Corporate tax cuts have both winners and losers in IT space : 26-09-2019

BENGALURU: IT companies Infosys, Persistent SystemsNSE -0.89 %, MindtreeNSE 0.23 %, L&T Technology Services, Birlasoft, Sonata Software and Zensar TechnologiesNSE 1.64 % are likely to benefit from a reduction in corporate tax rates, analysts said. However, a majority of software services companies will not see any short-term gain, they said.

The government announced a cut in corporate tax rates to an effective 25.2% last week.

The tax effectively paid by these IT companies vary between 27% and 31%, analysts said, and by switching to the new rate, they could improve earnings per share (EPS) by 2.5-3.5%. The reduced rate would also result in a 0.8-1% jump in net profit, they said.

“For the overall sector, if we factor effective tax rate reduction by 200-250 bps from FY21 onwards (depending on the mix of business in Special Economic Zones and time bracket of the SEZ operations), we can see 2.5-3.5% EPS improvement,” a senior analyst at a Mumbai-based brokerage firm said, adding some mid-caps will benefit.

For example, Birlasoft’s tax rate varies between 31% and 32%, Sonata Software pays tax effectively at 29% and Tata Elxsi does not enjoy benefits of the SEZ scheme, the analyst said.

“Within the IT sector, we estimate that companies like Infosys, Persistent, Sonata and Zensar will benefit the most from this tax reform, (and) the benefit will be in the range of 2-5% on EPS,” said Apurva Prasad, IT sector analyst at HDFC Securities. Eventually, there would be “a scenario when the IT services sector would garner more revenues outside the SEZs, resulting in an increase in tax rate,”

Prasad added Infosys and some of the mid-tier companies featured in the analysis declined to comment.

Sonata Software said it would actively consider moving to the new tax rate. “At a preliminary analysis, we see in the short term this new tax regime is beneficial to Sonata Software and we are actively considering adopting this. We need to do further analysis before we accurately quantify the benefit, given the fact that we have a high proportion of India business,” said Srikar Reddy, CEO.

L&T Technology Services said it would boost investment in R&D for firms focused on engineering services, without any significant material gain. “The move will make Indian enterprises more competitive and the resultant savings to be converted into investments is likely to boost critical areas like R&D and digital technologies,” said Keshab Panda, CEO.

Source : Financial Express