Impact of Tax Proposals on key sectors: “Setup in India” - An invitation letter to global investors
The tax break announcements today were a big shot in the arm though a tax reform. However, one needs to see this with a bit of pragmatism. Several key sectors like Cement, Power, Steel, Mining have incentives from capex under sections such as 80 IA; while sectors like Auto are broadly between 27-32% - but need efforts on the demand side to deliver growth.
Hence the beneficiaries of these will be limited to select sectors and companies.
The government had already moved to 25% tax (in Budget June 2019) for companies having revenues upto Rs 400 crores which, as per government data, would have covered 99.3% of the companies. We analysed the data of companies listed on BSE with turnover greater than Rs 1 cr – these totalled to 6082 companies – and the total tax payout as of their financial year end accounted to totally Rs 202,592 cr (on a standalone basis)
4874 companies (80% of companies) with turnover from Rs 1cr – 400cr, contribute to 2.4% of the total tax paid by these – the companies had already received the benefit in Budget in June 2019 for 25% tax
1207 companies (20% of the companies) with turnover of Rs 400 cr and above contribute to 97.6% of the total tax paid i.e. Rs.197,737cr – and are now falling under the purview of the new benefit, subject to incentives
The move is a positive reform for BFSI stocks – “the biggest beneficiaries” - (though not intended for them alone), as they will see a direct reduction in their tax outgo, which will directly and positively impact ROEs and internal accruals, which in turn will add to the core Tier 1 capital. There will be write down of deferred tax assets for companies, hence will impact P&L to that extent. Net impact from tax benefit announced will be lower this year i.e. FY20 in a scenario of DTA writeback and higher from FY21 onwards.
These reforms are definitely sentimentally positive and a signal to the government’s inclination to addressing issues of various industries. However we expect fiscal deficit to be closely watched and would need fast paced efforts from the government to address the same in the form of large divestments in PSUs, listing of large unlisted PSUs such as IRCTC and divestment of land holding under central government amongst others. Expect “Make in India” to witness a significant boost with competitive tax rates in South East Asia.
The tax cut to 15%+ surcharge for new manufacturing units / setups, makes India’s tax rate more competitive than some of its Asian peers (like China and Malaysia). It’s virtually an invitation to global corporations to setup their operations in India at the most competitive tax rate than peers.
India is now even more competitive than Bangladesh, which has been quite competitive in textiles.
India however would be lesser attractive than Vietnam, which recently had cut its tax rates to woo large corporates affected by the US-China trade dispute. The President of the US-India Strategic and Partnership Forum (USISPF) Mukesh Aghi in recent media interactions indicated that they are in talks with ~200 American companies, which are willing to move their manufacturing base from China to India.
Also, in June 2019, as per a survey conducted by quality control and supply chain auditor QIMA on companies leaving China, 80% of American and 67% European Union companies have showed their intent.
With a reduction in the corporate tax rates, gates for India open up as India would now look attractive. Also, higher labour costs in China make India a better alternative.
Disclaimer: This document is STRICTLY for authorised recipients only and is prepared for information purposes only. The information provided herein, we believe, is from reliable sources. IndiaNivesh is not liable for the accuracy of the source data as well as the results of the calculations based on the same. We do not claim that the data provided herein is accurate and complete in all respects. This is not an offer or solicitation of any offer to buy or sell securities. No action is intended to be taken by the recipients based on this document. The recipients may take their decisions based on their own judgement and independent advice that they may receive before making any investment or disinvestment decisions. The recipients are advised not to take any decision only on the basis of this document. No portion of this document should be printed, reprinted, redistributed, reproduced, duplicated or sold.
Disclaimer: This document is the property of IndiaNivesh Group (IndiaNivesh) and for use by the recipient as information only and is not for circulation or public distribution. This document is not to be reproduced, copied, redistributed or published or made available to others, in whole or in part without prior permission from us. This document is not to be construed as an offer to sell or the solicitation of an offer to buy any security. Recipients of this document should be aware that past performance is not necessarily a guide for future performance and price and value of investments can go up or down. The suitability or otherwise of any investments will depend upon the recipients particular circumstances. The information contained in this document has been obtained from sources that are considered as reliable though its accuracy or completeness has not been verified by IndiaNivesh independently and cannot be guaranteed. Neither IndiaNivesh nor any of its affiliates, its directors or its employees accepts any responsibility or whatever nature for the information, statements and opinion given, made available or expressed herein or for any omission or for any liability arising from the use of this document. Opinions expressed are our current opinions as of the date appearing on this material only.
Posted by Mehul Kothari | Published on 28-AUG-2019
Investment Rationale
Most of the PSU banks seem to be on the cusp of turnaround after years of rigorous overhaul of processes, systems and practices in place.
Canara Bank looks promising among the pack. In FY19, the bank bounced back into black.
Stellar Q1FY20 earnings : There was strong improvement in asset quality. Gross NPA was down to 8.80% as at June’19 from 11.08% YoY. Net NPA also improved to 5.35% (Q1FY20) from 6.91% (Q1FY19). Profit came in at Rs. 373 crore in Q1FY20 vis-a-vis Rs.313 crore in Q1FY19.
Business back on growth trajectory : Advances grew by 11.12% (YoY) in Q1FY20. In a falling interest rate scenario, we expect NIMs to be stable. Major driver being Retail Credit, which grew at 13.48% (YoY).
Pick up in monsoons, the government’s infra push, and slow but steady improvement in the economy is likely to maintain business growth momentum.
The board has passed the resolution for raising fresh equity of around Rs. 6,000 crore and unlocking value by disinvesting stake in Can Fin Homes, which at prevailing market price is worth around Rs. 1,400 crore, and will take care of capital needs for business growth.
The bank has delivered advances CAGR of 15.57% in the last 15 years, which grew from around Rs. 48,871 crore in 2004 to Rs. 4,28,114 crore by March’19. In the same period, CASA grew at a CAGR of 13.48%, which stands at around Rs. 6 lakh crore as at March’19.
Given the visibility, government’s determination and regulator’s approach, we believe Canara Bank is an attractive investment buy.
VALUATIONThe bank looks attractively priced. In favourable times it has commanded valuation of 1.5x P/BV on TTM basis. In the last 10 years, the bank was plagued by bad loans which resulted in the stock trading consistently below 1x P/BV, with a mean at 0.93x. We expect the business to grow by a tad over 10% for next two years, while the asset quality improves. Assuming 10% traction in advances, stable margins, 50 bps sequential improvements in gross NPA & net NPA, and operating margin at 30%, we arrive at FY21E book value of Rs. 538 per share. Here, we have not taken into account potential impact of upgradation and/or recoveries of existing NPA or bad loans. Conservatively valuing the bank at 0.9x P/BV at FY21E per share, we arrive at a target price of Rs. 484, implying an upside return of around 118% from the current levels. We recommend to accumulate Canara Bank.FINANCIAL SUMMARY
ASSET QUALITY
The concerted efforts of the bank for improving the asset quality have yielded results, with gross NPA decreasing from 11.08% as at June’18 to 8.80% as at June’19. Net NPA reduced from 6.91% in June’18 to 5.35% in June’19. This marked improvement in asset quality was on the back of significant recoveries and upgradations.
The provision coverage ratio (PCR) improved considerably during the quarter from 60.6% in Q1 FY19 to 68.12% in Q1 FY20
Slippage has been contained substantially slippage ratio stood at 0.91% in Q1 FY20 vis-à-vis 1.19 in Q1 FY19
About the CompanyCanara Bank is one of the largest public sector banks owned by the Government of India. It is headquartered in Bengaluru. It was established at Mangalore in 1906, and is one of the oldest public sector banks in the country. The government nationalized the bank in 1969. As of 31 March 2019, the bank had a network of 6,310 branches and more than 8,851 ATMs spread across 4,467 centers.)
Posted by Mehul Kothari | Published on 26-SEP-2019
IPO Note : IRCTC
ISSUE HIGHLIGHTS
Initial Public Offer of up to 2,01,60,000 equity shares through an Offer for Sale by GOI.
The objects of the Offer:
(a) To carry out the disinvestment of 2,01,60,000 Equity Shares by the GOI constituting 12.60% of our Company’s paid up Equity Share capital.(b) To achieve the benefit of listing on Stock Exchanges.
SHAREHOLDING PATTERN
COMPANY HIGHLIGHTSIRCTC operates primarily in four businesses:1. Internet ticketing (12% of Revenue) – IRCTC is the only entity authorized by Indian Railways to offer railway tickets online through website and mobile application. As of August 31, 2019, more than 1.40 million passengers travelled on Indian Railways on a daily basis, of which approximately 72.60% of tickets were booked online.
2. Catering (55% of Revenue)- IRCTC provide food catering services to Indian Railway passengers on trains and at stations. For food ordering three options are available : a) On-board catering services, where freshly prepared food are delivered in running trainsb) Catering services at stations, through IRCTC approved vendors c) Food can be ordered through mobile app. Vendors are IRCTC approved. For example one order Domino’s pizza through this app. while traveling.
3. Packaged drinking water (10% of Revenue) - IRCTC is the only entity authorized by the Ministry of Railways to manufacture and distribute packaged drinking water (Branded as Rail Neer) at all railway stations and on trains. Currently, IRCTC operate ten Rail Neer plants which caters to approximately 45% of the present demand. IRCTC is in the process of commissioning 4 more plants by 2021 to meet entire demand in house.4. Travel and Tourism (23% of Revenue) - IRCTC also provide tourism and travel related services. It has footprints across tourism segments be it hotel bookings or complete holiday package through rail, land & cruise along with tour packages and air ticket bookings.
FINANCIAL PERFORMANCEBALANCE SHEETSEGMENTAL RESULTSVALUATION
IRCTC enjoys monopoly business in online rail ticket booking and food catering on running trains. Mobile application based food ordering is gaining fast traction among travellers. It provides multiple caterers in tune with today’s taste and preferences of commuters.
We expect food catering and travel tourism segments to grow in mid teens while operating margins of packaged water division to improve as more plants are commissioned.
Strong fundamentals and debt free balance sheet along with decent return ratios; ROE being 26%, operating margins of 20% and PAT margin at 15% augurs well. We expect revenue and PAT Cagr of 20% plus for next couple of years.
IPO looks conservatively priced at a PER of around 19x based on FY19 earnings.
We recommend subscribe.
Dharmesh Kant Head - Retail Research +91 22 6240 6402 dharmesh.kant@indianivesh.in)
Corporate Tax Cut - Impact of Tax Proposals on Key sectors
Impact of Tax Proposals on key sectors: “Setup in India” - An invitation letter to global investors
The tax break announcements today were a big shot in the arm though a tax reform.
However, one needs to see this with a bit of pragmatism. Several key sectors like Cement, Power, Steel, Mining have incentives from capex under sections such as 80 IA; while sectors like Auto are broadly between 27-32% - but need efforts on the demand side to deliver growth.
Hence the beneficiaries of these will be limited to select sectors and companies.
The government had already moved to 25% tax (in Budget June 2019) for companies having revenues upto Rs 400 crores which, as per government data, would have covered 99.3% of the companies.
We analysed the data of companies listed on BSE with turnover greater than Rs 1 cr – these totalled to 6082 companies – and the total tax payout as of their financial year end accounted to totally Rs 202,592 cr (on a standalone basis)
The move is a positive reform for BFSI stocks – “the biggest beneficiaries” - (though not intended for them alone), as they will see a direct reduction in their tax outgo, which will directly and positively impact ROEs and internal accruals, which in turn will add to the core Tier 1 capital. There will be write down of deferred tax assets for companies, hence will impact P&L to that extent. Net impact from tax benefit announced will be lower this year i.e. FY20 in a scenario of DTA writeback and higher from FY21 onwards.
These reforms are definitely sentimentally positive and a signal to the government’s inclination to addressing issues of various industries. However we expect fiscal deficit to be closely watched and would need fast paced efforts from the government to address the same in the form of large divestments in PSUs, listing of large unlisted PSUs such as IRCTC and divestment of land holding under central government amongst others.
Expect “Make in India” to witness a significant boost with competitive tax rates in South East Asia.
The tax cut to 15%+ surcharge for new manufacturing units / setups, makes India’s tax rate more competitive than some of its Asian peers (like China and Malaysia). It’s virtually an invitation to global corporations to setup their operations in India at the most competitive tax rate than peers.
India is now even more competitive than Bangladesh, which has been quite competitive in textiles.
India however would be lesser attractive than Vietnam, which recently had cut its tax rates to woo large corporates affected by the US-China trade dispute.
The President of the US-India Strategic and Partnership Forum (USISPF) Mukesh Aghi in recent media interactions indicated that they are in talks with ~200 American companies, which are willing to move their manufacturing base from China to India.
Also, in June 2019, as per a survey conducted by quality control and supply chain auditor QIMA on companies leaving China, 80% of American and 67% European Union companies have showed their intent.
With a reduction in the corporate tax rates, gates for India open up as India would now look attractive. Also, higher labour costs in China make India a better alternative.
Country
Corporate tax rate
South Korea
11.00-24.20%
Taiwan
17.00%
Malaysia
24.00%
Thailand
20.00%
Indonesia
12.50- 25.00%
China
25.00%
India
25.17% (15%+ for new setups)
Vietnam
20.00%
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Research Desk
Disclaimer: This document is STRICTLY for authorised recipients only and is prepared for information purposes only. The information provided herein, we believe, is from reliable sources. IndiaNivesh is not liable for the accuracy of the source data as well as the results of the calculations based on the same. We do not claim that the data provided herein is accurate and complete in all respects. This is not an offer or solicitation of any offer to buy or sell securities. No action is intended to be taken by the recipients based on this document. The recipients may take their decisions based on their own judgement and independent advice that they may receive before making any investment or disinvestment decisions. The recipients are advised not to take any decision only on the basis of this document. No portion of this document should be printed, reprinted, redistributed, reproduced, duplicated or sold.
Disclaimer: This document is the property of IndiaNivesh Group (IndiaNivesh) and for use by the recipient as information only and is not for circulation or public distribution. This document is not to be reproduced, copied, redistributed or published or made available to others, in whole or in part without prior permission from us. This document is not to be construed as an offer to sell or the solicitation of an offer to buy any security. Recipients of this document should be aware that past performance is not necessarily a guide for future performance and price and value of investments can go up or down. The suitability or otherwise of any investments will depend upon the recipients particular circumstances. The information contained in this document has been obtained from sources that are considered as reliable though its accuracy or completeness has not been verified by IndiaNivesh independently and cannot be guaranteed. Neither IndiaNivesh nor any of its affiliates, its directors or its employees accepts any responsibility or whatever nature for the information, statements and opinion given, made available or expressed herein or for any omission or for any liability arising from the use of this document. Opinions expressed are our current opinions as of the date appearing on this material only.
Previous Story
Canara Bank Stock Prices – Shareholding Pattern, Charts & Financial Summary
Investment Rationale Most of the PSU banks seem to be on the cusp of turnaround after years of rigorous overhaul of processes, systems and practices in place. Canara Bank looks promising among the pack. In FY19, the bank bounced back into black. Stellar Q1FY20 earnings : There was strong improvement in asset quality. Gross NPA was down to 8.80% as at June’19 from 11.08% YoY. Net NPA also improved to 5.35% (Q1FY20) from 6.91% (Q1FY19). Profit came in at Rs. 373 crore in Q1FY20 vis-a-vis Rs.313 crore in Q1FY19. Business back on growth trajectory : Advances grew by 11.12% (YoY) in Q1FY20. In a falling interest rate scenario, we expect NIMs to be stable. Major driver being Retail Credit, which grew at 13.48% (YoY). Pick up in monsoons, the government’s infra push, and slow but steady improvement in the economy is likely to maintain business growth momentum. The board has passed the resolution for raising fresh equity of around Rs. 6,000 crore and unlocking value by disinvesting stake in Can Fin Homes, which at prevailing market price is worth around Rs. 1,400 crore, and will take care of capital needs for business growth. The bank has delivered advances CAGR of 15.57% in the last 15 years, which grew from around Rs. 48,871 crore in 2004 to Rs. 4,28,114 crore by March’19. In the same period, CASA grew at a CAGR of 13.48%, which stands at around Rs. 6 lakh crore as at March’19. Given the visibility, government’s determination and regulator’s approach, we believe Canara Bank is an attractive investment buy. VALUATIONThe bank looks attractively priced. In favourable times it has commanded valuation of 1.5x P/BV on TTM basis. In the last 10 years, the bank was plagued by bad loans which resulted in the stock trading consistently below 1x P/BV, with a mean at 0.93x. We expect the business to grow by a tad over 10% for next two years, while the asset quality improves. Assuming 10% traction in advances, stable margins, 50 bps sequential improvements in gross NPA & net NPA, and operating margin at 30%, we arrive at FY21E book value of Rs. 538 per share. Here, we have not taken into account potential impact of upgradation and/or recoveries of existing NPA or bad loans. Conservatively valuing the bank at 0.9x P/BV at FY21E per share, we arrive at a target price of Rs. 484, implying an upside return of around 118% from the current levels. We recommend to accumulate Canara Bank.FINANCIAL SUMMARY ASSET QUALITY The concerted efforts of the bank for improving the asset quality have yielded results, with gross NPA decreasing from 11.08% as at June’18 to 8.80% as at June’19. Net NPA reduced from 6.91% in June’18 to 5.35% in June’19. This marked improvement in asset quality was on the back of significant recoveries and upgradations. The provision coverage ratio (PCR) improved considerably during the quarter from 60.6% in Q1 FY19 to 68.12% in Q1 FY20 Slippage has been contained substantially slippage ratio stood at 0.91% in Q1 FY20 vis-à-vis 1.19 in Q1 FY19 About the CompanyCanara Bank is one of the largest public sector banks owned by the Government of India. It is headquartered in Bengaluru. It was established at Mangalore in 1906, and is one of the oldest public sector banks in the country. The government nationalized the bank in 1969. As of 31 March 2019, the bank had a network of 6,310 branches and more than 8,851 ATMs spread across 4,467 centers.)
Next Story
IRCTC IPO 2019 – Issue Details, Balance Sheet & Company Highlights
IPO Note : IRCTC ISSUE HIGHLIGHTS Initial Public Offer of up to 2,01,60,000 equity shares through an Offer for Sale by GOI. The objects of the Offer: (a) To carry out the disinvestment of 2,01,60,000 Equity Shares by the GOI constituting 12.60% of our Company’s paid up Equity Share capital.(b) To achieve the benefit of listing on Stock Exchanges. SHAREHOLDING PATTERN COMPANY HIGHLIGHTSIRCTC operates primarily in four businesses:1. Internet ticketing (12% of Revenue) – IRCTC is the only entity authorized by Indian Railways to offer railway tickets online through website and mobile application. As of August 31, 2019, more than 1.40 million passengers travelled on Indian Railways on a daily basis, of which approximately 72.60% of tickets were booked online. 2. Catering (55% of Revenue)- IRCTC provide food catering services to Indian Railway passengers on trains and at stations. For food ordering three options are available : a) On-board catering services, where freshly prepared food are delivered in running trainsb) Catering services at stations, through IRCTC approved vendors c) Food can be ordered through mobile app. Vendors are IRCTC approved. For example one order Domino’s pizza through this app. while traveling. 3. Packaged drinking water (10% of Revenue) - IRCTC is the only entity authorized by the Ministry of Railways to manufacture and distribute packaged drinking water (Branded as Rail Neer) at all railway stations and on trains. Currently, IRCTC operate ten Rail Neer plants which caters to approximately 45% of the present demand. IRCTC is in the process of commissioning 4 more plants by 2021 to meet entire demand in house.4. Travel and Tourism (23% of Revenue) - IRCTC also provide tourism and travel related services. It has footprints across tourism segments be it hotel bookings or complete holiday package through rail, land & cruise along with tour packages and air ticket bookings. FINANCIAL PERFORMANCEBALANCE SHEETSEGMENTAL RESULTSVALUATION IRCTC enjoys monopoly business in online rail ticket booking and food catering on running trains. Mobile application based food ordering is gaining fast traction among travellers. It provides multiple caterers in tune with today’s taste and preferences of commuters. We expect food catering and travel tourism segments to grow in mid teens while operating margins of packaged water division to improve as more plants are commissioned. Strong fundamentals and debt free balance sheet along with decent return ratios; ROE being 26%, operating margins of 20% and PAT margin at 15% augurs well. We expect revenue and PAT Cagr of 20% plus for next couple of years. IPO looks conservatively priced at a PER of around 19x based on FY19 earnings. We recommend subscribe. Dharmesh Kant Head - Retail Research +91 22 6240 6402 dharmesh.kant@indianivesh.in)