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BHEL v/s Doosan Heavy Industries & Construction - Views on News from Equitymaster

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BHEL v/s Doosan Heavy Industries & Construction
Nov 25, 2008

BHEL has had to face a lot of competition in the recent past, both from domestic as well as international companies. This has led to concerns from the management about deterioration in its market share in the power segment. This article seeks to draw a comparison between BHEL and Doosan Heavy Industries and Construction, a large company based in Korea and having a similar business as BHEL. This would help us see how BHEL stacks up against such competition on a global level. A brief about the companies:
BHEL is India’s largest PSU engineering company catering to the power and infrastructure sectors. The company has a 25-year history of consistent profitability and manufactures over 180 products for industries like power generation and distribution, transportation, telecommunications and renewable energy. The company’s operations are organised around two major business segments – power (73% of FY08 revenues) and industry (27%). BHEL built sets account for almost 64% of India’s power generation capacity of 135,000 MW.

Doosan Heavy Industries & Construction Co. Ltd. was established in 1962 and has been playing an integral role in the development of Korea’s national economy by supplying industrial facilities to domestic and overseas markets.

Its business segment include:

  • Thermal & Hydro Power Plants- designing and manufacturing equipment and the construction and management of coal-fired power plants and combined-cycle power plants.

  • Nuclear Power Plants - nuclear steam systems and BOP (Balance of Plant) equipment. Services range from designing and manufacturing equipment to installment and operations.

  • Material Handling Equipment - Manufactures harbor cargo equipment including many large cranes that handle bulk materials.

  • Desalination Plants - designing and manufacturing equipment to plant construction of desalination plants

  • Casting & Forgings – manufactures for power facilities, marine engine parts, steel mill housing.

  • Construction - infrastructure construction of plants, roads, bridges and harbors etc.

in Rs millions Doosan CAGR BHEL CAGR
CY04 CY05 CY06 CY07 FY05 FY06 FY07 FY08
Revenue 82,261 110,670 117,543 137,003 18.5% 95,271 133,740 172,375 193,655 26.7%
EBIDTA 9,392 9,903 9,670 12,166 9.0% 8,455 21,789 32,909 33,668 58.5%
EBIDTA Margin 11.4% 8.9% 8.2% 8.9% 8.9% 16.3% 19.1% 17.4%
Net Profit 5,502 5,525 2,485 10,006 22.1% 10,213 16,792 22,718 28,593 40.9%
Net Profit Margin 6.7% 5.0% 2.1% 7.3% 10.7% 12.6% 13.2% 14.8%
EPS 63.7 64.5 28.8 116.0 22.1% 20.9 34.3 46.4 58.4 40.9%
ROE 8.7% 8.3% 3.7% 13.0% 16.9% 23.0% 25.8% 26.5%
Order Backlog 271,357 282,851 244,623 346,968 8.5% 320,000 376,000 550,000 855,000 38.8%
Order Backlog to Sales 3.3 2.6 2.1 2.5 3.4 2.8 3.2 4.4
*EPS taken as of CY07 and FY08 respectively; 1 Indian Rupee = 29.85 Korean Won as of 11/24/2008

Revenues
A comparison of the revenues of the two companies shows that even though BHEL started out with a larger base when compared to Doosan, the former has outpaced the latter when it comes to their compounded growth rate over the past three years. While Doosan grew its revenues at a CAGR of 18.5% during the last three years, BHEL managed a CAGR of 26.7% despite the fact that a larger base makes it that much tougher to achieve higher growth rates.

This relatively better performance of BHEL is indicative of the larger potential and larger investments of the infrastructure sector in India. Given the increasing infrastructural needs of the country, this trend is only expected to continue.

Order Backlog
The order backlog of the company provides a lot of clarity on the certainty of revenues going forward. Thus the larger size of the order backlog when compared to the revenues of the company gives a good indication of this measure.

As can be seen from the table, the order backlog of Doosan stood at Rs 347 bn at the end of CY07, and had witnessed a CAGR of 8.5% for the three years until CY07. The figures for BHEL were much higher during the same period. Its order backlog at the end of FY08 stood at Rs 855 bn, almost double compared to that of Doosan. But the higher backlog of BHEL needs to be put into perspective considering the higher sales of the company compared to Doosan. For this, we need to see the order backlog to sales of each company. In that respect too, BHEL comes out higher with an order backlog to sales of 4.4, that of Doosan being 2.5.

Profitability
BHEL has been consistently turning better numbers than its Korean counterpart, both in terms of operating as well as net margins. BHEL’s focus on increasing its profitability is evident from its improving margins on the net and operating front. Doosan’s margins on the other hand have seen a lot of fluctuations and have not headed in any definite direction. In FY08 (CY07 for Doosan), BHEL’s operating margins stood at 17.4%, almost double of that of Doosan’s 8.9%. Similarly the net profit margins for BHEL and Doosan stood at 14.8% and 7.3% respectively.

Profitability in terms of return on equity also has been equally superior for BHEL, despite the close to zero leverage used by the company.

Conclusion
As can be seen from the above analysis, India’s BHEL has been a much better performer in all respects considered above when compared to South Korea’s Doosan Heavy Industries & Construction, indicating much better business fundamentals of BHEL.

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