MUMBAI: A Merrill Lynch report titled "Pre Budget Views - A Balancing Act" dated 24 February 2003 says that reduction in the duties of set top boxes (STBs) will be a key to the implementation of CAS (conditional access system) in the country.
The report states that a 60 per cent reduction in customs duty and halving of excise duty on set top boxes (STB) would be the key benefits that the Indian media sector are looking forward to in the forthcoming Union Budget.
To implement the conditional access system (CAS) legislation, it would be necessary to import STBs, states the report.
According to industry sources, the ministry of information and broadcasting has recommended 10 per cent customs duty and five per cent excise levy for all components of the CAS system for a period of two years.
As STBs are not made in India, the report expects the finance minister to lower the customs levy only on STBs to 10 per cent (down 60 per cent) but not on all the CAS components. This is because, should the levies be reduced on all components of the CAS equipment as proposed by the ministry of I&B, industry might end up importing standard headend equipment (such as modulators and amplifiers) currently made in India as well. This could impact domestic industry adversely.
The report expects the FM to levy eight per cent excise levy (down from 16 per cent), as the five per cent rate slab for excise levy does not exist.
Duty structure on STBs
Duties
Import
Excise
Existing
Merrill Lynch esimates
Existing
Merrill Lynch estimates
Finished goods/STBs
25 + 4 per cent
10+ 4 percent
16 per cent
8 per cent
Impact and recommendations of the Merrill Lynch report:
The report says that the cut in duties would be the key to success of the CAS rollout. Price of the STB will be a key determinant of STB penetration. The price of STBs will depend on the rate of the customs duty, as there is no facility available domestically to manufacture STBs.
Given the current incidence of over 50 per cent tax on STBs, significant reduction in duties would make STBs far more affordable. Further, the duty structure would also influence capex requirements of cable operators and cost to consumers.
o Cut in duties could also influence selection of CAS technology. Digital STBs which are prohibitively expensive (Rs7K) at the current duty rate, might become more affordable (Rs4-5K) with duty reduction.
Removal of the 5 per cent surcharge in corporate tax rates. This would benefit both media companies as they pay tax at a high rate - Zee Tele (29 per cent) and Balaji Tele (>35 per cent).
Removal of tax on dividends may benefit Balaji's stock. Balaji with its large free cash, may be tempted to increase the payout. Also Balaji currently offers 4.2 per cent yield, which would be attractive in the zero dividend tax scenario.
Impact on Zee Telefilms:
The report has allotted its overweight rating to the Zee Telefilms scrip at a price level of around Rs 89.3.
The report states that it expects the peak custom duties to be reduced by five per cent. In excise, it expects rationalization of slabs with the reduction in excise duties in some products being accompanied by an increase in others.
The report also expects the government to reiterate its commitment to VAT. Overall, indirect tax changes will be marginally negative for corporate profitability.
The sensitivity analysis for removal of various tax deductions shows the following:
Additions to tax if deductions are removed
Backward area
Intra
Aligning of book and IT dept
Exports
Effective tax rate
Rs (mln)
EPS change
Rs (mln)
EPS change
Rs (mln)
EPS change
28.5 per cent
0
0
35
1.2 per cent
23
0.8 per cent
Effect of removal of surcharge on corporate tax:
Price as of 21 February 2003
PBTFY04
TaxFY04
Effective tax rate
Tax saving
EPS gain
85.80
4054.4
1155.5
28.5 per cent
55
1.9 per cent
Based on the 21 February 2003 price of Rs 85.80, the report states that the dividend yield would be around 0.70 and the dividend payout would be 12.7 per cent.
