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Spice: high valuations pose risk

Spice: high valuations pose risk
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First Published: Fri, Jun 06 2008. 11 30 PM IST

Updated: Fri, Jun 06 2008. 11 30 PM IST
Shares of Spice Communications Ltd have been in the thick of action even as its promoters negotiate with possible suitors for buying part or all of their 40.8% stake in the company. The shares had almost doubled in the two months till end-May, but have since given up more than one-fourth of those gains.
(LATE FALL) Spice currently has operations in Punjab and Karnataka, with a market share of 22% and 10%, respectively, but even at its current share price of Rs52, the company’s enterprise value is 20 times its earnings before interest, tax, depreciation and amortization (Ebitda) for the year ended 31 March.
On that basis, both Bharti Airtel Ltd and Reliance Communications Ltd, which have nation-wide networks and a much higher market share, are valued at about 14-15 times their Ebitda.
Although Spice’s Ebitda margin has improved by 500 basis points in the past year, it still reported losses after deducting depreciation and interest cost.
What’s interesting is that the company’s promoters are said to be quoting a much higher price, which analysts feel could even scuttle a deal.
According to media reports, there may be a three-way deal between the company’s promoters, Telekom Malaysia (TM) and Idea Cellular Ltd.
One of the ways the deal may be structured is that TM will buy out the majority of the promoters’ stake, with the rest being taken up by Idea. Eventually the company will be merged into Idea.
According to an analyst, the lure of eventually ending up with shares of Idea could possibly cause TM to buy the shares at close to the premium Spice’s promoters desire.
But why should Idea be keen on the deal? Rather than being involved in this expensive transaction, wouldn’t it be easier to launch operations in Punjab and Karnataka when it is allotted spectrum?
Spice’s main attraction is that it operates on the 900mHz frequency band, while all of the new spectrum that will be allotted will in the 1800mHz frequency. The former involves a lot less capital expenditure.
What’s more, since Spice is among the early entrants to the sector, it has a large chunk of post-paid subscribers, which can be mined by its new owners.
Newly launched operations will normally end up with a relatively larger share of pre-paid customers, whose average billing is lower. It remains to be seen, however, how the deal is finally structured and whether there will be any open offer at all for minority shareholders, since TM is already a large shareholder in the company and may well get an exemption from the open offer.
Investors, however, need to be mindful that valuations are already very high and so are risks of a downside.
Deepak Fertilisers: at an inflection point
Net sales at Deepak Fertilisers and Petrochemicals Corp. Ltd increased by 56.8% in the March quarter from the year-ago period, but its net profit growth was a tepid 13.1%.
That was because higher provisions for deferred taxes, interest, depreciation and exceptional expenses, together with much lower “other income”, pulled down profits.
Operating profit margins were lower than in the year-ago period, and analysts say that’s because of higher naphtha prices, on the one hand, and a higher proportion of low-margin trading income from fertilizers, on the other. Operations in the dominant fertilizer segment continue to suffer from lack of phosphoric acid, with sales of fertilizer manufactured in-house declining sharply. That was offset by a rise in fertilizer trading, but margins are much lower in trading.
The chemicals business did well, with an increase in volumes and prices of iso-propyl alcohol.
Looking ahead, however, there are several factors that could change the profile of the company. One of them is the company’s Ishanya mall, revenues from which are growing and which should be fully operational this fiscal year.
In the company’s core business, its ammonia capacity expansion will also take place this year while an improvement is also expected on gas availability.
Despite the commissioning of the Dahej-Uran pipeline, gas availability continues to be uncertain. Analysts say that once gas is available from the Krishna-Godavari basin, its price is likely to be lower. Higher gas availability will also boost capacity utilization, which is around 70% at present. The joint venture with Yara International could propel the company into a different league from other fertilizer and chemical firms given Yara’s skills in speciality fertilizer.
But the company will have to allay concerns about delays in projects—its Paradip project for ammonium nitrate is nowhere on the horizon, despite being an- nounced two years ago—and on the availability of gas and phosphoric acid.
Write to us at marktomarket@livemint.com
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First Published: Fri, Jun 06 2008. 11 30 PM IST