On Friday, the capital goods index on BSE closed 1.4% lower than the previous day. Investors quickly saw the duty to be levied on imported power equipment will hardly offer relief to the languishing domestic firms.
The effective 21% import duty includes a 12% countervailing duty, which is equal to the excise duty paid by domestic firms. Besides, some domestic power equipment makers import components, which may become more expensive, too. Hence, the difference in pricing could be only around 4-9%.
More importantly, capital goods firms in fiscal 2012 suffered from dismal order inflows. Given that most of the 12th Five-Year Plan (2012-2017) orders have already been awarded, the new duty structure could be applicable for fresh projects awarded thereafter.
The import duty, therefore, has come a trifle too late. A Mumbai-based brokerage report says that of the 94,000 megawatts (MW) of power generation capacity under construction (as on 31 March), around 42.5% is with Chinese firms.
Further, the depreciating rupee had already made imports more expensive. A Goldman Sachs report says, “Domestic pricing for main boiler turbine generator (BTG) equipment has already moved down by an average 15-20% over the last year and including INR (Indian rupee) versus CNY (Chinese renminbi) depreciation, Indian equipment is now on par with the average Chinese equipment, hence making additional duties relatively less impactful for now.”
Also, the actual capacity accretion is unlikely to exceed 15,000MW annually. Obviously, competition will heat up, which could reduce pricing power, especially when orders in the pipeline are few. The new tariff barriers will hardly alter the scenario.
Analysts’ consensus holds that the lack of the orders has already hit realizations for the BTG industry, which are at Rs 2.3-2.4 crore per MW, compared with Rs 3 crore per MW in fiscal year ended March 2011.
Most power equipment companies’ profitability has dropped in the past 18 months. Net profit growth contracted from an average of 21% for the capital goods index stocks to 13% between fiscal 2010 and 2012. Return on capital employed, too, has fallen during the period due to higher cost of capital and lower returns generated on assets that were added in the past couple of years.
That said, diversified companies like Larsen and Toubro Ltd, with a huge backlog of orders, will continue to be favoured stocks when valuations are beaten down, as they were about six months ago. Mid-sized firms such as Thermax Ltd, BGR Energy Systems Ltd and Crompton Greaves Ltd will win investor confidence only on order inflows and profit expansion.
A mere tariff barrier, that too when the industry is hardly seeing action on fresh big power projects, is unlikely to lead to a rerating of the capital goods sector.
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