Spice Mobility - retail telecom play; visit note; Edelweiss

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Spice Mobility (SPCEM IN, INR 102, Not Rated)

n  Multiple touch points across telecom value chain

Spice Mobility (erstwhile Spice Mobiles) taps a large part of the telecom value chain in India with presence in handsets, value-added services and retail stores that sell mobility related products. Spice recently restructured its group companies by merging the retail and VAS businesses with the listed company Spice Mobiles, which is in the handset business and renamed it as Spice Mobility.

n  ‘Spice’ brand second largest in Indian handsets

Spice mobile is the second-largest domestic brand with sale of 5 mn handsets in FY10. It works closely with chip sets manufacturers on product features and technical specifications and outsources manufacturing to OEM partners in China. It set up a manufacturing facility in Baddi, Himachal Pradesh, in February 2010 with a current capacity of 0.4 mn handsets per month, which is expected to be ramped up to 1 mn by March 2011. This unit contributed 43% to consolidated revenues.

n  Retail business growing at 30%

Hotspot, Spice Mobility’s retail store brand, primarily sells handsets and mobile phone accessories. It currently has 800 retail stores with major presence in Delhi and NCR. It plans to expand presence by acquiring local brands with multiple stores in a state/city. The business is currently incurring losses, although, it achieved EBITDA break-even in Q2FY11. Profitability in the business is driven by higher revenue per store, which the company plans to increase by also selling laptops and cameras. This business contributed 49% to consolidated revenues.

n  VAS business reasonably profitable

Spice Mobility derived INR 2.1 bn from VAS in the past 12 months, with 70% being from music-based content. Its two main applications are live aarti (online streaming of daily rituals from devotional places of popular religions in India) and radio. Margins have been under strain due to lower Revenue share with operators.

n  Valuations: Turnaround in retail business is key, ‘NOT RATED’

As a result of the restructuring, its equity capital expanded by 3.2x to INR 714 mn. It assigned a valuation of 15x earnings (TTM CY09) to mobile, 15x EV/EBITDA (TTM CY09) to VAS and 0.6x revenues to its retail businesses. Thus, the consolidated entity was valued at INR 18.9bn as of December 2009.