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India Budget Expectations
Potential STPI Extension A Modest Positive For IT/BPO Providers
But Likely Neutral If No Extension--Guidance/Ests Assume None
• Summary: Potential For STPI Extension Is The Main Focus For
IT/BPO Services For Monday's (2/28) Indian Budget Release. The
Indian government is expected to announce its budget proposal for FY2012
(begins April 1, 2011) on Monday, February 28. Based on our checks, the key issue
for the IT/BPO services sector is the potential that the STPI tax benefit is
extended one year beyond the current March 31 expiration date. It remains
unclear whether the benefit will again be extended, but we note that offshore
providers have assumed a higher tax rate from the anticipated expiration in their
forward outlooks/guidance. BOTTOM-LINE: In our view, an extension of the
STPI would represent some upside potential for most offshore IT/BPO providers,
but failure to extend the STPI would be neutral, not negative, since expiration has
already been assumed in guidance and our/Street estimates. Assuming that STPI
extension would keep CY2011 tax rates flat at CY2010 rates for each firm, we
estimate that Infosys (INFY) would see the smallest EPS benefit (see Exhibit 1) at
only 2% of our CY2011 EPS estimate. We estimate that Cognizant (CTSH) and
Syntel (SYNT) would benefit most with EPS increasing 11% and 8%, respectively.
• STPI And SEZ Background. The Software Parks of India (STPI) scheme by
the government includes tax benefits for export profits from designated STPI
sites. Export profits from these locations are exempted from taxation for a period
of ten years, starting when exports from the STPI site begin. We understand that
INFY and G were among the earliest users of STPI and so have the most STPI
facilities older than 10 years. The STPI tax benefit was initially set to expire March
31, 2009 but was extended twice for one year. As a result of this looming
expiration, large providers have been expanding their operations in newer taxfavored Special Economic Zones (SEZs), which provides tax incentives for 15
years, including a 100% tax exemption on exports from the zones for 5 years and
a 50% tax exemption for the next 5 years. We note that firms have been moving
the vast majority of incremental work into these new SEZs.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Budget Expectations
Potential STPI Extension A Modest Positive For IT/BPO Providers
But Likely Neutral If No Extension--Guidance/Ests Assume None
• Summary: Potential For STPI Extension Is The Main Focus For
IT/BPO Services For Monday's (2/28) Indian Budget Release. The
Indian government is expected to announce its budget proposal for FY2012
(begins April 1, 2011) on Monday, February 28. Based on our checks, the key issue
for the IT/BPO services sector is the potential that the STPI tax benefit is
extended one year beyond the current March 31 expiration date. It remains
unclear whether the benefit will again be extended, but we note that offshore
providers have assumed a higher tax rate from the anticipated expiration in their
forward outlooks/guidance. BOTTOM-LINE: In our view, an extension of the
STPI would represent some upside potential for most offshore IT/BPO providers,
but failure to extend the STPI would be neutral, not negative, since expiration has
already been assumed in guidance and our/Street estimates. Assuming that STPI
extension would keep CY2011 tax rates flat at CY2010 rates for each firm, we
estimate that Infosys (INFY) would see the smallest EPS benefit (see Exhibit 1) at
only 2% of our CY2011 EPS estimate. We estimate that Cognizant (CTSH) and
Syntel (SYNT) would benefit most with EPS increasing 11% and 8%, respectively.
• STPI And SEZ Background. The Software Parks of India (STPI) scheme by
the government includes tax benefits for export profits from designated STPI
sites. Export profits from these locations are exempted from taxation for a period
of ten years, starting when exports from the STPI site begin. We understand that
INFY and G were among the earliest users of STPI and so have the most STPI
facilities older than 10 years. The STPI tax benefit was initially set to expire March
31, 2009 but was extended twice for one year. As a result of this looming
expiration, large providers have been expanding their operations in newer taxfavored Special Economic Zones (SEZs), which provides tax incentives for 15
years, including a 100% tax exemption on exports from the zones for 5 years and
a 50% tax exemption for the next 5 years. We note that firms have been moving
the vast majority of incremental work into these new SEZs.
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