Apple's (AAPL) Tax Tussle In India Appears Far From Over

Per a recent report by Reuters, Apple Inc.’s (NASDAQ:AAPL) requests for deferment of tax on imported mobile phone parts in India are unlikely to be accepted. The government is supposedly against granting of any “special concessions” to the tech giant.

We note that India imposes a 10% tax on imported components like batteries, chargers and headsets in order to foster domestic production. With Narendra Modi at the helm, the “Make in India” concept is fast catching up with global manufacturing majors.

Apple is rumored to have demanded a 15-year tax holiday on the import of equipment and components in the country. At the beginning of the year, the company met with the government in order to discuss its intentions of setting up manufacturing units in the country in exchange of tax breaks. It was estimated that the expansion would create 5-10K jobs in the country.

Apple mentioned that it had "constructive and open dialogue” with the government regarding the expansion of local production but declined to share additional details.

However, both Apple and the concerned government are yet to make any comments regarding the current update.

Why is Apple Eyeing India?

Apple faces slowing iPhone demand in most of the regions, either because of competition or regulatory hurdles (as in the case of China) or market saturation (as in the United States). It is therefore taking a number of initiatives to strengthen its presence in growth regions like India, which can become a key long-term driver going ahead.

Notably, shares of Apple have gained 49.1% year to date, outperforming the industry’s 45.3% rally.

The country presents an attractive growth opportunity for the company over the long run given its younger population and increasing investment in 4G networks infrastructure. Apple has partnered with telecom company, Reliance, which will be providing its Jio (a unique all-IP network) service for free with the new iPhones along with Bharti Airtel.

Furthermore, the company is also setting up a couple of development centers in India to boost app development and to accelerate the development of maps. Also, Apple has set up its first manufacturing unit in Bangalore, Karnataka and has teamed up with Wistron Corp. from Taiwan to take care of the assembly of the iPhones.

In the last reported quarter, Apple sales in India doubled year over year. However, the company has failed to make it to the list of top five smartphone brands in the country.

According to the International Data Corporation (IDC) report released in November, Xiaomi and Samsung (KS:005930) are the two leading smartphone brands in India with 23.5% market share each in the third quarter.

Therefore, the company’s increasing focus on India to claim a greater share of the vast smartphone market, of which it reportedly holds only 2% currently, is prudent in our view.

However, the market is highly cost sensitive. The Chinese competitors are providing smartphones at very reasonable prices.

Reportedly, the majority of the smartphones sold are priced around INR 10K. iPhone 8, on the other hand, costs almost six times more while iPhone 9 costs nine times more.

The lion's share of Apple’s revenues in the country comes from devices that are a couple of generations old. Newer models have relatively low demand given their hefty price tag.

The denial of tax benefits will translate into an increase in pricing of the products, which might be detrimental to Apple’s growth in the country.

Zacks Rank & Stocks to Consider

Apple carries a Zacks Rank #3 (Hold).

Better-ranked stocks in the broader technology sector include IPG Photonics Corporation (NASDAQ:IPGP) , NetApp Inc. (NASDAQ:NTAP) and NVIDIA Corporation (NASDAQ:NVDA) , all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.

Long-term earnings growth rate for IPG Photonics, NetApp and NVIDIA is projected to be 19.7%, 11.3% and 10.3%, respectively.

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