Import Duty On Equipment May Not Favour Power Sector

The level playing field which the domestic power equipment manufacturers are asking for may not be very favourable to the power companies. The power equipment manufacturers are asking for an import duty of about 19% on the foreign power equipments. However, the Power Ministry has requested to exclude all existing UMPPs from this duty hike. Besides, it has proposed a 5% basic customs duty to curb the competition from low cost Chinese and Korean equipments.

Currently, the equipments for projects below the capacity of 1000 MW attract a custom duty of 5%, while those of over 1000 MW capacity attract no duty. There is large variation in the expectations of custom duty from various entities. The Finance Ministry as well as the Committee of Secretaries is supposed to have favoured 19% duty. The Commerce Ministry has recommended a 24% duty, while the Arun Maira Committee has suggested a 14% duty on foreign power equipments.

The argument being put forth by the Independent Power Producers Association of India (IPPAI) is that the domestic power equipment manufacturers are currently burdened by a huge order book. For example, BHEL, which is the biggest player in the industry, has an order book of 3.7x of its annual sales. The levy of the custom duty may cause a delay in project execution and future capacity additions. Profitability may also go for a toss, further worsening the scenario.

The power generators, mainly Tata Power, Adani Power and Reliance Power, may get impacted by any quantum of custom duty hike, as they have already started building their ambitious projects. Each of their projects is over 1000 MW in capacity, and hence, will attract custom duty. Tata Power’s Mundra UMPP is expected to be commercially operational any time soon.

Tata Power and Reliance Power have said that the duty hike may attract a tariff hike to the tune of Rs 30-35 paise per unit. Both these companies are struggling to keep their UMPPs profitable in the future. In the current scenario, they will not be able to pass on the prices, and hence, the duty hike will further erode their profits and reduce shareholders’ wealth.

As far as investors are concerned, they would do well to watch Capital Goods stocks like L&T, BHEL, Bharat Forge, Thermax, etc., which are prominent power equipment manufacturers. Both Tata Power and Reliance Power may remain subdued for next few days.