With AD benefit removed, capacity addition to fall; IRR to shrink by 300-400bps
AD benefit was removed from April 1, 2012, which was a major driver for wind installations in the 11th Plan. The country added 3.2GW of wind capacity in FY12 (last year of the 11th Plan), which is expected to fall sharply due to AD benefit removal. Consequently, CARE Research expects capacity addition to fall to sharply from FY13 onwards. The Central Board of Direct Taxes (CBDT) issued a notification on 30th March 2012, that the depreciation on wind mills will be restricted to 15% from the current financial year (with and additional 20% depreciation on equipments). This marks a significant change to the incentive structure as AD benefit typically increases project IRR by around 300-400bps, with other factors held constant. Thus, the industry would move strongly towards IPPs driven from a typical retail investor driven structure a few years ago.
Indian capacity glut to pressurise WTG margins; ancillary market to deepen
Indian wind market is primarily small captive player driven which used to invest in wind turbines primarily to avail tax-shield. With AD benefit removal, the wind equipment market is expected to shift towards large IPPs. Consequently, CARE Research believes that this coupled with capacity glut can continue to put pressure on wind equipment industry margins over the near to medium term. However, ancillary component manufacturing in India can partially help negating the margin pressure as lead time faced for procuring small components which are currently imported from Europe and China may contract significantly.
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