Sops And E-Sops

THE COMPASS

Infotech earnings will be boosted by the policy changes announced to the Union Budget. Additionally, corporate results thus far have been good, and business confidence is rising. This should improve stock market sentiment.

Two major irritants for the ICE (information technology, communication, entertainment) sectors have been the tax on Esops as a perquisite and of course, the phased reduction of export benefits.

Now Esops will be taxed in the hands of the employee only when sold. This not only ensures that employees are not forced to fork out cash on acquiring an illiquid asset (during the lock-in period) but also that they do not suffer on exercising the option. For example, an employee who exercised the option during the peak would have paid out a significant amount as tax, only to see the value of the holding come down now.

Earlier, the proposals were that software companies in STPs/EPZs would not be eligible for full tax exemption from the current fiscal. Now, they will be allowed these benefits in a graded fashion. Thus, till fiscal 2010, software units and IT-enabled services companies set up in specified areas will be eligible for tax sops. Essentially, that protects the earnings streams of most software companies till then. Since this will entail an increase in their earnings estimates a re-rating of stock prices is expected, which is visible in yesterday's rally in prices. Also, the move will encourage new investments and expansion in the sector whereas earlier only the older units were benefiting.

On the personal taxation front, the restriction on Sec 54EA/EB investments has been softened by lowering the lock-in period. Now, investments made in Nabard or NHAI bonds under Sec 54 EC will attract a lock-in of three years against the earlier five years. Infrastructure got another boost with the hiking of the investment limit to Rs 20,000 from Rs 10,000 under Sec 88.

Housing got another boost with the limit on exemption on interest paid being hiked to Rs one lakh from Rs 30,000. Earlier, in the Budget, the exemption on the principal repayment made on a housing loan was doubled to Rs 20,000 and capital gains exemption was extended to the purchase of a second house too. The current move will give a further boost to housing stock and real estate prices, especially with interest on housing loans are also softening.

Duty changes

In an obvious bid to boost the fortunes of the public sector coal units, duties on non-coking coal has been hiked which may be good for local coal units but industries which use this like power and cement will not be very happy. Tea and coffee producing companies will benefit from the steep hike in import duties from 15 to 35 per cent. The gainers will be plantation companies and plantation-cum-packaged tea companies. Thus, companies like Tata Tea, Consolidated Coffee, Eveready and Goodricke Group will benefit. Since the basic duty has been hiked, after CVD, additional duty and special additional duty, the impact will be much higher.

Biscuits manufacturers who were cribbing about the hike in excise duties on biscuits will get some relief. Sales in the mass market segment will be exempt from 50 per cent of Cenvat that was levied on them. Thus, the hike from eight to sixteen per cent will be rolled back to eight per cent for this category. Britannia will benefit from this move.

Godrej Soaps

Godrej Soaps' restructuring efforts continue to bear fruit, with the company posting a profit before tax of Rs 30.52 crore (excluding extraordinary items) in 1999-00 against a loss of Rs 29.93 crore in the previous year. Sales have declined by 19 per cent to Rs 735.25 crore as a result of a conscious decision to lower income from commodities trading activities and contract manufacturing.

Thus, while sales of branded Godrej products have increased 28 per cent to Rs 324.44 crore, non-branded products have fallen 33 per cent to Rs 58.04 crore. Income from commodities trading has fallen by 95 per cent to Rs 14.6 crore. Chemicals' sales has increased by 24 per cent to Rs 290.74 crore. The improvement in operating margins has been drastic as a result, increasing to 11.25 per cent in 1999-00 from 4.4 per cent in the previous year.

The increase in its branded products sales would have been aided by its acquisition of some brands like Ezee, Trilo and Key brands in August 1999, the full effect of which will be visible in the current fiscal.

The trend so far seems quite encouraging. What is visible in its results is the effect of better management focus on its business, that has enabled it to boost sales of chemicals and branded products in 1999-00. It needs to plough back the profits earned in to these businesses in sales promotion and new products. Its liquidity position last year was aided by the Sara Lee divestment but these are non-recurring inflows. Its first-half performance in 2000-01 will reveal if its good performance will continue.