Despite being a regional GSM mobile operator having presence in just two telecom circles in the Indian states of Punjab and Karnataka out of total 23 circles across the country, Spice Communications Ltd has received a good response from the investors for its initial public offering (IPO). The growth potential in the mobile phone services segment that’s witnessing an addition of 6 million subscribers a month, and the possibility of takeover bid have played a major role in attracting the investors toward the Spice IPO, which got subscribed more than 37.6 times on its last day on June 27, 2007. The highest 58.6 times subscription was registered in the Qualified Institutional Buyers (QIBs) portion. The Non Institutional Investors portion received subscription of more than 19 times, while the Retail Individual Investors portion received a subscription of 4 times their allocated potions.

The company, a joint venture of Delhi-based B.K. Modi Group and Asia-Pacific region’s second largest telecom operator Telekom Malaysia Berhad, had fixed a price band of $1 (Rs.41) to $1.12 (Rs.46) per share for the IPO of 113.11 million shares to raise $113.21 million (Rs.463.75 crore) at the lower end of the price band and $127 million (Rs.520.31 crore) at the upper end of the price band. It had also made a pre-IPO placement of 24 million shares at $1.10 (Rs.45) per share, raising $27.34 million (Rs.112 crore) from investors including Lehman Brothers Holdings Inc, the fourth largest investment bank of the U.S., and Sinnaker Investments.

Spice will have a total post-issue equity base of 689.93 million shares, and a market capitalisation of $775 million (Rs.3174 crore) at the upper end of the IPO price band. The issue constitutes 16.39% of the fully diluted post-issue equity share capital of the company.

Spice is the second largest mobile operator in Punjab and fifth largest mobile operator in Karnataka. At the end of May 2007, it had 2.05 million subscribers in Punjab circle and 0.95 million subscribers in Karnataka circle, resulting in to a total subscriber base of 3 million. With this subscriber base, the enterprise valuation (EV) per subscriber has been estimated by broking firms in the range of $300-$350, which is roughly at 40%-50% discount to listed peers such as Bharti Airtel, Reliance Communications and Idea Cellular.

The financials of the company are rather weak. Its revenue grew by 9% year-on-year during the year ended June 2006. During the last four years, its revenue grew by compound annual growth rate (CAGR) of 7% to $161.7 million (Rs.661.5 crore) in the fiscal year 2005-06 (ending June) from $122.7 million (Rs.501.7 crore) in 2001-02. The operating cost, however, grew by CAGR of 17.7% to $58 million (Rs.237.8 crore) from $30.3 million (Rs.123.8 crore) in this period. As a result, EBIDTA of the company declined to $35.8 million (Rs.146.6 crore) in 2005-06, from $39 million (Rs.160 crore) in 2001-02, showing a negative CAGR of 2.2%.

The six months revenue of $94.2 million (Rs.385.1 crore) during the first half of fiscal year 2006-07 showed an improvement over the full year revenue of $161.7 million (Rs.661.5 crore). A rise in operating cost and finance cost, however, negated the benefits of this rise in revenue and the losses of the company mounted further. The net loss for the first half of 2006-07 stood at $10 million (Rs.41.8 crore) against the full year loss of $16.8 million (Rs.68.7 crore) in 2005-06. Spice has an accumulated loss of Rs.642.5 crore ($161 million) till December 2006.

Competitive Scenario 

TThe company has improved its performance in the recent months in terms of subscriber additions. During May 2007, its subscriber base expanded by 12% in Karnataka circle compared with Bharti Airtel Ltd’s, India’s largest GSM mobile service provider subscriber growth of 4%, Hutchison Essar Ltd’s the second largest GSM mobile service provider subscriber growth of 4.6% and the state owned Bharat Sanchar Nigam Ltd’s (BSNL) negative 2.4% growth. The subscriber base of the company grew by 4.6% in Punjab during May 2007, compared with Bharti Airtel’s 2.5%, BSNL’s 1 % and Hutchison Essar’s 5.3% growth.

In fact, the company has added about a million new subscribers in the last twelve months, registering 48% annual growth. It has a market share of 28% in Punjab and 10% in Karnataka among the GSM operators. Between June 2006 and March 2007, the company has expanded its network coverage by about 80% to 817 towns out of the total addressable market of more than 950 towns in each circle, which has helped in adding new subscribers rapidly despite severe competition from players who have a larger footprint across the country.

Future Plans 

Spice has applied for licenses to expand in the remaining 21 circles, but there is no certainty of the role out in the new circles considering the limited availability of spectrum. So, it’s apparent that the company’s immediate growth will depend on how it scales up in the two telecom circles of its existing operations.

Out of the money raised through the IPO, the company has planned a part payment of the long term debt to the tune of $63.5 million (Rs.260 crore). The part-repayment of the high cost debt will reduce the finance cost of the company, which had gone up sharply in the first half 2006-07.

Going forward, the limited presence in just two circles remains a serious concern for Spice. It will either have to expand in other circles or take the mergers & acquisitions route to have a larger footprint. It was believed to have engaged in serious discussions with Idea Cellular Ltd, the fifth largest mobile phone operator of India, for a merger or even acquiring Idea Cellular just before the IPO. The talks apparently didn’t materialize due to differences on valuations. The company, however, has officially declined such reports. But considering the financial status and limited presence, Spice looks like an ideal takeover candidate. In fact, most of the broking firms who advised their clients to subscribe the IPO, have counted the takeover possibility as one of the major factors for their recommendation.