Five reasons why import duty on power equipment does not matter
Despite the seemingly high level of duty protection, stocks of power equipment firms are trading in the red.
The euphoria in power equipment manufacturer stocks was short-lived even after the Cabinet cleared the imposition of duties on imported equipment. Stocks of power equipment manufacturers such as Bharat Heavy Electricals and Larsen & Toubro opened higher, but after the first hour of trades these stocks were trading in the negative territory.
The Cabinet on Thursday cleared imposition of 5 per cent import duty, 12 per cent countervailing duty (CVD is to counter the effect of excise duty on local manufacturers) and 4 per cent special additional duty. These duties add up to a protection level of 21 per cent for domestic manufacturers. Power equipment manufacturers have been asking for duty protection from cheap imports in the country from Chinese and Korean manufacturers.
Despite the seemingly high level of duty protection, the market has reacted as though nothing has happened. Following are the five reasons why the imposition of import duty on power equipment does not matter:
The duties are applicable by August-September 2012 for the project that will be awarded in 2012-2022 as orders for the current plan (2012-2017) have already been placed. In other words, companies will have to wait for another five years, thanks to the government delay in imposing this duty.
International players from China and Korea have set up shop in India as joint ventures with various Indian players. Thus, the duty, in effect also protects these international players.
According to BHEL chairman BP Rao, the net positive impact of the duty will be only 4 per cent as Indian producers too have to import critical components, which are not produced in the country. Low cost of funds and labour easily eats away this small margin of safety.
The recently concluded tenders have been won by companies that will be generating single digit margins when they implement the projects. Thus, competition has grown so intense that the little margin offered will be fiercely fought. With slowdown across the globe and especially in China, international players are willing to grab orders at extremely low margins.
Though the duty levels have come down, international players bundle their sales with a financing option, which Indian players have not yet mastered. Though they make lower profit in equipment sales, financing the equipment make up for the margin, especially since their cost of funding is low. Also, their time taken to implement these projects is lower by six-12 months, giving better time and cost benefit to the power producer.