HBJ Capital - 10in3 Small Cap Multibagger Stock Reco for Feb'10 - Spic

Slide 1: 

HBJ Capital, India Web: www.hbjcapital.com Mail: Info@hbjcapital.com Call: +91 98867 36791 Spice Mobiles Limited “10in3" - Small Cap Multibagger for Feb 2010 Spice Mobiles is one of the fastest growing mobile handset maker in India. Spice Mobiles was the first Indian company to venture into mobile handsets and is the pioneer in Feature rich phones category like Dual SIM phones and Dual Mode phones in India. Spice Mobiles is currently on a merger process, which will allow the resultant entity to span across Mobile handsets, Mobile VAS (value added services), Telecom retail and Mobile Internet.

Best Buying Price…: 

Best Buying Price… 2 Phase Buying Strategies Suggested [Always buy in SIP ways] 1 st Phase : Buy at the current price range Rs 40 – 44 [50% of investment] 2 nd Phase : Add when the price falls down to Rs 30 - 34 [50% of investment] Average Buy Price Recommended – Rs 37 [(42 + 32 ) / 2 ] >>>Expect at least 8-10 times returns in next 3 years time frame!!!

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What Next? HBJ Capital – “Specialists in discovering multibagger stocks” is launching more & more innovative products & services with single focus on long term wealth creation!!! HBJ Cap is growing faster than ever. HBJ Capital can be your 50x in 3years investment. Ask how? Aim to become #1 - Equity Research Company in India by 2012, the same year we have planned to get it listed at BSE/NSE.

Table of Contents: 

Table of Contents From the desk of CEO, HBJ Capital. Spice Mobiles Ltd – Page#12 Spice Group – Page#14 Merger – Page#17 Spice Mobility – Page#21 Investment Rationale – Page#29 The Merged Entity & Its Benefits – Page#50 Financial S tatements – Page#55 Management Team – Page#59 Best B uying P rice - Page#63 Challenges / Risks Involved - Page#65 Know more about Your - HBJ Capital.

From the desk of CEO, HBJ Capital: 

Dear Investors, If just one sector were to be selected from the decade that went by, which has revolutionized our lifestyle and has reached the masses of our country, that has to be telecom. Mobile phones and Wireless connections which were seen as priced commodities and possessions of only the rich during the start of the decade ended up on almost all of our hands by the end of the decade. Today, there are more than 500 million subscribers in the country, with the tele density inching towards 50% mark. India has the second largest Telecom subscriber base and mobile handsets user base in the world. In fact, it is expected that we will grab the top slot from China in the current decade. So, from nowhere on the charts, we jumped to #2 slot during the first decade and during the next, we are poised to top the charts. But, that’s not all in the story. India and its telecom industry is poised for a new kind of revolution. Yes, call it the mobile internet revolution or simply the story of content gaining upper hand over voice, the stage is already set. From the desk of CEO, HBJ Capital In another 5 years time, it is expected that more than 50% of the airline tickets will be booked through mobile internet. Also, if the masses of the country were to benefit from the usage of internet by any means, it ought to be through mobile internet, owing the very high penetration of GPRS enabled mobiles compared to penetration of broadband connections.

Contd…: 

Contd… In another 5 years time, it is expected that more than 50% of the airline tickets will be booked through mobile internet. Also, if the masses of the country were to benefit from the usage of internet by any means, it ought to be through mobile internet, owing the very high penetration of GPRS enabled mobiles compared to penetration of broadband connections. Also, on the other hand, the telcos clearly know that if there is someway by which ARPU s can be increased or the slide can be stopped, it is by way of selling content and valued added services. The introduction of new technologies like 3G and Wimax will only aid in the process of mobile internet revolution. With this idea, we would like to introduce the 10in3 for the month of Feb 2010 – Spice Mobiles Ltd. Spice Mobiles is the first indigenous mobile handset manufacturer in the country and is one of the fastest growing handset makers in the market. The promoters of Spice Mobiles have a track record of identifying opportunities at a early stage and now they have spotted the mobile internet story. In order to ride the next growth wave in Telecom, they are reverse merging the group’s other business entities with the listed Spice Mobiles Ltd. Post Merger, the merged entity will be a direct play on mobile handset business, mobile value added services, telecom retail business and mobile internet in the country. Kumar Harendra, CEO, HBJ Capital Services Pvt Ltd. www.hbjcapital.com , www.multibaggerpennystocks.com & www.stoplosstrade.com 5 th Main, Girinagar, BSK 3 rd Stage, Bangalore 85; Call : 098867 36791 or Mail : Info@hbjcapital.com

Mobile Handsets market in India: 

Mobile Handsets market in India Today mobile phones have moved beyond their primary role of voice communications and have graduated to become an essential entertaining device for mobile users. We are in an era where users buy mobile phones not just to be in touch, today’s youth use it to express their thoughts, for social networking, play games, read news, surf on the internet, listen to music, chat instantly with friends & families and even check their bank balances. India's mobile handset market touched 100.9 million units in the year ended June 2009, recording a growth of 6.7 per cent from 94.6 million units in the previous year ended June 2008. The year 2008-09 saw the launch of high-end smartphones, latest entry-level as well as mid-market models, addressing needs of both the 'price conscious' and 'value conscious' Indian consumer. With the mobile handsets market in India growing in volumes, device manufacturers have started focusing on niche and emerging segments based on lifestyle profiling of buyers. Overall, this trend points to the growing maturity of the India mobile handsets market. Consumers bought nearly 700,000 high-end phones (in June 2009 Qtr) also referred to as smart handheld devices.

Feature-rich phones and replacement markets are the future: 

Feature-rich phones and replacement markets are the future Feature rich phones - Feature rich, lower priced handsets are key to an evolving telecom consumer base: as the prices go down and features improve, more and more people will buy handsets and discover new features. Almost all the new vendors try to get in to the mobile handset market by addressing this key segment. While the entire mobile handset market in India recorded growth rates of less than 10% recently, dual SIM phone market is growing at 100%. Dual-SIM handsets can easily account for nearly 50% of the total Indian mobile phone market in two to three years. According to handset vendors, South contributes most to the sales of dual-SIM handsets. Replacement Market – Currently, there are around 525 million mobiles phones in use in India. And this represents around 45% of the country’s population. The total cellular phone market in India is valued at around 80,000 crore and 50% of the handsets are Ultra Low Cost Handsets. Currently, the replacement market stands at around 55% and is expected to contribute for around 75% of the market share in another 1 to 2 years. The replacement market is growing at around 15%, higher than the new phone market.

Mobile VAS in India: 

Mobile VAS in India Cellular majors in India have already matched each other on prices, technology, and service offerings. Now, how do you differentiate your brand ? The answer lies in providing the unique value added services. In addition,  the rolling out of the third general mobile services (3G) is all set to take the VAS market to new heights. According to industry experts, who congregated at seventh VAS INDIA 2010, the Indian value added services (VAS) industry is expected to touch a turnover of over Rs 21,000 crore by the year 2013. Mobile value added services are about to create a huge buzz in the market for the masses. Mobile VAS has been contributing to only 8% to 10% of the ARPU so far. However, it is on a constant rise and is expected to contribute around 20% in another 2 to 3 years time. Mobile VAS as an industry has been growing at impressive rates of around 40% to 50% in the recent years. This trend is expected to increase in future, as VAS services will become a major revenue source for telecom operators in India. This becomes critical, as the Average Revenue Per User (ARPU) for telecom operators is decreasing despite the overall increase in consumer base. VAS in India will continue to grow due to factors like increase in awareness of VAS, increased subscriber base, introduction of 3G services and increased focus on m-Commerce.

Mobile Internet revolution - Mobile meets Internet: 

Mobile Internet revolution - Mobile meets Internet Internet in India is growing rapidly since its introduction but primarily restricted usage of Internet from “fixed” points like homes, offices and cyber café. While mobility for Internet exists, public access points such as cyber café have dominated as point of access for low PC penetrated Indian Market. Internet usage on the move can be facilitated by the high speed data cards, public Wi-Fi hot spots and Internet access on mobile phone. Over the years, other access points such as Wi-Fi hot spots and Internet access on the mobile phone are gaining user acceptance with better convenience and mobility. Google India recently quoted – “The year 2009 was big for us. We used to think that India is basically low-end mobile market with users having no appetite for data consumption over mobile. But towards the February and March timeframe in 2009, we started seeing a sudden spike in traffic in mobile Internet space. We analyzed the data only to find that this is the real growth and the industry is growing,” The trend of using mobile phones for Internet access has already started picking up and we will only see this trend grow manifold when 3G services are launched. Very low PC penetration + High Literacy rates + Very high penetration of mobiles + Higher expectations of income growth = Increased demand for mobile internet usage in India

Mobile handset, Internet and VAS will fuse together: 

Mobile handset, Internet and VAS will fuse together Though currently mobile handsets, VAS and Internet are seen as separate business segments, the time has arrived where these three will fuse together and support each other’s growth. Mobile Internet cannot take off in a meaningful way without the availability of innovative and attractively priced mobile handsets. Feature rich phones will count on newer technologies like 3G and Wimax for their next level of growth. With a saturation evident in the voice segment, only innovative content can lead to higher ARPU s. Given the right device backed by right services, consumers are voting by their time spent. Mobile is no more about voice calls. Apple with its combination of D evices + iTunes + App Store has shown that winners will increasingly capture the customer imagination by spanning across the boundaries between Devices, Services and Customer ownership.

Spice Mobiles Ltd – Snapshot (Feb 26th 2010): 

Spice Mobiles Ltd – Snapshot (Feb 26 th 2010) CMP – Rs. 41.10 (KPMG has valued the equity shares of Spice Mobiles to be worth around Rs. 109. Irrespective of whether their valuations is correct or now, we believe that the shares of Spice Mobiles is very much under valued.) Mcap – 306 crore (We are expecting an earnings growth of around 30% for the next 3 years and the company is likely to post earnings of around 160 crore by FY 13. Applying a valuation of 15 would give a market cap of around 2400 crore for the company, more than 8 times from the current market cap for Spice Mobiles alone. ) PE – 4.2 (Spice mobiles has been reporting very good earnings growth over the last few quarters. We believe that the company will put a strong performance in the years to come. At such a juncture, a valuation of 4.2 for the third largest and only reasonable mobile handset play available looks very cheap.) EPS – Rs. 6.35 (based on the TTM basis ) 52 Weeks High / Low – 50.20 / 9.75 Pledged shares – NIL Promoter’s holding – 63.25% ( The holdings of the promoter is expected to increase to 85% post merger. This will also enable the promoters to raise capital by selling their stake .) Total # of shares – 7.4 crore shares (Post merger, the merged entity will have 19.09 crore equity shares) Liquidity – High Face Value – Rs. 3 Authorized Capital – Rs. 51 crore Issued Capital – Rs. 22.39 crore Web: http :// www.spiceglobal.com/SpiceMobiles/ SpiceMobiles.aspx

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Spice Group Spice Global is one of the largest business house in the country with various business domains and presence across many countries.

Spice Group: 

Spice Group

Spice Group - Contd: 

Spice Group - Contd

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Merger The listed entity – Spice Mobiles Ltd is currently undergoing a merger process that will create a business entity working across mobile handsets, mobile VAS, Telecom retail and mobile internet

Spice Mobiles and Spice Televentures – Ownership structure: 

Spice Mobiles and Spice Televentures – Ownership structure Spice Televentures (STVL) is one of the entities in the Spice Group which has ownership across all Telecom and related business segments. Consequently, it owns 63.25% in Spice Mobiles Ltd. Spice Retail, Spice Digital, Bharat BPO and Spice Labs are the other business entities where STVL has ownership. Spice Mobiles Ltd currently has an equity capital of 22.39 crore with 7.4 crore equity shares of Rs. 3 each.

Spice Mobiles + Spice Televenutures = Spice Mobility: 

Spice Mobiles + Spice Televenutures = Spice Mobility Spice Mobiles, in its Board meeting that was held on January 30 2010, had transacted the following – The Board of spice Mobiles approved a scheme of Amalgamation for the Merger of Spice Televentures Pvt Ltd into the company with effect from January 1 2010. The Board accepted the valuation carried out by M/s BSR and Co, Chartered Accountants vide their report dated January 30, 2010. Per the report, the company’s shares were valued at Rs. 109 per equity share and the shares of Spice Televentures were valued at Rs. 862 per equity share. The Board of STPL and the company have accepted the swap ration of 791 equity shares of the company for every 100 shares held in STPL. As a result of the merger, on approval by relevant authorities, 16.34 Crore equity shares will be issued to the share holders of STPL as on the Record date. Also the existing shares of the company held by STPL will be extinguished. The equity capital of the company post completion of the merger process will be 19.09 equity shares of Rs. 3 each. Aforesaid Scheme shall, inter-alia, be subject to approval of the Shareholders / Creditors of respective Companies, the Hon'ble High Courts of Allahabad and Delhi and other statutory / regulatory authorities.

Spice Mobility Valuations: 

Spice Mobility Valuations The Audit and the Valuations of Spice Mobiles Ltd and Spice Televentures were carried out by BSR and Co, the Indian arm of KPMG. KPMG valued the currently listed Spice Mobiles at Rs. 109 per equity share and Spice Televentures at Rs. 862 per equity share. It has also advised a swap ratio of 100 (Spice Televentures ) : 791 (Spice Mobiles Ltd). With the above valuations, KPMG values Spice Mobility to have a market cap of 2080 Crore. The break up of the valuations are as follows – Spice Mobiles Ltd = Around 813 Crore Spice Digital Ltd = Around 800 Crore Spice Retail = Around 400 Crore Spice Labs + Bharat BPO = Around 70 Crore

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Spice Mobility Post Merger Spice Mobility = Spice Mobiles + Spice Retail + Spice Digital + Spice Labs + Bharat BPO

Spice Mobility – An Overview: 

Spice Mobility – An Overview

Spice Mobility – Over the years: 

Spice Mobility – Over the years

Spice Mobiles Ltd: 

Spice Mobiles Ltd Spice Mobiles Ltd is a part of Spice Group, a multi-faceted group with an exclusive telecom eco-system in India. With "Innovation" as the company’s mantra, Spice began the process of revolutionizing the Communication & Entertainment sector, with its new age technologically advanced state of the art mobile phones. The company entered into the mobile handsets market in 2004 targeting at the entry level segment. But, today the brand has grown rapidly and has a bouquet of offerings targeting entry, mid & premium segments. Spice Mobiles claims to be the 3 rd largest mobile handset company in India by volumes after Nokia and Samsung. By Value, Spice claims to be the 4th largest after Nokia, Samsung and LG. Spice Mobiles has a 4% market share in the country (including grey market). Spice mobiles operate in around 15 states and they are the second largest player in around 7 states. The company is also currently expanding aggressively into overseas markets. Spice Mobiles has many Firsts attached to it – Spice Mobiles was the first Indian company to manufacture mobile handsets Spice Mobiles was the first company to introduce Dual MODE phones in India Spice Mobiles was the first to introduce Dual SIM phones in India

Spice Retail (Hotspot) – Digital Lifestyle: 

Spice Retail (Hotspot) – Digital Lifestyle Spice Retail was the first national chain in the telecom retail business and the second largest player in the company. Spice Retail started operations in 2005 with a team of just 15 people and out of 5 pilot stores. With in short span of 4 years, the company has grown into a chain of more than 700 stores across 139 cities in India and employing more than 2000 people. The company has managed to grow using both organic and inorganic routes. Spice Retail is a dominant player in North India; it commands a market share of over 20% translating to a 50% share of the organized retail market in the Delhi NCR region. Spice Retail is not just about retailing mobile phones. Spice Retail is all about the Digital Lifestyle story that is panning out in the country. Spice Retail sells Mobile phones (Multi brands), Accessories (like Bluetooth, Batteries, Chargers …), Music (MP3 players, iPods), Airtimes (both CDMA and GSM), Airtime recharge (both CDMA and GSM), Content (ring tones, games, videos, wall papers, animation) and Mobile Repair service.

Spice Digital: 

Spice Digital Spice Digital was founded in 2002 as Cellebrum and it is the second largest mobile VAS player in the country. Spice Digital is a premier global provider of Mobile Value Added Services (VAS) to Network Operators and Enterprises. Spice Digital offers services across 3 major domains – Telecom, Government and Private Enterprises and across 4 verticals – Voice, SMS, USSD and WAP. Spice Digital has a subscriber base of more than 30 million. Spice Digital through its services reaches more than 500 million potential customers and has deployments across all the major carriers in the country like Airtel, Reliance Communication, Vodafone, Idea and BSNL. Spice Digital has presence in more than 11 countries and is consciously planning to expand the reach even further across the emerging economies. Spice Digital has some of the major international clients like Orange, Hutchison Telecom, MTN and Afghan Wireless. Spice Digital is the first VAS provider in the country to launch 3G VAS services with MTNL. Also, Spice Digital is at the fore front of m governance and has partnered with various state governments.

Spice Labs: 

Spice Labs

Bharat BPO: 

Bharat BPO

Slide 29: 

Investment Rationale The listed entity Spice Mobiles is already undervalued. With the merger, the resultant entity provides an opportunity to play across various high growth areas at an attractive entry point.

Investment Rationale: 

Investment Rationale There are many favorable existing and upcoming factors that will impact all the business units and the entire business group in a positive manner. One may find it tough to visualize a 10in3 potential in Spice Mobility as a business group due to its higher market cap (700 crore +). However, one should look at the constituent business units to feel how much potential each and every business unit has. Hence, we will look at the key shaping factors for the next few years for every business unit and finally for the group as a whole.

Slide 31: 

Spice Mobiles

Growing Market Size: 

Growing Market Size India is the second largest mobile handset market in the world after China. India's mobile handset market touched 100.9 million units in the year ended June 2009, recording a growth of 6.7 per cent from 94.6 million units in the previous year ended June 2008, one of the lowest in recent years due to bad consumer sentiments. However, the growth has strongly rebounded and the industry is expected to grow at around 12% in the next few years. Also, going forward, the growth is expected from the replacement market rather than the new mobile handset consumer. The total cellular phone market in India is valued at around 80,000 crore. Currently the replacement market stands at around 55% and is expected to grow to contribute around 75% in another 2 years time. Also, the replacement market is expected to grow at higher rates compared to the new mobile handset consumer segment. While the growth rates could relatively slow down compared to what we have seen 2 or 3 years before, the market will continue to support huge volumes.

Feature rich phones – Forte of Spice Mobiles: 

Feature rich phones – Forte of Spice Mobiles Gone are the days when mobile handsets were bought for the sole reason of making voice calls. The consumers of today demand a mobile handset which is rich in features and still available at a reasonable cost. For ex – Dual SIM phones contributed for just 3% of the total handset market 2 years back. But, now they contribute for more than 10% of the total market share. While the mobile handset market in India is growing at around 10%, the Dual SIM phones are growing at more than 100%. It is this feature rich phone market like Dual SIM and Dual Mode market (GSM + CDMA), where Spice Mobiles is a pioneer. Spice Mobile was the first company to introduce Dual SIM and Dual Mode phones in India, while Nokia is still planning to launch one. More than 90% of the handsets sold by Spice are feature rich phones like dual SIM and dual mode handsets. Dual SIM phones are expected to record strong growth rates going forward and can easily contribute for even 50% of the total handset market in India in another 3 years time. This augers well for a pioneer in the segment like Spice Mobiles.

Geographic Expansion: 

Geographic Expansion Spice Mobiles is aggressively readying itself for a geographic expansion covering both overseas markets and domestic markets. Overseas markets – Spice Mobiles will foray into the emerging markets of Asia, Middle East and Africa. It has already forayed into markets like Bangladesh, Indonesia and Nepal. Spice Mobiles will try to replicate its success story in India across the overseas markets, where similar consumer tastes are witnessed. Indian Market – In the domestic market, Spice Mobiles will look at strengthening its existing distribution network and expanding it. Spice Mobiles was the first Indian company to foray into Mobile handsets 5 years back when foreign players already had a well developed distribution network. The company currently operates in 15 states in India, servicing through 56 state distributors, 500 micro distributors and 40,000 retail outlets in India. Spice is currently expanding in the country and plans to have presence across 100,000 retail outlets in the country in the next one year. While Spice Mobiles spotted the opportunity 5 years back, there are many names that are entering the mobile handset market with a product or two. However, in order to sustain, the new entrants will need a strong distribution network which Spice mobiles already has.

Portfolio and Capacity Expansion: 

Portfolio and Capacity Expansion Portfolio Expansion – In order be successful and increase market share, a mobile handset maker should have a wide variety to offer and an impressive time to market. Spice Mobiles is the BEST in both of these categories. Spice Mobiles started with just 5 models and today it has more than 30 models. The company plans to expand its portfolio to contain more than 100 models in the next one year time period. The company has already forayed into Smartphones segment and QWERTY segments. Capacity Expansion – Spice Mobiles currently manufactures its mobile handsets through Chinese vendors, to whom it will provide the necessary specifications and customizations. These are the same vendors who manufacture products for Apple ipod and the Garmin GPS receiver. However, in order to satisfy the huge demand ramp up, the company will set up a manufacturing unit for mobile devices in India with an initial investment of around 100 crore. The company is looking at manufacturing two million units a month from the new facility. The new manufacturing facility is expected to be gin production by March 2010. It is expected that the new production facility will be used for export markets.

Business achieving profitability: 

Business achieving profitability While Spice Mobiles has been profitable for many years, the profitability was negligible in comparison to the turnover. It is no easy task to set up a mobile handset business and to expect reaping the benefits in very few years. Any new player has to first develop a brand and associate with the consumer. The company also has to come out with a variety of mobile handsets that are attractive on both price points and offerings. And the most important is to create a strong distribution network reaching the masses of the country. Spice Mobiles has taken almost 5 years to reap the benefits and to make huge profits. In the Dec Qtr of 2008, the company sold around 490,000 mobile handsets while it has sold around 1.5 million handsets in the Dec Qtr of 2009. Spice Mobiles has posted the highest turnover and profits ever in the 9M ending Dec 2009. It reported a turnover of 702 crore and net earnings of around 47 crore in the 9M ending Dec 2009. This compares with the 700 crore turnover and 1 crore net earnings in FY 09 and 310 crore turnover and 14 crore net earnings in FY 08. We expect Spice Mobiles to post 1000 crore turnover and net earnings of around 70 Crore in FY 10. We also expect the strong growth momentum to continue for the next 2 years time.

Impressive Valuations: 

Impressive Valuations The CMP of Spice Mobiles is Rs 41 and it is available at a market cap of Rs 306 Cr. However, KPMG has valued the entity at Rs 109 per equity share, providing it a valuation of Rs 813 Crore. KPMG has arrived at this valuation by considering the existing business scenario, the future prospects for the company and by employing discounted cash flow method and comparable company evaluation. A look into the current valuation of the listed entity indicates that the current valuations are very much depressed and are not sustainable in the long run. Spice Mobiles as a business entity is expected to post 1000 Crore in turnover and 70 crore in net earnings for the financial year FY 10. Considering the growth in feature rich phone segment, the overseas expansion and the new manufacturing facility, the company is expected to report robust earnings in the years to come. At such a juncture, the company is currently available at a valuation of just 4.2, which looks very cheap considering that the Spice Mobiles has become an established player with zero debt. For the next 3 years, we expect the company to grow its earnings at a CAGR of around 30%. The company is well placed to report earnings of around 155 Crore by FY 13 .

Slide 38: 

Spice Retail

Growth in Organized Mobile Retailing: 

Growth in Organized Mobile Retailing The Overall Mobile retail market in India is valued at around 80,000 crore. This market has so far been dominated by un organized vendors across the lengths and breadths of the country. There are almost 500,000 mom and pop stores in the country that sell mobile phones, talk time and accessories. The replacement market is expected to contribute for around 70% of the total market in a year. The features that the customer demands in a mobile phone is constantly changing and the trend is expected to continue especially with the expected commencement of 3G services and Wimax. The Organized mobile retail play is fast catching up. Organized mobile retailing which had a market share of just 1% 3 years back now has a market share of around 15%. This is expected to reach 40% in around 2 years time. There are various reasons why Organized mobile retail play is growing at healthy rates of more than 40%. The branded chains provide high quality services to the consumer as they provide full scale servicing tie ups with different brands. Moreover, they carry a wide variety of inventory when compared to the mom and pop stores. Since branded players deal with the mobile manufacturers directly, they are also able to source the products at a considerable discount to others. Organized mobile retailing is all about size and volumes.

Expansion – Organic and Inorganic: 

Expansion – Organic and Inorganic Spice Retail started operations in 2005 with a team of just 15 people and out of 5 pilot stores. With in short span of 4 years, the company has grown into a chain of more than 700 stores across 139 cities in India and employing more than 2000 people. Spice Retail has grown on account of both organic and inorganic expansion. Spice Retail is a dominant player in North India. The company continues to be open any expansion opportunities that come up. In 2009, Spice Retail acquired 100% stake in the Indian arm of Dubai based mobile retail chain Cellucom. Cellucom was operating as a JV with RPG. Cellucom had about 120 mobile and IT product stores. More recently, the company acquired “Global Access”, an established Mobile retailer based out of Bangalore. Global Access operates more than 20 retail stores and with this acquisition Spice Retail will be able to make a strong presence in Karnataka. Spice retail plans to increase its presence across the country and to have 3000 retail stores by 2012. We believe that Spice Retail will continue to grow geographically and will have around 2000 stores in the next 3 years time.

Business to break even: 

Business to break even Spice Retail currently operates on a negative EBIDTA and with the rapid expansion on the table, Spice Retail could take another 2 years to break even. For the 9M ending Dec 2009, Spice Retail made a total turnover of around 475 Crore and reported an EBITDA loss of around 34 Crore. However, it should be noted that Spice Retail has already achieved an EBITDA breakeven at the store level in last quarter. Any new Spice retail store takes around 12 months time to breakeven at the operating levels. This has actually come down from around 16 months earlier. The Cellucom store that was acquired by the company about a year ago is expected to achieve gross margins of around 9% in another 2 quarters are expected to break even. Already some of the mature stores of Spice retail have gross margins between 12% and 16%. We expect the entire business unit to break in about two to three years from now and that would depend on the size of the expansion. We also expect the enterprise value of the business to improve substantially over the years.

Slide 42: 

Spice Digital

Wide Variety of Offerings: 

Wide Variety of Offerings Spice Digital provides a wide variety of products and services in the arena of mobile VAS. In fact, Spice Digital has been the first to get the going in services like m Governance in India. Spice Digital provides services across 3 major domains – Telecom, Government and Private Enterprises. The mobile radio service is the second largest VAS in the country, both in terms of revenues and active user base. Spice Digital has pioneered this platform and is the market leader.

Strong Clientele and broader tie-ups: 

Strong Clientele and broader tie-ups Spice Digital has tie ups will all the major carriers in the country and hence be accessible to more than 95% of the subscriber base in the country. The subscriber base of Spice Digital stands at more than 30 million currently and is growing at healthy rates. Spice Digital through its tie – ups with international carriers like Orange and MTN has been providing VAS in the overseas markets as well. Spice Digital is already present across 11 countries and is aggressively expanding in Africa and other emerging countries in Asia. Spice Digital sources content from various sources like Hungama, Rediff, Sony, MTv, Cricinfo, FM stations, Hindustan Times, India Times …

Highly Profitable and Attractive Valuations: 

Highly Profitable and Attractive Valuations Onmobile Global has a far better reach than Spice Digital currently. Onmobile is present in more than 24 countries and is accessible to more than 670 million subscribers compared with 12 countries and 500 million subscriber reach. Also, the customer base of Onmobile global is far higher at around 350 million user compared to around 33 million subscribers of Spice Digital. While Onmobile is currently better placed in terms of reach and subscriber base, Spice Digital has continuously been a highly profitable venture compared to Onmobile. For Ex – The total turnover and net earnings of Onmobile in the 9M ending Dec 2009 was around 348 crore and 32 crore respectively. For the Same period, Spice Digital has reported a turnover of 135 Crore and 27 Crore respectively. Spice Digital has a superior EBITDA and net margin of 30% and 20% respectively compared to 22% and 9% from Onmobile Global. Onmobile Global is currently valued at 50 times the annualized FY 10 earnings of 42 crore. This makes the valuation of Spice Digital cheap and attractive at 22 times FY 10 annualized earnings, based on KPMG recommended price.

Slide 46: 

Spice Labs

India getting ready for Mobile Internet: 

India getting ready for Mobile Internet

Mitr Platform – Mobile application development platform from Spice : 

Mitr Platform – Mobile application development platform from Spice Spice Labs product offering is focused around the vision for a ubiquitous way to facilitate application development and distribution of rich content and user interface over a vast range of phone platforms - J2ME, Symbian, Blackberry, Windows Mobile and more. The flagship product of Spice Labs is Mitr. Mitr Platform – With the plethora of mobile operating platforms, and numerous development options available for each, it has become a nightmare for application development teams to develop and maintain consumer applications for multiple platforms. Mitr, the development platform offered by Spice Labs, allows fast paced development of Mobile applications for multiple phone platforms. Mitr supports J2ME, Symbian, Blackberry and Windows Mobile for "Write Once, Run Everywhere" respite. Development teams using Mitr can focus on the product features instead of recreating bits to implement the same components in different programming languages on different platforms. The current release of Mitr supports more than 270 mobile phones. While many of you might be aware of the same platform from Sun Microsystems- J2ME or JME, it is a fact that it supports very less number of phone models. Case in point, iPhones don’t support J2ME and iPhone SDK can be applied only on Apple’s products. Mobile apps developed using Mitr

App stores – Music, Games, Apps and more: 

App stores – Music, Games, Apps and more Apple inc introduced and pioneered the concept of App store, where developers put their applications and games for sale, that can be downloaded by Apple phone users. This is excluding the sale of Music by iTunes which Apple had started way back in 2003. And now, through its App store, Apple is on its way to make a billion USD in revenues. With the increasing number of Smartphones and internet accessible mobiles in the country, the demand for applications is constantly on the rise. The carriers have also been supportive by offering data plans at lower rates. It is expected that in the next 4 or 5 years, more than 50% of Air tickets will be booked online. That is kind of growth we are looking at from the mobile internet story. Nokia already has its app store – “Nokia Ovi” and Bharti Airtel had launched its App store this month. Spice had ventured with Idea to put up an App store. Spice has already put its own app store in the name of Fun spice. In the context of App store, we expect indigenous players to have the winning edge since they will be better placed to come out with multi lingual content and applications, which will be required to cover the masses of the country. With the introduction of 3G, we believe that Spice Labs will grow into a key differentiator for the group from the current incubation stage.

Slide 50: 

The Merged Entity - Benefits

Integration advantage: 

Integration advantage

Potential to create immediate wins: 

Potential to create immediate wins

Significant Value Creation: 

Significant Value Creation

Very Attractive Valuation: 

Very Attractive Valuation Per the Audit and the evaluation carried out by KPMG, the following are the valuations of the various business entities – Spice Mobiles Ltd = Around 813 Crore Spice Digital Ltd = Around 800 Crore Spice Retail = Around 400 Crore Spice Labs + Bharat BPO = Around 70 Crore However, the above stands true assuming that Spice Mobiles is valued at Rs. 109 per equity share. However, the CMP is only Rs. 41.10 per equity share, down by 62% from the KPMG Audit price. Based on the CMP, the following are the actual valuations – Spice Mobiles Ltd = Around 300 Crore (4.2 times FY 10E earnings) Spice Digital Ltd = Around 304 Crore (8.4 times FY 10 Earnings) Spice Retail = Around 152 Crore Spice Labs + Bharat BPO = Around 26 Crore Spice Mobiles at a valuation of just 4.2 looks very depressed. Spice Digital’s valuation of 8.4 times compared to more than 50 times of Onmobile Global is unsustainable. Spice Retail is a retailer with huge network in place and revenues of more than 650 crore and valuing it at just 150 crore is an opportunity.

Slide 55: 

Financial Statements Spice Mobiles has taken 4 years to make a marked presence in the markets. Now, its time to reap the benefits.

P and L statement - Annual: 

P and L statement - Annual The revenues of Spice Mobiles have grown constantly over the last few years. However, it has taken almost 4 years for the business to take off in a big way. In these 4 years, Spice Mobiles has concentrated on putting up a distribution network, establishing a strong design and manufacturing ability, build its brand and to increase its portfolio size. Spice Mobiles recorded the highest earnings ever in the last 3 quarters and we expect the trend to continue for the next 2 to 3 years.

P and L statement - Interim: 

P and L statement - Interim With a rebound in the handset markets since the Mar Qtr of 2009, the company has done extremely well. One major reason is the strong growth in Feature rich phones. With the TRAI banning almost 25 million handsets without IMEI number in Dec 2009, the growth rates are expected to get better in the coming quarters. We expect Spice Mobiles to report a total turnover of around 1000 crore and net earnings of around 70 crore for FY 10. As a merged entity, we expect Spice Mobility to report a turnover of around 2000 Crore and net earnings of around 80 to 100 crore for FY 10.

Balance Sheet: 

Balance Sheet A look at the balance sheet of Spice Mobiles suggests that the business has been run in a best manner that the business model is agile. Spice Mobiles has grown into a 1000 crore revenue company from just 120 crore in the last 4 years. But, the company has diluted its equity only once and currently has almost negligible debt on its books. In fact, it has around 70 crore of cash reserves. Post Merger, Spice Mobility will have net cash reserves of 300 crore and no debt. Spice Mobiles has been very agile in a manner that it has very low inventory holding period and a high inventory turnover. The company also has been able to make maximum use of its assets and manufacturing facilities.

Slide 59: 

Management team Spice Group is run by one of the largest business groups in Asia. Currently, they hold 63.25% in the listed entity and post merger, their holdings will improve to 85%

Top Two: 

Top Two BK Modi - BK Modi is the founder of the Spice Group. The group which has transitioned from being known as MCorp Global and Modi Corp earlier has a long and rich 30-year history of leadership in Technology, Automation and Telecommunications. The Group was established in the early 1980s, has been known for its landmark JVs with global leaders in Technology & Automation, and several pioneering business initiatives/products for the Indian market – from the first computer, printer, photocopier, fax machine to the first Mobile GSM service call (on the Modi Telstra Network in 1996). The Group was restructured in July 2008; to be reorganized into 4 distinctive sectors based business verticals which are Telecom and related businesses through Spice Televentures; Entertainment, Media & Content through Spice Enfotainment; Financial Services, Asset Reconstruction and allied businesses in Spice Investment & Capital Services & Information Technology, Software & System Integration business through Spice Technology. Dilip Modi - Dilip started his professional career in 1996, working closely with McKinsey to help restructure the BK Modi Group businesses, which included companies like Modi Xerox, Modi Olivetti, Modi Alcatel, Modi Telstra and Spice Telecom. Dilip helped restructure the organization with its key focus on the telecom industry. He was instrumental in the divestment of this company from the group, in a deal dubbed as one of the ‘smartest’ in the annals of the history of corporate India. Dilip played a dynamic role as the youngest Chairman of the Cellular Operators Association of India (COAI), for the years 2004 -2005. Dilip is currently directly responsible for overseeing the conglomerate’s entry into the emerging business areas of Retailing with Hot Spot Retail (now Spice Retail), Mobile Devices with Spice Mobile, Onshore Business Process Outsourcing with Omnia BPO Services (now Spice BPO) & Telecom Value Added Services, with Cellebrum (now Spice Digital) and Mobisoc (now Spice Labs).

Key Players: 

Key Players Kunal Ahuja – Kunal is currently the CEO and Whole Time Director of Spice Mobiles. Kunal has been associated with Spice Mobiles since 2005. Kunal has a B.A in Economics and has around 25 years of Corporate Experience. Prior to joining Spice Mobiles, Kunal Ahooja has been associated with Samsung India as the VP and with Nokia India as the Sales Head of the country. Sanjeev Mahajan – Sanjeev is currently the CEO of Spice Retail. Sanjeev has been associated with Spice Retail since 2005. Sanjeev has secured his Management Degree from IRMA. Prior to Spice Retail, Sanjeev was associated with HCL Infosystems as the National marketing Manager and was taking care of the operations of Nokia India. Saket Agarwal – Saket is currently the CEO of Spice Digital. Saket has been associated with Spice Group since 1998 and with Spice Digital since inception. Saket has secured his Engineering degree and Science Degree from BITS. Prior to Spice Group, he was managing various projects in Crompton Greaves. Lokesh Gupta – Lokesh is currently the CEO of Spice Labs. Lokesh has been associated with Spice Labs since inception and has over 10 years of management experience in diversified domains. Prior to Spice Labs, Lokesh was associated with ICICI Bank. Lokesh holds his management diploma from IIM – A and bachelors degree in computers from IIT Delhi.

Share Holdings Pattern: 

Share Holdings Pattern The promoters have a very strong stake holding in the company with no pledged shares at 63.25%. The promoters holding has remained almost the same for around 4 years now. Post merger, the promoter holding will increase to 85%. The current institutional holdings stand at around 2.9%. Lehman brothers have been holding this company for almost 2 years. BCCL has a holding of around 2.5% in the company. Retail investors hold around 12.5% stake in the company. The counter is highly liquid with retail investors owning around 93 lac shares in the company.

Slide 63: 

Best Buying Price?

Buying strategy: 

Buying strategy When the merger was announced, the counter was quoting at 33 levels and it went on to make a high of 46. The counter has been consolidating since then which is good in the long run. The consolidation will ready the stock for the next up move. It is highly unlikely that the counter will fall below 33 levels. Even if it does, there is a strong support between 28 and 30 levels. Hence, we advise a 2 phase buying strategy – 50% at the current levels and the remaining 50% between 30 and 34 levels.

Slide 65: 

Challenges / Risks involved Any investment for capital appreciation carries an associated risk with it. What are the risks that could derail the growth prospects for this company?

Challenges / Risks involved: 

Challenges / Risks involved Following are some of the key risks that could derail our estimates and expectations – Very High Competition – Our 10in3 pick faces tight competition in 2 key business areas – Telecom retail and mobile handsets. A number of new players are entering these markets which will be a threat to Spice Mobiles. Though the fact that Spice Mobiles is an established brand and player in these segments, the company is likely to be on its toes continuously. Failure in the Merger process – The management has a clear vision and goal behind the merger process that it had approved. The merger process is expected to be wrapped up in another 4 months time. However, it needs to go through various approvals from various sources. Any failure in getting the merger process approved will hurt our expectations . In such a case, if the stock prices dive, one can use it as a buying opportunity since Spice Mobiles is still a attractive investment.

Slide 67: 

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Slide 69: 

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Disclaimer: 

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Thank you: 

Thank you