Havells, Voltas slip on custom duty hike; here's how analysts see the move

The new tariffs came into effect from Wednesday midnight. The import of these 19 items cost Rs 860 billion in FY18, according to the finance ministry.

Shares of select consumer durable companies fell in trade on Thursday, after the government raised import duties on 19 essential items, including refrigerators, air conditioners, and jet fuel. 

At 09:45 am, Voltas was trading nearly 3.5 per cent lower at Rs 552.50 apiece on the BSE. The stock slipped nearly 7 per cent in the opening deals to hit a low of Rs 533.50. Havells India was trading at Rs 636 per share, nearly 2 per cent down.

Ambareesh Baliga, an independent market analyst, seemed unperturbed by the stock reaction on Thursday, saying the correction was only a knee-jerk reaction and the long-term impact seemed minimal at this stage.

Foreign brokerages CLSA, Morgan Stanley and Goldman Sachs, on the other hand, feel the hike in import duty will hurt consumer durable companies. Hike in Custom Duty is negative for Voltas and Havells India, said Goldman Sachs in its note. However, it says Crompton Consumer is best placed in the segment as none of its product categories have been impacted. 

Going ahead, analysts expect the industry to collectively pass this custom duty hike to consumers. "Price hike could be with a lag and impact margins in the near to medium-term," said the Goldman Sachs note.

Havells currently imports 70 per cent Lloyds requirement but has option to shift to domestic manufacturing, but, Voltas’s JV with Arcelik would be hurt as appliances are 100 per cent imported, noted CLSA.

Morgan Stanley said that though the increase in duty on consumer durables will hurt earnings in H2FY19, the medium-term outlook for consumer durables remains intact. It has maintained equal-weight rating on Havells India with the target price of Rs 712. "Likely commissioning of AC plant by March 2019 will moderate the impact in FY20, "it said.

The government on Wednesday raised import duties on 19 items, including consumer electronics, diamonds, jet fuel and leather footwear, to curtail the widening current account deficit. The new tariffs came into effect from Wednesday midnight. The import of these 19 items cost Rs 860 billion in 2017-18, according to the finance ministry.

Sudip Bandyopadhyay, group chairman, Inditrade Capital, also feels the step is negative for the companies in the consumer durables segment. 

"Even if the companies do not import the entire product, there are a lot of imported components which will become expensive, hence hurting the companies' overall financial performance. At this point, it's not clear as how much they will be able to pass on the hike and if they do so whether there will be impact on demand or not," he said.