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MOSL: Morning India (27/September/18)-Bharat Electronics (Limited impact of new pricing policy); 2. Consumer (Taking stock after the correction); 3. Auto; 4. EcoScope; 5. India Durables

MOrning India (27/September/18): Bharat Electronics (Limited impact of new pricing policy); 2. Consumer (Taking stock after the correction); 3. Auto; 4. EcoScope; 5. India Durables

 

Today’s top research idea

Bharat Electronics: Limited impact of new pricing policy

• As per the new pricing policy for nomination projects finalized by the Ministry of Defense (MoD) in May 2018, a 7.5% PBT margin would be allowed v/s the earlier 10-12% margin; however, this allows pass-through of all costs and risks in the project, which was not the case earlier. Note that the new policy does not affect existing INR500b order book and therefore no impact is expected for the next 2-3 years. However, management expects a 50-200 bps impact on margins for nomination orders starting FY22 from this policy change - currently 35% of the order book is from nominated orders and assuming a similar share of order book in FY21, the impact on FY22 margin is limited to 0.2-0.7%.
• As per management, legacy orders (24% of order book) would not be covered under this policy since these are repeat orders. In a worst case scenario, if we assume that legacy orders are also primarily on a nomination basis where the new pricing policy is applicable, then the overall impact rises to 0.3-1.2% of margins. On the positive side, the new policy is expected to shorten the ordering timelines, which is the Government's intention.

Piping hot news

Import duty hiked on over 19 items

• The government on Wednesday raised import duties on 19 non-essential items, including refrigerators, air conditioners, jewellery, diamonds and jet fuel, accounting for annual imports worth ₹86,000 crore, to arrest a widening current account deficit (CAD) and a weakening rupee. The imposition of a 5% import duty on jet fuel is, however, unlikely to increase air fare as India mostly imports crude oil and refines jet fuel locally.