As an investment, Spice Telecom has little going for it at the proposed price band of Rs 41-46. To begin with it is a very small player in a space which requires scale: compared with Bharti Airtel’s nearly 40 million strong subscriber base, Spice has just under 3 million subscribers and operates in only two circles.

In the Punjab circle, the telco is ranked second behind Bharti, while in Karnataka it is fifth. As a result, at a national level, GSM player Spice has a share of just 2 per cent compared with Bharti’s 20 per cent. It hasn’t been able to scale up its operations, having grown at a far lower pace compared with other operators.

The lack of scale wouldn’t have mattered if the business had been profitable. But, the firm’s financials too are far from inspiring. At Rs 661.5 crore, it posted a revenue growth of just 10 per cent in year ended June 2006, with 39 per cent rise in the subscriber growth and a 22 per cent fall in average revenue per user (ARPU). For H1 FY07, revenues stood at Rs 385 crore while the operating profit was Rs 93.4 crore.

As such, Spice’s operating margins at 22-24 per cent are way below those of industry majors- -Bharti’s operating margins in Q4 FY07 were 41.7 per cent. Spice’s ARPU, however, is higher than those of Idea and Reliance because it operates in relatively prosperous regions.

Despite having been around for 10 years, it has a negative net worth and is still in the red. Besides, the interest coverage at 0.2 is far lower than those of Idea at 2.4 or Bharti at 16.2.

Given the weak balance sheet, the stock should trade at discount of at least 40-50 per cent to Bharti Airtel, even if the firm is a potential acquisition candidate.

However, the price band of Rs 41-46, values it far more aggressively. Bharti trades at an EV/EBITDA of 14.3 on estimated FY08 numbers. At a 40 per cent discount, the equity value for Spice would be around Rs 24.