India Strategy
India Strategy | 18 July 2014
India Strategy
The new depreciation regime!
New norms to negatively impact EPS for many companies; though, there will be no cash flow impact
Event: The Companies Act, 2013 has notified new rates for depreciation of fixed assets which have become effective
from April 1, 2014. Thus, many companies declaring 1QFY15 results are witnessing higher depreciation charges.
Treatment: Schedule II to the Companies Act, 2013 lays down the new rates for depreciation of fixed assets. The
calculation for the revised depreciation has to be done in the following manner:
i)
ii)
Where the remaining useful life of an asset is nil: The carrying amount of the asset as at April 1, 2014, after
retaining the residual value, shall be recognized through the general reserves/accumulated P&L account.
For other assets: The carrying amount of the asset as at April 1, 2014 shall be depreciated over the remaining useful
life of the asset as per the rates stated in this Schedule.
Companies can use depreciation rates different from those stated in Schedule II. However, if rates different from
Schedule II are used, then justification for the same needs to be disclosed in the financial statements.
No cash flow or income-tax implications: The change in depreciation rates will not have any impact on companies’ cash
flows. However, deferred tax liabilities/assets may change depending on the revised rates.
EPS/valuation impact: The new norms will negatively impact EPS of many companies on account of higher depreciation
rates. This is critical for companies being valued on P/E basis. Most analyst estimates do not include the impact of higher
depreciation for FY15/FY16 due to information constraints with respect to the life of fixed assets completed till date,
rates of depreciation, method of depreciation (SLM or WDV) as well as choice of shift depreciation used
(single/double/triple shift or continuous process plant). We are closely tracking the EPS impact on account of change in
depreciation for all our coverage companies (Refer Table 2 and 3 on Page 2). Based on 1QFY15 results declared till now,
we expect downward earnings revision for FY15/FY16 on account of the higher depreciation rates for many companies.
The extent of impact on companies will be different – for instance, Infosys’ FY15 EPS was raised by 3.3%, while Bajaj Auto
FY15 EPS was cut by 2.5% as a result of change in depreciation.
Table 1: Depreciation rate change for key asset classes
Asset class
Building
Factory buildings
Other than factory building
Plant and Machinery
Plant and Machinery - General (Single shift)
Plant and Machinery - General (Double shift)
Plant and Machinery - General (Triple shift)
Continuous process plant for which no special rate has been prescribed [NESD]
Furniture & Fittings
Vehicles
Motor buses, motor lorries, motor cars & motor taxies used in business of running them on hire
Office equipment [NESD]
Computers
End user devices, such as, desktops, laptops, etc.
SLM rate as per
old Act (%)
3.34
1.63
4.75
7.42
10.34
5.28
6.33
9.5
4.75
Effective SLM rate as
per new Act (%)
3.33
1.67
6.67
10.01
13.34
4.00
10.00
16.67
20.00
16.21
33.33
Source: Ministry of Company Affairs, MOSL
Ashish Gupta
(Ashish.Gupta@MotilalOswal.com); +91 22 3982 5544
18 July 2014
Investors are advised to refer through disclosures made at the end of the Research Report.
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India Strategy
Table 2: Impact on 1QFY15 P&L on account of change in norms (INR m)
Depreciation
Company Name
1QFY15
Bajaj Auto
Bajaj Finance
D B Corp
GRUH Finance
Infosys
Mindtree
NIIT Technology
692
78
204
(13)
192
228
149
223
156
4QFY14
445
142
165
6
1QFY14
446
50
158
6
250
181
104
2.2
(4.6)
P&L
Amt. added/
impact
(deducted) to
due to Remarks
YoY
/through general
QoQ
new dep.
increase
reserve
increase (%)
rates
(%)
55.6
(45.2)
23.5
(296.9)
55.3
55.1
29.1
(317.2)
(23.2)
26.0
43.4
NM
(16)
NA
NM
(63)
NM
(160)
NM
(48)
6
1,270
NM
(21)
Earlier some assets were
depreciated on WDV and some
on SLM. Changed to SLM basis.
Exceptional income of
INR4,898m is routed as
exceptional item instead of
reserves
Source: BSE, MOSL
Earlier some assets were
depreciated on WDV and some
on SLM. Changed to SLM basis
Earlier some assets were
depreciated on WDV and some
on SLM. Changed to SLM basis
TCS
4,175
3,749
2,972
11.4
40.5
-
(606)
NM: Not meaningful; NA: Not available
Table 3: Negative EPS impact on account of change in depreciation rates for results declared till date (excluding banks) (INR b)
Depreciation
Company Name
FY15
(Preview)
1.9
0.7
14.5
0.6
15.3
FY15
(Review)
2.8
0.8
10.6
0.8
18.3
FY16
(Preview)
2.1
0.7
15.0
0.7
17.5
FY16
(Review)
3.1
0.9
13.7
0.9
17.5
FY15
(Preview)
38.0
3.5
116.9
2.5
219.2
PAT
FY15
(Review)
37.1
3.4
120.8
2.3
216.3
FY16
(Preview)
43.6
4.2
130.1
2.8
251.1
FY16
(Review)
42.6
4.0
131.4
2.6
251.1
Assuming only
depreciation change (%)
FY15 EPS
FY16 EPS
change (%) change (%)
(2.5)
(4.3)
3.3
(7.3)
(1.3)
(2.3)
(3.8)
1.0
(7.6)
0.0
Bajaj Auto
D B Corp
Infosys
NIIT Technology
TCS
No changes in depreciation have been made for Bajaj Finance, Gruh Finance and Mindtree since the same were not material; Source: MOSL
18 July 2014
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NOTES
18 July 2014
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