IPO Note : Spice Communications

26_06_2007_020_020

 

Reasonably valued; consolidation may provide further upside Issue snapshot

™ Spice Communications is the second largest player in the Punjab circleand the fifth largest in Karnataka, operating in the 900MHz spectrum.

™ Telekom Malaysia, a leading telecom service provider in the Asian region, is a strategic investor in the company and will hold 39.2% of the post-issue equity.

™ Funds from the current public issue are to be used for debt repayment,obtaining NLD and ILD licenses, and strengthening the company’s position in existing markets through network expansion.

™ Recent network expansion has led to higher subscriber addition and will likely arrest the steady decline in market share witnessed by the company in recent years; however, in the long term, we expect Spice to lag behind market leaders due to its limited presence.

™ We believe that consolidation is inevitable in the telecom sector in the long term, with space enough for only 3-4 players; Spice remains a lucrative target for acquisition.

Key concerns

™ The company operates in two circles only, as compared to competitors which have a pan-India presence.

™ Spice has defaulted on payments to its network equipment vendors, due to which legal proceedings have been initiated against the company.

™ Net worth of the company is negative due to past losses. Inability to improve profitability would further erode its net worth.

Valuation

™ At the lower band of Rs 41, the issue is available at a discount rangingfrom 40-67% to larger players in the industry, which we believe is reasonable. We thus recommend that investors Subscribe to the issue at the lower end of the price band.

Refer to our IPO Note dated 25 June 2007 for further details.

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