One is the largest power company in India. The other is one of the five largest power companies in China. One is an eyewitness to the sorry state of affairs in the power sector. The other has seen its country grow exponentially when it comes to power generation. The former is India’s NTPC and the latter China’s Huaneng Power. This article captures a comparison between the two companies.
China’s power scenario
Before we move further, here’s a brief on China’s power sector. One word is enough to describe the growth the power sector has seen in China over the past few years – phenomenal! From generating 620 bn units in 1990, China’s power generation has multiplied almost 6.5 times by the end of 2010. That’s an average annual growth of around 10% during this 20 year period. During this very period, India’s power generation has multiplied by just around 3.2 times, or an average annual growth of 6%. So while China’s power generation has kept pace with its GDP growth, India’s has lagged far behind. And this is the reason a large part of India remains in dark even as of today.
Coal fired stations form a majority of China’s power generation (78%, as compared to 65% in India). The second biggest component is hydropower (14%, as compared to 26% in India).
About Huaneng Power
Huaneng Power is one of China’s five largest state-controlled power companies. Its power generation capacity stands at around 48,700 MW. Founded in 1994, the company operates power plants in China and Singapore. As per the latest available data, it owns 19 operating power plants. It also has controlling interests in 17 operating power plants, and minority interests in 5 operating power companies in China. Most of its power generating capacity is coal-fired.
NTPC is India’s largest power generating company with an installed capacity of around 33,200 MW (over one-fifth of India’s total installed capacity). NTPC contributes to around 30% of the country’s annual power generation and has an outstanding track record in terms of efficiency. Of its owned capacity, 78% is coal-based, operated through 15 coal-based power stations, and 12% is based on gas or liquid fuel. During the period between FY05 and FY10, the company grew its net sales and profits at average annual rates of 16% and 9% respectively.
Comparative financial performance
Let’s now get down to the financial comparison of the two companies. As seen from the table below, Huaneng Power scores over NTPC in terms of size – capacity and revenue. However, the latter far outperforms the former when it comes to business efficiency.
NTPC generates higher revenue per MW of installed capacity. It has a far greater profitability. And it also scores handsomely on the return ratios. What is also important is that NTPC has a far safer balance sheet than Huaneng Power, as seen from their comparative debt to equity ratios. While the former’s stands at 0.6 times, the latter’s ratio is at 3.2 times. As far as the return on equity is concerned, one reason it is low for Huaneng Power is that Chinese power regulations cap the rate at 10%. As compared to this, India caps the return on equity for power generation companies at 15.5%.
|Revenue per MW||US$ ‘000||331||311|
|Net profit margin*||%||16.8||4.1|
|Return on equity*||%||12.6||10.1|
|Market cap||US$ bn||37||7|
|Price to earnings*||Times||19.7||10.4|
|Price to book value*||Times||2.5||1.1|
|Price to sales*||Times||3.3||0.5|
Source: NTPC reports, Yahoo Finance
NTPC’s far superior financial performance is what also gets it much better valuations as compared to Huaneng Power. Based on the price to book value ratio, which suggests the true value of power companies, NTPC commands 2.5 times as compared to just 1.1 times for Huaneng Power. The story repeats when one looks across the price to earnings, price to sales, and EV/EBIDTA ratios as well. In short, investors in India are more comfortable paying a higher price for NTPC’s good financial standing as compared to what investors in China are comfortable paying for Huaneng Power. Now, that’s the power of a good financial performance!