Budget 2012-13 (Power Equipment): Import duty hike will provide limited respite

A hike in import duty on power equipment to 19 per cent is on top of the Budget wish list of boiler turbine and generator (BTG) makers led by BHEL. This comes after at least five years of steadily increasing competition from Chinese and Korean players in India. Right now, the duty is 5 per cent for projects with less than 1,000 MW capacity and nil for projects over 1,000 MW.

Even as this levy is being debated, domestic equipment manufacturers may be up against challenges. Intense competition and lower profit margins are here to stay; the quantum of import duty notwithstanding. And here's why.

For one, it is not just the Chinese players but increasing local competition that has hurt domestic players, especially BHEL, the most. At least eight Indian players, through joint ventures with established overseas players, have entered the BTG space in the last 3-4 years. Others, such as Korean player Doosan, are setting up fully-owned units locally.

Recent NTPC orders too have seen players such as Bharat Forge–Alstom, JSW-Toshiba as well as BGR Energy Systems emerge as the lowest bidder with 10-20 per cent lower bids than the second competitive bidder. The latter's recent 660MW bulk order bid is, in fact, stated to be lower than the 800MW order bid by Doosan in an earlier bulk order. In all, the top three bidders in these orders were mostly Indian joint ventures.

 Agreed, these companies may have bid aggressively to ward off Chinese competition (the other foreign players have already made inroads through joint ventures with local players). The import duty levy may thus help bridge the gap.

Two, Chinese equipment still make sense for many utilities simply because the suppliers now bundle their equipment with easy finance from Chinese lenders, thus making it a tempting melange for Indian utilities. Interest rates, reported to be in single digits for Chinese finance, may be no match for the 11-14 per cent rates locally.

Super-critical tech

 Three, and most importantly, the Indian behemoth BHEL as well as the other joint ventures, are testing their wings on super-critical technology in India. Close to 60 per cent of the Twelfth Five-Year Plan orders for coal power projects is based on supercritical technology. Chinese equipment players have walked away with well over half of these orders because of their first-mover advantage. Players such as BHEL and L&T have been making inroads only from FY-09.

And since most of the domestic tie-up will involve technology transfer and use of imported material for a good part, this segment is unlikely to leave much room for local players to bid competitively. Chinese players themselves saw a compression in margins in 2006, when they first entered this arena.

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