Spice: Time to Rejig

Looking to raise about Rs 2,000 crore, Spice Communications has
turned to an IPO. This move comes at a time when Spice is looking to shave off a
huge debt of Rs 11,491 crore. The regional cellular operator has proposed an
initial public offering of 13.79 crore equity shares about 20% of its capital,
for listing on the NSE and BSE. The company is proposing the maiden float
through a 100% book building route.

Recently, telecom IPOs in India have been attracting massive
oversubscription rates. Rival operator, Idea Cellular, for example, saw its IPO
oversubscribed at least 57 times, while demand for shares in software
development firm MindTree Consulting exceeded the offering 103 times. While
Spice will look forward to make hay while the sun shines on Indian telcos,
analysts and industry sources believe that if branding, timing, and pricing are
not correct, the IPO will be lost.

The company's promoters-Modi Wellvest (MWPL) and Telekom
Malaysia Berhad (TM)-intend to dilute 20% of their holding through the IPO. At
present, MWPL holds 51% stake while TM holds the remaining 49% stake in the GSM
operator through TMI India.

Crucial Time

As the seventh largest telecom operator, Spice Communications faces stiff
competition, as most of its competitors are larger, have a pan-India presence
and possess greater financial, technical and marketing resources. When compared
to other peers in the market, Spice Communications has had negative net worth
through the last three fiscals. As a result, its Net Asset Value and Earning per
Share remains the lowest among the peers.

To its advantage, Spice is a strong regional player in Karnataka
and Punjab enjoying a market share of 14.26% in these two circles. However, in
the past, Spice has lost key corporate clients, particularly in Karnataka,
primarily due to its lack of coverage in certain geographic areas. It is most
likely that its limited presence and lack of a pan-India presence may not seem
lucrative for investors.

Industry analysts feel that Spice's IPO comes at a wrong time
when the market is going through a serious correction. Recently, the trade has
shown lower price than the initial offer price for many new entrants. So it is
unlikely that Spice will be lucky to get a huge oversubscription as enjoyed by
Idea and MindTree.

Telecom Plans Ahead

In a bid to have a pan-India presence, Spice has applied for licences for 20
additional cellular circles in India including Delhi, Mumbai, Kolkata and
Chennai. In addition, it is in the race for 3G and it's awaiting spectrum
allocation from DoT. The operator has also applied for licenses to provide NLD
and ILD services for data and voice transmission.

Currently, Spice's cellular networks operate on spectrum in
the 900 MHz band and it has an allocation of 7.8 MHz and 6.2 MHz for Punjab and
Karnataka respectively. The operator has applied for additional spectrum of 2
MHz in Punjab. It is most likely that Spice will get an additional spectrum
granted in the 1800 MHz band, since there is no availability in the 900 MHz
band. The 1800 MHz band generally requires more capital expenditure than the 900
MHz band.

Traders and investors will certainly keep an eye on the growing
losses and accumulated debt of the operator. On the other hand, Spice's
business size is significant enough for institutional investors and FIIs and it
may be able to get away with securing a price on the higher side if not higher
than the initial price offer. It will be interesting to see, however, where the
operator will be headed six months after the IPO is secured.

Further, market consolidation in the telecom space will
certainly see smaller players losing out in the race. So it is upto regional
players like Spice Communications to choose the right plan and execute it at the
right time.

Malovika Rao

malovikar@cybermedia.co.in