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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The non-extension of STPI was built into our/consensus estimates, and hence is largely a nonevent.
However, the Budget brings forward MAT levy on SEZ units proposed in the Direct tax
code (likely effective in FY13), and hence is a one-year additional cash levy. We maintain our
Overweight stance on the sector.
No further extension of STPI tax benefits; SEZ units brought under MAT
The non-extension of STPI tax benefits beyond 31 March 2011 is in line with our
expectations. We believe consensus EPS estimates were not considering any extension.
Though this will have no impact on EPS, it will be in terms of sentiment negative for midcaps
considering their low balance sheet capacity to expand in SEZ.
MAT on SEZ units will not have a major impact on EPS of IT companies as MAT credit would
be carried forward. However this will result in higher cash outflow and thus have some impact
on treasury income. Given that the Direct Tax Code proposals which are likely to come into
effect from 1 April 2012 onwards already propose MAT on SEZs, we see this move as an
additional one-year cash flow impact.
MAT rate marginally raised to 18.5%, while surcharge on tax lowered to 5%
The marginal increase in MAT rate from 18% to 18.5% will not impact the EPS materially
considering carry forward of MAT credit. However will marginally increase the cash outflow
and some resulting impact on treasury income.
Reduction in surcharge on corporate tax from 7.5% to 5% results in the marginal tax rate
coming down from 33.2% to 32.4%. In line with other Indian corporates, it will be marginally
positive for profitability of Indian IT companies
Lower tax on repatriated dividend income from foreign subsidiaries
The budget proposes lower tax on repatriated dividend income from foreign subsidiaries to
Indian parent at 15% versus marginal tax earlier.
This move will improve the financial flexibility (particularly for TCS and HCL Tech among large
caps, which have sizeable foreign subsidiaries). Companies can either pay out higher
dividends if required or earn higher other income on repatriated liquid assets.
Increased outlay on IT programmes and Education
The Government targets rural broadband to reach all of India's 3,50,000 villages. It also plans
investments to implement National Knowledge network and GST rollout and other initiatives
to improve IT infrastructure and delivery mechanism. The budget also proposes a 24%
increase in allocation for Education at Rs521bn.
We believe the budget proposals are positive for the domestic IT market as well as the
education sector. Within our coverage universe, HCL Infosystems should benefit on its
domestic System Integration and Education business. TCS and Wipro also stand to benefit
given their focus on the domestic IT.
Reduction/exemption in import duties for PC/mobile components
The Budget proposes lower duties on printers and disk drives, PC and mobile components.
This is positive for HCL Infosystems, which has a own-branded PC business and is a
distributor of Nokia handsets in India, though given the competitive environment, any gains
are likely to be passed on to the consumer.
We stay positive on the sector outlook
We retain our positive stance on the sector and expect minimal impact on our coverage
universe from the Budget proposals.
Our top picks are Infosys, TCS, HCL Tech and Polaris Software.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The non-extension of STPI was built into our/consensus estimates, and hence is largely a nonevent.
However, the Budget brings forward MAT levy on SEZ units proposed in the Direct tax
code (likely effective in FY13), and hence is a one-year additional cash levy. We maintain our
Overweight stance on the sector.
No further extension of STPI tax benefits; SEZ units brought under MAT
The non-extension of STPI tax benefits beyond 31 March 2011 is in line with our
expectations. We believe consensus EPS estimates were not considering any extension.
Though this will have no impact on EPS, it will be in terms of sentiment negative for midcaps
considering their low balance sheet capacity to expand in SEZ.
MAT on SEZ units will not have a major impact on EPS of IT companies as MAT credit would
be carried forward. However this will result in higher cash outflow and thus have some impact
on treasury income. Given that the Direct Tax Code proposals which are likely to come into
effect from 1 April 2012 onwards already propose MAT on SEZs, we see this move as an
additional one-year cash flow impact.
MAT rate marginally raised to 18.5%, while surcharge on tax lowered to 5%
The marginal increase in MAT rate from 18% to 18.5% will not impact the EPS materially
considering carry forward of MAT credit. However will marginally increase the cash outflow
and some resulting impact on treasury income.
Reduction in surcharge on corporate tax from 7.5% to 5% results in the marginal tax rate
coming down from 33.2% to 32.4%. In line with other Indian corporates, it will be marginally
positive for profitability of Indian IT companies
Lower tax on repatriated dividend income from foreign subsidiaries
The budget proposes lower tax on repatriated dividend income from foreign subsidiaries to
Indian parent at 15% versus marginal tax earlier.
This move will improve the financial flexibility (particularly for TCS and HCL Tech among large
caps, which have sizeable foreign subsidiaries). Companies can either pay out higher
dividends if required or earn higher other income on repatriated liquid assets.
Increased outlay on IT programmes and Education
The Government targets rural broadband to reach all of India's 3,50,000 villages. It also plans
investments to implement National Knowledge network and GST rollout and other initiatives
to improve IT infrastructure and delivery mechanism. The budget also proposes a 24%
increase in allocation for Education at Rs521bn.
We believe the budget proposals are positive for the domestic IT market as well as the
education sector. Within our coverage universe, HCL Infosystems should benefit on its
domestic System Integration and Education business. TCS and Wipro also stand to benefit
given their focus on the domestic IT.
Reduction/exemption in import duties for PC/mobile components
The Budget proposes lower duties on printers and disk drives, PC and mobile components.
This is positive for HCL Infosystems, which has a own-branded PC business and is a
distributor of Nokia handsets in India, though given the competitive environment, any gains
are likely to be passed on to the consumer.
We stay positive on the sector outlook
We retain our positive stance on the sector and expect minimal impact on our coverage
universe from the Budget proposals.
Our top picks are Infosys, TCS, HCL Tech and Polaris Software.
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