Thursday, February 25, 2010

Budget Impact on taxes: Save Rs 50 Thousand + 6.5 thousand in personal taxes

The new proposal announced today in Budget speech by pranab mukherjea provide for up to Rs 50 thousand saving for income up to Rs 8 lac. due to change in slabs. For income between Rs 3 lac and Rs 8 lac, the average reduction is 10%, across various slabs

In addition, you could save  upto ~6.5 K on additional investment in long term, government infrastructure bonds, giving a total benefit of upto 56.6 thousand

Revised Tax Slabs are as follows
  • No tax for income upto 1.6 lakh.
  • For income between 1.6 lakh - 5 lakh tax liability 10%. (old slab was Rs 1.6 to 3 lakh)
  • For income between 5 lakh - 8 lakh 20%. (old slab was Rs 3-5 lakh)
  • For income above 8 lakh 30% (old slab was Rs 5 lakh +)
  • Additional investment of 20K in infra bonds over and above Rs 1 lakh in 80C

3G Auction Schedule

The Government has announced the Schedule of 3 G Auction. The auction process for 3G will follow the schedule given below:

Notice inviting applications: 25th February, 2010
Last date of submission of application: 19th March, 2010
Publication of ownership details ofapplicants: 26th March, 2010
Pre-qualification of bidders: 30th March, 2010
Mock auctions: 5th and 6th April, 2010
Start of 3G auctions: 9th April, 2010
Start of BWA auctions: Two days after the close of 3G auctions

Source: PIB

Tuesday, February 23, 2010

Public Private Partnerships: Why they may not be the solution?

PPP’s have become the latest buzzword in town. Politicians and Babus hawk 'Public Private Partnerships' as a silver bullet to help Indian economy achieve breakneck development while upholding government’s inclusiveness agenda. Here are my views on the matter
  • India needs a huge pile of cash to develop its infrastructure, both hard and soft. Funding these is well beyond the means of the government.  
  • That does not mean that government is not spending. The government spends huge amount of meney every year. The problem is that most of the money is spent on salaries and other operating expenses with little left over for new capacity expansion 
  • The hope is that PPPs would attract the private sector to made the deficit investments and drive capacity expansion. Private sector responds to incentives and is looking for return on its investment. Given the large opportunity, PPP is a very attractive concept for them  
  • However, in reality, the government loses all concept of partnership and sharing of risk/rewards when dealing with the private sector. It carries a huge intellectual baggage when it comes to partnering with the private sector. Take education for example, government has been allocating money for PPP for model schools every year for two years now (has been talking about it a few more years). It still has to come out with the model for sharing rewards with the private sector. It expects private sector to put money. However, whenever a model is proposed, the politicos run for cover. How can anyone make profits from education or more importantly how can the government approve a scheme which legalizes profit making from education? Does the government expect to attract all the money required from charitable organizations?  
  • The problem is not just confined to one sector. Pick up any education, railways, power, roads the story is the same. The best solutions is to allow privatization, create level playing field for private players , have an independent regulator and foster competition. Healthcare and Telecom are the two sectors that stand out. Government allowed for profit companies to enter these two sectors a few years back. While there is room for improvement both private players have made healthcare and telecom available to a large number of people who otherwise were left out of government ‘inclusive’ plans

Are PPPs the magic wand that government hopes they are? My short answer is ‘No’


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Thursday, February 18, 2010

Bharti Zain Deal Analysis

Bharti has decided to acquire the Africa operations of Zain at an EV of $ 10.7 Bn . This comes after its earlier failed bid to acquire MTN.

After the recent entry of new players in the Indian market, Bharti has been desperate to acquire major presence outside of India and Africa is probaly the only large scale growth market that it can gainfully deploy its cash in.

Bharti joins the long list of other Indian companies trying to strike it big in the continent. NIIT is already making it big in the region through franchising of its IT training business

While the story is good and deployment of exess cash makes sense,  it would not be an easy task for Bharti to create value from this deal. The market senses this and which is why its stock has been punished in the last few days
As earlier discussed on this blog, the current acquisition makes a lot more sense for Bharti than its previous bid for the largest player in the contient (MTN). Can Mittal work his magic in the the region and propel Zain to the leadership position, ahead of MTN?

Wednesday, February 10, 2010

Are you an 'Average Person'?

Talking of averages... we have all heard the example of "...average depth of water"  trap. Here's an alternative version of that (from levitt and dubner..superfreaks)....

"The average person (man or waman) walking this earth has one b * * b and one t * * t * cle".

Next time you look at statistics, make sure that you don't fall into the 'Average Person' trap

Tuesday, February 02, 2010

Educomp Results Analysis

Educomp Solutions' consolidated revenues, EBITDA and PAT rose 37%, 86% and 92% YoY to Rs2.6bn, Rs1.33bn and Rs612mn respectively.

Educomp, as indicated in Q2FY10, initiated the process of securitizing its Smart_Class revenue through selling contracts to Edusmart (which borrowed from banks against receivables from schools and corporate guarantee of Educomp) where Edusmart is a non-Educomp company apparently owned by ex employees of Educomp and is independently run (Yeah right!!)

In Q3FY10, the company transferred 518 schools with contracts worth Rs980mn (on top of 300 schools in Q2FY10 with contracts worth Rs630mn). Educomp has received sanctions worth Rs4.15bn for securitisation of Smart_Class revenues from many leading banks and has received Rs2.45bn disbursement. Besides, securitisation proposal worth Rs2-3bn is under consideration.

The transfer of existing Smart Class contracts to Edusmart would be done in tranches over the next few quarters.

The apparent reasons given are

• The new Smart Class model would improve cashflow for the company
• Would address the issue of frequent equity dilution,
• Some convoluted tax saving logic (I have no idea how this is possible)

Here is my analysis of the situation

1. This is a more expensive form of debt structure except that ‘Financing cash flows’ appear as ‘Operating cash flows’ in Educomp’s books

2. People say it increases lumpiness; Incorrect. It gives them a perfect tool to smoothen earnings and show growth, as there is absolutely no logic to how many contracts are securitized in a quarter.

3. Of course this can last for a short while only. Once they have securitized all their contracts, they would have to rely on new additions every quarter(growth in which is slowing down due to increased competition and lower realizations as Educomp is forced to cut prices because it no longer has the best product in the market). After that, the growth at least if not revenues, are likely to fall off the cliff

4. Once there are no annuity revenues from smart class, they have to keep adding a large number of schools every quarter to remain at the same level. You are already seeing that in their Government Schools business (predictably, they have started to hide their Gov’t business numbers by clubbing it with the smart class segment)

5. However, I hope you would agree with me that value cannot be created (or destroyed) through accounting changes. Stripped of the accounting treatment, the organic growth in their smart class seems to be slowing

6. The fact is, that with high stakes on their stock price, Educomp simply must keep showing growth to survive. In securitization, it has found a legal way of doing so.

7. Promoter holding is already down to 50 percent and may not want to dilute more. Debt is already at 1000+ Cr (excl unconverted FCCB of another 400 Cr and not counting off balance sheet guarantees for smart class securitization) despite diluting additional 35% post the IPO.

8. Of course, the hope is that some of their new initiatives (Own K-12 schools, online learning, and hundreds of other options that Educomp is buying with its overpriced currency …read stock) would by that time (when there are no more contracts to be securitized) begin to contribute materially.

9. For now, at least one will see their numbers grow at 100% over the next year or two, with a much smaller actual growth.
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