Budget FY08...The Day After
IT/Software:
Policy Initiatives
Non-extension of STP benefits beyond 2009 - Negative especially for all smaller & medium sized IT companies which will be forced to find relief under the SEZ scheme now.
MAT @ 11.2% on adjusted book profits extended to income u/s 10A & 10B – Negative for all the players as effective tax rate would increase (with MAT applicable on STP units) but impact could be severe for medium & smaller players having all or majority units under STP scheme.
Effective Tax Rate (ETR) to go up for almost all companies as STP units u/s 10A & 10B would be taxed at 11.2% now for FY08 & FY09 (till the sunset clause gets over in 2009). Beyond FY09 these units will come out of the tax holiday and would pay normal tax (full tax) on profits. MAT paid over the next two years would be allowed to be set-off post FY09 thereby lowering ETRs of those years to that extent.
Inclusion of ESOPs under the FBT net (rate & method of calculation not disclosed) - Negative for all players.
Higher education allocation by 34.2% to Rs32,352cr - Positive for IT education companies like Educomp Solutions (Not Rated), NIIT (Not Rated), Aptech (Not Rated), etc.
Almost doubling of e-Governance outlays both at the Centre and State level – Positive for companies like Vakrangee Software (Not Rated).
Impact – Negative
“Double Whammy!!!” – EPS estimates of FY08 and FY09 to be worst hit by combination of taxability on STP units
and FBT on ESOPs.
Outlook
We believe the post Budget battering of 5-10% for most of the sector stocks has opened up attractive buying opportunities into the large cap IT space. Though revising our 12-month target price downwards in line with reduction
in EPS forecast, we remain buyers for the Top 5 companies considering reasonable to significant upside potential from current prices. Amongst other stocks, we downgrade Infotech to SELL in the light of limited medium term price
appreciation potential while we maintain HOLD on Allsec.