Computer education: Industry expectations partly met

Contrary to industry expectations, the allocation for Sarva Sikhsya Abhiyan has not been increased, but retained at Rs 13100 crore for FY 2009-10.

Budget provisions:

The budget proposes to increase the allocation for education sector by 6% from Rs 34400 crore (Rs 344 billion) in 2008-09 to Rs 36400 crore (Rs 364 billion) in 2009-10. Out of this amount, Sarva Shiksha Abhiyan (SSA) will be provided Rs 13100 crore (Rs 131 billion) same as in 2008-09 and Rs 1354 crore (Rs 13.54 billion) towards Rashtriya Madhyamik Shiksha Abhiyaan.

Industry expectation - partly fulfilled

In the budget 2008, the government had increased the allocation by 20% at Rs 34400 crore. The industry is expecting such increase in the current budget.

The industry is demanding tax breaks to Companies investing in Education infrastructure so as to encourage fast paced growth in education infrastructure.

Budget impact

The increased allocation towards education would have a positive impact on all the IT – Education Companies as this would lead to higher ICT projects coming their way. However, the allocation to SSA and overall allocation is lower than expected.

The hike in Minimum Alternate Tax (MAT) from 10% to 15% is an irritant for the corporate sector.  On the positive side, this hike has come with a benefit of extending the period allowed to carry forward the tax credit under MAT from seven years to ten years.

Also, the hike in MAT will not be earnings dilative but will only be cash flow dilative.  The increase in liability towards MAT will be matched by an incremental deferred tax credit. Hence, the net profit or EPS of a company will not change due to hike in MAT from 10% to 15%.

But it will mean increase in cash outflow, and if the company is not returning to profits as per Income tax act within ten years, then it may have to forego them. So, from a current year(s) point of view, increase in MAT from 10% to 15% is not earnings dilative but cash flow dilative. On the other hand, the removal of Fringe Benefit Tax (FBT) is a major positive for Corporate India.

Stocks to watch

NIIT, Educomp Solutions, Everonn Systems

Outlook

On an overall basis the budget has been positive for the Computer education companies with the increased allocation to education. However, the increase in allocation was lower than expectation. The Government is focused on improving literacy and quality of education.

The spending on education is expected to rise 12-fold per household between FY1995-2025E due to rise in income levels of the Indian middle class. However, the sector is unorganized with regional content and a large number of regional players with large dependence on government spending and lack of quality education in rural areas. Any delay in the government programme and red-tapism can delay the growth.