The Hindu Business Line : Spice: Invest

Competition in the mobile handset segment is likely to be fierce, but the contribution from IT business may be reasonably strong over the next couple of years.

Shareholders with a high-risk appetite and medium-term outlook can consider subscribing to the rights offer from Spice at an offer price of Rs 10 per share.

Of the two business segments of Spice, the competition in the mobile handset segment is likely to be fierce putting pressure on its revenue growth and margins, but the contribution from IT business may turn out to be reasonably strong over the next couple of years.

Since the offer price is also pegged at a discount to the market price of Rs 14.40, shareholders can consider an exposure at these levels.

On the flip side, however, Spice operates in the high-volume and low-margin business segments which, in the absence of strong revenue scale-up, can affect the bottomline sharply. And its track record has also been patchy.

Business Segments

The object of the rights offer is to part-finance the working capital requirements of the mobile handset business, which Spice entered into in 2004-05. As of August, it has sold about 5 lakh handsets. The company also disposed off its investment in its subsidiary, Spice Net, in late 2005 to focus on its core business segments.

In the mobile handset business, the company is likely to face stiff competition from leading multinational brands such as Nokia, Samsung, LG or Motorola in the GSM/CDMA technology space. With some of these players establishing manufacturing facilities in India, they may enjoy a significant price advantage over Spice, especially in the high-end segment. Currently, Spice sources the mobile handsets from manufacturers in the completely built kit form.

Growth opportunities

In the IT business, with the government and industry focussed on enhancing IT penetration, Spice is likely to generate good business volumes, despite the intense competition.

The recent re-entry by the company into State Bank of India's select list of empanelled vendors for IT products and services is opening up growth opportunities among the SBI and associate banks.

The passbook printer business is another strategic line of revenue for the company. In the nine months ended March 31, 2006, the passbook printer business accounted for Rs 32.57 crore of the total revenues of Rs 116.31 crore.

The company turned in a disappointing performance in the first six months of 2006-07 largely due to the poor performance of the IT segment and the substantial jump in expenses on the selling and marketing side.

However, the performance is expected to pick up in the second half of the year as the company has confirmed orders for IT systems and solutions from the branches of the State Bank of India.

The rights offer from Spice in the ratio of 1:1 opened on December 11 and closes on January 9. Nexgen Capitals is the lead manager to the offer.

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