IBS Group May Double Net Income on Tax Breaks
OREANDA-NEWS. July 20, 2010. Under a proposed law introduced in the Duma, designated IT companies would pay only 14% in social payments for employees instead of the usual 26%. IT companies had tax privileges under the Unified Social Tax, but starting 1 January 2010, this tax was replaced by payments into pension funds as well as into social and medical funds, under which IT companies received no special benefits, reported the press-centre of OTKRITIE Financial Corporation.
View: Personnel comprises the bulk of costs for IBS Group and its software business Luxoft, so the proposed tax breaks would amount to substantial savings -- around 5% of revenue or USD30m in 2010E. Social taxes are slated to rise to 34% in 2011. The impact on net income is substantial as the company is expected to have a net income margin in 2010 of just 3%. Moreover, the new law would place restrictions on the number of companies that could receive the tax break, which could give established players like IBS an advantage in recruiting staff.
Valuation: IBS Group trades on a 2010 EV/EBITDA of 7.8x and at 2010 a P/E of 22x.
Action: We expect the stock to react positively, as the proposed tax breaks could more than double the company's net income next year.