Bhel a winner on likely duty on imported power equipment

Shares of power equipment makers extended gains after media reports said the government is likely to impose a 21 percent import duty on power equipment.

State-run BHEL was up 2,60 percent at Rs 220.50 while private sector major Larsen and Toubro gained 1 percent. Mid-sized power gear makers BGR Energy and Thermax gained 2 percent and 1.8 percent, respectively. The Bombay Stock Exchange Capital Goods index, is up 1 percent compared to 0.4 percent fall in the benchmark Sensex .

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The imposition of the duty, which includes a 5 percent basic duty, 12 percent countervailing duty and 4 percent special additional duty, will curb the import of cheap Chinese equipment thus boosting the demand for products of BHEL and L&T. Currently, equipment imported for projects of less than 1,000 MW capacity attract 5 percent customs duty while those above that are exempt.

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The Prime Minister’s Office has asked the power ministry to circulate a cabinet note on the duty issue, which has been pending with the government for long, media reports said. The revival of the proposal is in view of the state of the domestic capital goods industry. Latest data indicate the capital goods sector contracted by 16.4 percent, which was one of the key reason why overall industry growth was flat at 0.1 percent in April.

Local power makers have requested import duties for the past two years to curtail the supply of cheaper equipment from China. An Economic Times report estimates that foreign equipment makers account for almost 30 percent of the total power equipment market in India. The leading foreign equipment makers who have eaten into the domestic market are those from China, Korea and Japan.

Equipment makers, much like other exporters from China, benefit from low interest rates and an undervalued currency. And if the rupee continues to remain depreciated at the current levels, it would be a double gain for power equipment makers.

Chart: Power equipment stocks gainDescription: Tags: Author: charts powered by iCharts

Power generators like Tatas, Reliance Power, Lanco and GMR Power opposed the move, and warned that the duty will result in an increase in power tariff for the consumers.

In a letter to Power Secretary, the Association of Power Producers Director General Ashok Khurana has written that fuel availability and pricing concerns, financing difficulties and poor health of distribution utilities have led to an increase in cost of power generation in many cases.

BHEL has given an order intake guidance of 12?14 gigawatt (1 GW = 1000 MW) for this financial year.

In a research report, Edelweiss has assumed an order intake of 7.5 GW. “Even as managing the fixed cost base remains a critical factor for BHEL’s profitability, a sharp fall in revenue visibility could lead to an actual decline in revenues from FY14E-FY15E onwards,” the report said.