Hope to file DRHP of Spice Digital by 2010-end: Spice Group

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Spice Digital, which is part of the BK Modi-promoted Spice Group kitty, is looking to file a draft red herring prospectus (DRHP) by fiscal-end. The Chairman of Spice Group said that once the reverse merger took place, Spice Digital would come under Spice Mobility . He expects the merger to be completed by September-end, pending the High Court's decision.

The Spice Digital valuation is seen at around Rs 800 crore out of their total business valuation, which is around Rs 2,570 crore. He also mentioned, "We will follow the Securities and Exchange Board of India (SEBI) lines, which talk of minimum 25% and we will go with that. We may dilute another 5% to some initial offering to some investors as a pre-IPO, but the public offering will be around 25%."

Here is the verbatim transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: Can you tell us which quarter next year do you intend to do this Spice Digital initial public offering (IPO) and what the size of that would be roughly?

A: We have done our reverse merger. This has been approved by the Allahabad High Court for Spice Digital into Spice Mobility. This reverse merger is now approved by the High Court so the whole process will be completed by end September. Once the reverse merger happens then Spice Digital will become a subsidy of Spice Mobile which is now Spice Mobility. We have just launched our Android phone with our Spice value added services (VAS) product because in Spice Digital we are putting a lot of our VAS in the device itself rather than going through the service provider. That exercise is going on.

I think we will have from Spice Digital three marketing arms. One, which will go through service provider, one though the device and the third towards the retail part. Despite digital which is are going through a major growth in the next few months we are taking that into account. We will file hopefully by the end of this year to Securities and Exchange Board of India (SEBI). Depending on the approval we will be in the market in 2011.

Q: Will it still be between 20-25% stake that Spice Mobile will look to dilute in this issue or would you be open to putting more on the table?

A: We will follow the SEBI lines which talk of minimum 25% and we will go with that. We may dilute another 5% to some initial offering to some investors as a pre-IPO but the public offering will be around 25%.

Q: So anchor investors you mean?

A: Yes, that is right.

Q: A word on the revenue profile of Spice Digital itself?

A: Spice Digital is at present in growth mode because we have got two new revenue streams coming. One is coming from putting the products on the device itself. We have also now tied up with our company in Singapore. We have come out with new phones which we call Connected Spice Life (CSL). We will have the application on the phone.

At present the revenue is as per last year, which is flat. It is a 10% growth, but we hope in future the growth will be around 30 to 50%. But it has a good profit margin. We have been showing a consistent profit margin of more than 20 to 25%.

Q: If we had to add up those numbers do you think you could stretch Spice Digital to about Rs 250 crore in revenues and something in the vicinity of Rs 60-70 crore in profits next year?

A: Yes. Even I hope to do better than that. We are going to start retailing the products. We have put new kiosks which have been developed by us. You can download virtually everything from gaming to music to whatever you want to have on your phones. The first ten kiosks have been put in our Spice Retail and Hot Spot and we are going to put more of them. We have more than 750 stores.

We have just acquired a company in Malaysia which is also in the retail business. We are in the process of acquiring from other countries also. We are also expanding in India. The VAS field will become very interesting in the coming years. If you look at China, the VAS revenues from the service provider and device use to be 10% for the 2G market. Once the 3G markets hit in, VAS revenues go as high as 25-30% of the total average revenue per user (ARPU) of our telecom companies.

Q: What kind of ballpark valuation do you have in mind? Given the revenue targets that you spoke about for Spice Digital and if it is just 6 months away then you would have given it some thought? What kind of valuation do you want to do for the 20- 25% offer?

A: We have just finished the reverse merger which has been approved by the High Court of Allahabad. That has put Rs 108 share of mobility which gives a total valuation of Rs 2,570 crore including Spice Mobile, Spice Device Company, our retail company and VAS company. Out of this Rs 2,570 crore which is coming as a total valuation, I think the VAS is around Rs 800 crore.

Q: You had approved a fund raising plan in March of about Rs 700 crore via any kind of equity instrument. Will you still need that money for Spice Mobile or do you think any fund requirements will be covered by this stake dilution in Spice Digital?

A: We are getting into the mode of merger and acquisition (M&A). There are a lot of small companies which are in the VAS field, which have very good products and we are in the process of acquiring them. We will need money for M&A. There will be a lot of consolidation in the VAS field because of three things. With 3G coming in, the whole game plan is changing and the amount of money you have to spend to market VAS will become different.

The second is that VAS is no longer something which will only go to the service provider. You have to have a device and you can put the VAS preloaded on the device. We are a very strong device company. So that advantage we have. Thirdly, we have about 750 stores which we are going to take to 2,000 by the end of this year.

That itself gives us a lot on the marketing side, these technology companies we will acquire. We have already acquired one recently. These are all private companies which have been started by individuals, where the investors are putting money and they want to exit. For these small companies to do IPO is not that easy. They will rather ride on our public limited company and we can do these with them which will include shares as well as cash.