Spice Comm: Towering gain

The telecom firm has earned a profit before tax of Rs 500 crore from the deal with Quipo

The stock price of Spice Communications jumped 5 per cent on the news that the company, which operates cellular telephony services in Punjab and Karnataka, has divested its entire tower portfolio to Quipo for about Rs 600 crore.

According to the management, the company has made a profit before tax of Rs 500 crore from the deal. Why the stock went up is obvious as the company was struggling to make cash profits from its operations and there weren't many options.

With towers being a major cost for running a cellular service, Spice too decided to exit. Earlier this month, Bharti, Vodafone and Idea had announced the formation of a separate company, which will house wireless infrastructure including towers.

Setting up a ground-based tower costs Rs 30 lakh, while a roof-top version comes for Rs 12-13 lakh, and this investment would keep increasing as the network expands and customers increase.

If Reliance Communications' 5 per cent sale of its tower portfolio is taken as a benchmark, this deal is understandably fetching lower valuation. In case of Reliance, its 14,000 towers were valued at Rs 27,540 crore.

With this sale, the company will only incur an operating expense of Rs 40,000 a month per tower, which will come down once the number of operators on the tower goes up.

At present, the tenancy on Spice's tower infrastructure is 1.7 per tower. Spice says now it will focus on running the core telecom business rather than service a tower network as well.

Spice will continue to be the base tenant on the towers and Quipo can take a total of three more tenants on these towers.

Analysts say that Spice is cash-strapped and the deal will help it to enhance its borrowing capacity, create reserves which can be used to fund licence fees, meet the net worth criterion as a pan-India operator and roll out the network in stipulated time.

This could also be the reason for increasing its borrowing facilities by $810 million (Rs 3,200 crore). From a profit of Rs 40 lakh in the quarter ended June 2007, the company recorded a loss of Rs 5 crore in the September quarter.

Despite the immediate cash flow, there is little reason to get excited as the company is making losses and there is uncertainty on the licence issue and even if it starts expanding, it will have to compete with the larger operators with deeper pockets.

L&T: Offshore boost

The Larsen & Toubro (L&T) stock has nearly tripled since the beginning of 2007 as its order-book keeps expanding and profitability improves. During this quarter too, it has bagged several contracts including the two new orders on Wednesday amounting to Rs 750 crore.

Both the orders are to be executed in Oman and have been acquired in a JV. In the first order, it will construct a township, while the second project involves the construction of a sub-station.

As a part of its growth strategy, L&T has been emphasising more on the overseas market. As of September 2007, the company's engineering and construction segment reported a total order-book of Rs 42,028 crore, which is almost 2.4 times its FY07 standalone revenue of Rs 17,578.8 crore.

Of this order-book, international orders account for 17 per cent. L&T is operating into different segments and well placed to grab the opportunities available in the construction, power, oil and gas, industrial capex, ship-building and defence.

It has also formed JVs in areas such as producing super-critical steam turbines and medium multi-role combat aircraft programme, where it does not have expertise.

During the quarter, it has also bagged contracts as a part of a consortium or through other JVs. During the second quarter of FY08, its operating margin more than doubled over the September 2006 quarter to 10.5 per cent.

At the current market price of Rs 4,195, the stock is trading at 50 times estimated FY08 earnings and 39 times its FY09 estimated earnings.

Besides its core business of engineering, construction and procurement, analysts believe the company is investing into different businesses through JVs and SPVs, and expanding into other markets.

L&T will spend about Rs 2,000 crore in ship-building, which is expected to add another Rs 9,000 crore to the top line by 2012. Considering these developments, along with the strong order-book and emerging opportunities in the power sector, the stock is expected to trade at higher valuations.

With contributions from Ram Prasad Sahu and Jitendra Kumar Gupta