BHEL And L&T Surges As Govt. Hikes Import Duty on Power Equipments

In a move to help the Indian power equipment manufacturers, the Indian government has proposed to hike duty on the foreign power equipments between 19-21%. In the yesterday’s meeting, the prime minister’s office (PMO) has asked the power ministry to float a note on the same by 28^th June as reported by newspaper ‘Mint’.

The issue was very buzzing the budget however it could not get materialized at that time. The Heavy industries ministry along with sector majors L&T and BHEL had been lobbying for the same which has come true at this time. According to new duty structure the imported power equipments for mega power projects (above 1000MW) will attract 5% import duty, 10% countervailing duty (CVD) and 4% special additional duty (SAD) taking total duty to 19%. For the non mega projects (below 1000MW capacity) the duty structure includes 5% import duty, 10% CVD, 2% Excise duty and 4% SAD which makes it 21% altogether.

Several related authorities had proposed the duty structure in line with what has been proposed by PMO office. The final decision on the same is awaited in next 15-20 days.

Recently due to low cost Chinese equipment manufacturers, Indian equipment manufacturing companies were seen losing orders. Due to the increased competition Indian companies have reported shrunk in their order books. After the import duties are set to rise, the domestic companies will have a duty cushion as well as level playing field against their foreign competitors.

The newspaper has also reported that the duty structure will not be applicable for the orders already placed or will be placed in the 12th five year plan (2012-2017). This duty structure is applicable for the next five year plan i.e. 2017-2022 which means Tata Power, Adani Power, Reliance Power and Lanco Infra have escaped from the proposed duty structure.

Domestic equipments companies have their order books full for about next 2 years. Besides many companies have either cancelled their orders or have delayed their plans to add more capacities due to the coal and gas shortage in the countries. The Central Electricity Authority has already asked the power generating companies not to add more gas based power plants in next 4-5 years due to the gas supply constraints. Ahead of this as demand is set to decline, we expect the capital goods sector to remain under stress. The new duty structure will partially curb the competition however due to the overall disappointment in the capacity additions, demand will remain muted.

Shares of capital goods majors such as L&T and BHEL have gained between 1-2% today on this news. We believe that the gains may not hold in case of BHEL unless its order book shows healthy growth this year.