Why the Street is excited about Gujarat Gas’s restructuring despite concerns (2024)

Gujarat State Petronet Ltd (GSPL) and Gujarat State Petroleum Corp. Ltd (GSPC) will be merged into Gujarat Gas. GSPL will become a derivative of how the Gujarat Gas stock moves thanks to the merger ratio announced. Thus, it is pertinent hereon to evaluate the scheme’s impact on the future path of GGL stock.

Prima facie, the Street seems to be viewing this positively. The stock price of GSPL, the other listed company here currently, was up close to 4% on Monday.

GSPC has gas trading and an exploration and production business; GSPL has the gas transmission business; and Gujarat Gas is into city gas distribution.

“The objective of the merger is mainly to solve the slightly complex holding structure, mainly to unlock the value of Gujarat Gas’ shares being held by GSPL currently," Antique Stock Broking said in a report dated 2 September.

While the development is accretive in terms of earnings per share for the stable city gas distribution business of Gujarat Gas, a worry is that the stock might face a price-to-earnings (P/E) multiple de-rating with GSPC’s acquisition due to the latter’s volatile earnings profile.

However, a near-term balancing factor is the low-risk and stable returns business—the GSPL gas transmission business. Moreover, next year, the gas transmission business will be demerged into a separate company—GSPL Transmission Ltd. In August 2025, GSPL Transmission will be listed and the shares thus received will also sweeten the deal.

Still, the P/E multiple derating argument must be examined in detail. As of Friday, the last trading day before the scheme was announced, Gujarat Gas’s shares were trading at a P/E multiple of 27x, based on Bloomberg consensus FY26 EPS estimate.

A drastic drop in valuation

One can look at Gujarat Gas’s post transaction valuation in two ways. The first is valuing a consolidated Gujarat Gas, including GSPL Transmission. Antique Stock Broking expects consolidated EPS (after the set-off of carry-forward losses) at ₹46 for fiscal year 2025-26, based on a fully diluted equity base after the proposed transaction. Based on that, the Gujarat Gas stock currently trades at a P/E multiple of 14x.

The second way is by deducting GSPL Transmission’s profit and value from Gujarat Gas’s profit and market capitalization, respectively, which works out to a P/E of 16x. GSPL Transmission is valued at about ₹5,000 crore- ₹7,000 crore by brokerages.

In both the cases, there is a drastic drop in Gujarat Gas’s P/E to 14x-16x from 27x. The moot question for investors is whether such a steep fall in valuation is justified in the backdrop of Gujarat Gas’s core EPS getting a big lift with potential synergies from the transaction.

A key synergy is decline in gas cost for Gujarat Gas by about ₹2 per standard cubic meter as it is the margin currently being paid for sourcing gas from GSPC, according to Antique. Further, the carry forward of loss of ₹7,200 crore from GSPC would mean tax savings of ₹1,800 crore, based on the corporate tax rate of 25%.

Antique analysts believe that there is a higher intrinsic value of both GSPC and GSPL businesses than what is being factored in.

Note that GSPC’s trading business has been suffering due to high LNG prices and substitution of imported LNG with domestic gas. The management expects that post FY26, there could be an opportunity to regain the lost customers of gas from the fertilizer industry.

However, it may be too early to take a view on future prospects as the scheme is expected to be completed in August 2025. This has meant some brokerages such as Motilal Oswal Financial Services have not made any changes to their estimates yet.