punjab, making it the second-largest player out of seven in the circle with a market share of 23.2 per cent; the largest was Bharti (2.69 million subscribers, 30.4 per cent market share). In Karnataka, it was tied for the fifth and last slot with Tata Teleservices, with 0.95 million subscribers, or a market share of 7.9 per cent. Here too, the largest was Bharti, with 4.66 million subscribers and a 38.6 per cent market share.
It has accumulated losses of Rs 684.3 crore, of which, Rs 41.8 crore came in the first half of 2006-07. Part of it was due to its huge debt burden of Rs 1,207 crore. However, even at the operating level, Spice lags its peers, recording an operating margin of 25 per cent, which is way below that of Bharti (41 per cent), Reliance (39 per cent) and Idea (34 per cent). That’s hardly a performance to remember.
More importantly, those are neither the kind of numbers nor the kind of business model that augur well for the future. Telecom is an industry where size brings in economies of scale and gives pricing power. In India, there are four pan-India players (Bharti, Reliance Communications, Hutch and BSNL) and two more (Idea and Tata Teleservices) are steadily building towards a national presence. Even the company acknowledges this threat in its offer document: “In the past, we lost key corporate clients, particularly in Karnataka, primarily due to our lack of coverage in certain geographical areas.”
Like all other providers, Spice has been growing, though not as fast as most others. In the past 14 months, its subscriber base has increased from 1.9 million to 3 million, or an increase of 55 per cent. That’s significantly less than Bharti (108 per cent), Reliance (78 per cent) and Idea (107 per cent). It’s constrained by its scope and area of operations. Punjab has a mobile penetration of 30.5 per cent, which is the highest among category ‘B’ circles. Similarly, Karnataka has a penetration level of 20 per cent, which is the highest among category ‘A’ circles. This suggests there’s less scope for growth in these circles. And chances are, the larger, better-known players will corner more of this incremental growth.
Cross connectionsSpice needs to add subscribers and increase usage, but staying confined to two circles won’t take it far. The company has applied for GSM licences in 21 additional circles, as well as for providing STD and ISD services, but even that road is paved with disturbance for a new or small player.
To start with, getting licences and building networks from scratch requires a lot of money. It’s one thing to do so when even the competition is building, it’s another thing to start when the competition has a headstart, as everyone does. Spice is looking to raise Rs 463-520 crore from the IPO, of which, Rs 241 crore is earmarked for expansion. It will need a lot more to make any impression. Then, there’s a scarcity of spectrum, which is holding back players from rolling out services as they would like to.
Telecom companies have roped in the affluent and a lot of the middle-class. They are going lower down the income ladder, where people buy pre-paid cards and bring in a fraction of the revenues an affluent post-paid subscriber brings in. Spice has felt the effect of this declining productivity — in the last five years, while its subscriber base has increased at a CAGR of 43 per cent, its revenues have increased only 9 per cent — and will feel it even more in the coming years. Spice is unlikely to turn the corner in the foreseeable future and making strides on its own seems to be a tall ask.
That brings us to the one reason why Spice might be considered as an investment: it could be a takeover target. Smaller players, present in a circle or two, have been systematically gobbled up, and Spice is one of the last survivors. Unless Telecom Malaysia pumps in big money, Spice is likely to be acquired. Just before the IPO, there was intense speculation that Idea was in talks to buy Spice, but the deal fell through on differences over price.
According to unconfirmed reports, the Spice owners wanted about Rs 4,300 crore, while Idea was quoting Rs 3,800 crore. At the upper end of the price band, Spice will have a market capitalisation of Rs 3,174 crore. That suggests that only if the Spice owners have their way will shareholders get a return worthy of the risk they are being asked to take. Wonder if Ms Chopra would make that call? Probably not.