Do capital goods firms have a bleak future? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Do capital goods firms have a bleak future?

May 21, 2013

The issue of import duty on power equipments had been lingering since many years. Finally, the government took notice of the plight of domestic manufacturers. It approved imposition of 21% duty on imported power equipments in July 2012. This will include 5% basic import duty on power generation equipments. Also, 12% countervailing duty (CVD) and 4% special additional duty (SAD) is likely to be levied.

The domestic manufacturers have long been struggling with lack of orders and delay in execution due to poor health of the power sector On top of this, influx of cheaper imports particularly Chinese has made matters worse for the domestic companies.

Reason for the relaxed terms on duty earlier

For power plants of above 1,000 MW there is no import duty, while plants below 1,000 MW attract a 5% import duty.

We believe; relaxation of import duty was a necessity in earlier years of capacity expansion i.e. 10th and 11th plan. At that time, the domestic manufacturers did not have expertise and capacity for super critical equipments. However, once the domestic manufacturers started setting up super critical facilities; it was time to increase the import duty. This was essential to get a level playing field with Chinese competitors. This is because manufacturers from countries like China and Korea enjoy various benefits. These benefits range from large scale manufacturing, low interest rates, easy procurement of loans to an undervalued currency. Such cost benefits make Chinese equipments relatively cheaper as compared to their Indian counterparts. Typically, the cost to set up a power plant is Rs.50-55 m/MW. Chinese manufacturers, however, are able to quote as low as Rs. 45 m/MW. Clearly Indian firms have a price disadvantage of about 15-20%.

The following could be likely implications of duty in our view

  • The import duty will be levied on a prospective basis. Hence it is not expected to impact power projects for which equipment orders have already been placed. The Boiler, Turbine and Generator (BTG) orders for 12th plan (2012-17) have already been placed. And for the 13th plan (2017-2022), orders will start after 2-3 years. So there will not be an immediate uptick in demand.

  • The kind of products/ components that will come under the duty’s purview need to be known. This is crucial because domestic manufacturers also import certain power equipments and components. Hence, import duty may in turn increase manufacturing cost for domestic companies as well.

  • The expected capacity for boilers is 31,000 MW; while for TG sets it is 36,000 MW. On an average, the demand for BTG may not be more than 20,000MW per annum. Hence, capacity may exceed the demand. This may induce price war amongst foreign and domestic firms. We fear over capacity may negate the positive effect of import duty.

  • The duty’s impact will be seen on China’s Indian customers too. These customers are largely private power developers such as Reliance Power , Lanco Infratech and Adani Power. Any rise in the cost of the equipment may lead to higher power tariffs.

  • On the contrary, Chinese and Korean manufacturers have already begun setting shops in India. This will help them avert the impact of duty to a certain extent.


We expect that imposition of import duty may make import (largely Chinese) costlier by at least 5-6%. This difference excludes foreign exchange impact. While we welcome this move, it has come in to implementation too late. Enough damage has been done in the 11th plan and 12th plans where domestic companies lost out in a big way to foreign players. In addition, the demand for power equipments will continue to be bogged down by other existing issues like coal linkages, land acquisition and environmental clearances. Therefore, in our view, duty has been imposed too late and perhaps, cannot do much to push the domestic equipment industry.

Equitymaster requests your view! Post a comment on "Do capital goods firms have a bleak future?". Click here!


More Views on News

What Triggered the Over 10% Surge in Greaves Cotton Today? (Views On News)

Jun 17, 2021

Last week, the stock of Greaves Cotton has soared 23%. What's fueling the rally?

BHEL Shares Tumble 18% on Disappointing March Quarter Results (Views On News)

Jun 14, 2021

BHEL's net loss narrowed to Rs 10.4 bn in the March 2021 quarter.

Videocon Hits Upper Circuit After NCLT Clears Vedanta Group's Bid (Views On News)

Jun 9, 2021

The stock has fallen over 90% in the last five years. Will it recover?

Mazagon Dock Shipbuilders IPO: Should You Apply? (IPO)

Sep 29, 2020

Should you bet on this public sector defence shipbuilder?

Welspun Corp Hits 52-Week High After Securing Orders Worth Rs 17.3 Bn (Views On News)

Jun 9, 2021

Welspun Corp share price touched a 52-week high of Rs 165 per share after the company received multiple orders.

More Views on News

Most Popular

Hotel Stocks Will Reward Investors (Fast Profits Daily)

Jun 8, 2021

This is why I'm bullish on the hotel and hospitality sector.

My 'Unlock' Investments (Fast Profits Daily)

Jun 11, 2021

The best unlock investments you can make in the market.

The Most Visible Sign of India's Revival is on Two Wheels (Profit Hunter)

Jun 9, 2021

Investing in the best stocks could result in wealth compounding on a massive scale.

How I Discovered a 400-Year-Old Open Secret to Extreme Wealth (Profit Hunter)

Jun 11, 2021

Charlie Munger's open secret about investing success.


India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get this Special Report,
The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms


Jun 18, 2021 (Close)