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Tax cuts bring no key benefits for telecom sector: I-Sec

Mumbai, Sep 23

The redcution of corporate tax to 25 per cent, from 35 per cent, brings little cheer to telecom companies given their continued losses, which make the tax cut irrelevant to them, broking firm I-Sec said in its sectoral report on Monday.

According to the report, the tax cut means at the most that Bharti Airtel (Bharti) will see a small benefit on cashflow basis in the near term.

Bharti Infratel. however, stands to benefit, says I-Sec sees and has raised the firm's earning per share (EPS) estimate by 17 per cent each for the current fiscal and 2020-21/ FY21E, while it sees "small benefits" for Bharti Airtel.

"Vodafone Idea (VIL) will see no near-term benefit. On the contrary, Bharti and VIL's reported losses will increase due to lower deferred tax, though it will have no impact on cashflow," the report said.

Government has now allowed domestic companies an option to pay income tax at an effective tax rate (ETR) of 25.17 per cent instead of the earlier 34.94 per cent.

"If the new rates were to be applied to 2018-19, Bharti's consolidated net profit would have been impacted negatively by Rs 3.9 billion. This is because Bharti as a standalone entity and Bharti Hexacom are pre-tax loss-makers, and their net losses have been lower due to higher deferred taxes," it added.

According to I-Sec, the new rates will however benefit Bharti Telemedia, Bharti Infratel and Indus Towers.

On cashflow basis, Bharti would have benefited by Rs 2.2 billion if the new ETR were to be applied to 2018-19.

"We have incorporated the new ETR and made slight changes in our estimates for Bharti's India EBITDA (earnings before interest, tax, depreciation, amortisation)", it said.

Vodafone Idea (VIL) will see negligible near-term benefit. The company makes huge pre-tax losses, and hence sees no benefit in the near term. On reported basis, VIL would see higher losses due to lower deferred taxes.

Bharti Infratel is the biggest beneficiary. It had an ETR higher than 34 per cent in 2018-19, "but if we apply the new ETR, its net profit for the year increases by 16.7 per cent. We have incorporated the new rate in our model and accordingly increased our EPS estimates by 17 per cent each for FY20 and FY21."

Tata Communications (TCom) will see some benefit. Though TCom on consolidated basis has not been generating huge profit before tax, it does make profit in the standalone entity and its two India subsidiaries -- Transformation Services and Collaboration Services -- while it incurs loss in one subsidiary.

"If we apply the new ETR to FY19, TCom's net profit would increase by Rs 1.4 billion," it said.