Expect lobbying for perpetual STPI to continue

Posted on    03 May 2008

Author : C Chitti Pantulu/DNA-Daily News & Analysis

Brokerages and analysts are reworking their numbers to re-rate IT counters following the government's decision to extend the Software Technology Parks of India (STPI) scheme for one more year.

Finance minister P Chidambaram on Tuesday announced the extension of the scheme that provides Income-Tax exemption to IT companies under sections 10A and 10B.

"We would expect our and consensus estimates to be revised upwards for FY10," Morgan Stanley analysts Vipin Khare and Gaurav Rateria said, adding that, if the offshore IT companies manage to grow at historical rates in FY09, the re-rating would be required as the impact of the higher tax rates would be reflected only in FY11.

While small companies, most of which were set up post FY2000, will benefit from the STPI extension to the fullest till FY10, they would, however, be hurt in FY11 owing to a one-time increase in tax rates, they added.

The extension of the tax benefits would also lead to differential tax rates for companies in FY10 and FY11 depending on when they started, how many of them go out of the tax holiday in March 2009 and the rate of their incremental presence in SEZs.

However, a view that lobbying for the perpetual continuation of the scheme would continue post the announcement of its extension for one more year is gaining ground among analysts and industry observers.

While the proposal is clearly a positive for near-term sentiment and hence stock prices, we believe this would lead to a fundamental change in investor perception towards tax exemptions, JP Morgan's Manoj Singla and Bhavin Shah said.

"We expect Indian IT stocks to bounce significantly on the back of this news," they said, hastening to caution that the business impact from the US economic slowdown remains a source of near-term worry for the sector.

If approved, the move would help Indian IT companies maintain tax rates at FY09 level in FY10 and lead to 5-7% increase in FY10 EPS for large Indian players, they added.

Commenting on the impact of the proposal on foreign owned IT & BPO services companies, Citi Group analysts Ashwin Shirvaikar and Partick M Burton said there would be a reduction in Cognisant's tax rate from the current forecast of 23% to 16.5%.

However, company specific factors lessen the impact for others like Genepact and WNS, which would likely see an addition of $0.01 to calendar 2009 EPS estimates, they added.

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