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Friday, Jan 09, 2004

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Capital goods: On thin edge

Sowmya Sundar

THE revision in the Customs duties will perpetuate the inverted duty structure in the capital goods segment. Raw materials and finished products will continue to be taxed at the same rate. To this extent, there is unlikely to be a major change in the competitiveness of the domestic companies.

However, the effective reduction in duty on imported capital goods to 39.2 per cent from 50.8 per cent would increase the pressure on realisations of domestic capital goods manufacturers with low import content, such as Elgi Equipments, Crompton Greaves, Kirloskar Oil Engines and Thermax. However, the reduction in the import duty of steel may offer some flexibility by ensuring that steel prices do not keep rising. On the other hand, companies that have a high import content, such as Cummins, which imports 33 per cent of its inputs, would stand to benefit.

Companies such as KSB Pumps and Kirloskar Brothers, which are into water management projects for industrial and agricultural purposes, would probably be the most affected because of the tariff revisions.

Both customs and excise duty exemptions on water supply projects hold the potential to significantly affect their profitability, by putting these players on a par with imported goods.

With import competition already stiff, margins are already thin in the business, and the revision could have a negative impact on both revenue growth and margins. Thermax, which derives close to 34 per cent of its revenues from this business, would also feel the impact.

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