IMPACT: CAPITAL GOODS

INTERIM BUDGET

MEASURES

• Reduction in peak customs duty from 25 per cent to 20 per cent
• Abolition of special additional duty

IMPACT
The move will negatively impact capital goods manufacturers (ABB, Bhel, Crompton Greaves, etc.). These companies already face stiff competition from imports on transmission and distribution equipment for power equipment companies and also other industrial equipment which will become cheaper.

The move will further put pressure on them due to intense pricing pressures.

Imports have increased 18 per cent in 2002-03 compared to the previous year and will rise further as imports are cheaper.

OUTLOOK
The capital goods sector outperformed all others last year. The questions now is whether this can be sustained.

The sector witnessed an upsurge mainly due to two factors - the reforms in the power sector and the growth in the industrial sector.

The companies in the sector also gave out improving fundamentals.

Analysts, however, point out that the initiatives taken by the Government have aided the companies in posting better results.

The focus on infrastructure development, especially in the road sector, has given a boost to major engineering and construction companies, which have seen surge in orders.

The story of India's economy growing at 7-8 per cent in the coming years as well as a potential export market will drive the capital goods sector going forward.

The resurgence in auto industry and investments in oil and gas sector has provided further stimulus for sectors like industrial machinery, drilling equipment and auto ancillaries.

Low labour costs and high skill sets have given and will continue to drive Indian companies in the export market.

Analysts believe that Indian capital goods companies give a cost advantage of at least 7-8 per cent over bigger international players.

It is estimated that the industry's combined export revenues will touch $10 billion mark by 2006 (currently around $6 billion).

Impact - Negative

BHEL
The company is likely to be marginally affected due to the increased threat from imported transmission and distribution equipment (T&D equipment accounts for about 4-5 per cent of Bhel's business). Imported equipment will come much cheaper than what's available here.

BHEL is the largest engineering and manufacturing enterprise in India in the energy related/infrastructure sector today.

BHEL manufactures over 180 products under 30 major product groups and caters to core sectors of the Indian economy viz., power generation & transmission, industry, transportation, telecommunication and renewable energy.

SIEMENS
The company will suffer on the power equipment (mainly transmission and distribution equipment) front due to cheaper imports. However, around 20 per cent of its business is from medical equipment which be cheaper to import now.

In the Energy sector, the company has expertise ranging from power plants to meters and in the industrial sector.

The company intends to concentrate on exports and in this endeavor is looking forward to making its cost position more competitive, specially on the manufacturing front.

For the quarter ended December 2003, new order intake was Rs. 911.3 crore compared with Rs. 406.3 crore in the year-ago period"�a 124 per cent rise.

ABB
The company is optimistic about the future with the power sector reforms taking shape in the transmission and distribution segment.

But it remains to be seen whether the company can counter cheaper imports as companies can now source cheaper T&D equipment from abroad with the reduction in peak customs duty.

Asea Brown Boveri is a leader in power and automation technologies. ABB group operate in over 100 countries. ABB's fourth quarter results ended 31 December 2003 were impressive, with net profits registering a growth of 20 per cent to Rs 49.3 crore.

Revenues recorded a 38 per cent growth to Rs 529.3 crore on the of a healthy order book backlog as well as through higher exports.