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Merger to unlock value for GUJGA and GUJS

Gujarat Gas has announced a scheme of amalgamation and arrangement, under which Gujarat State Petroleum Corp. (GSPC), Gujarat State Petronet (GUJS) and GSPC Energy (GEL) will merge with Gujarat Gas. This will be followed by the merged entity de-merging the transmission business into a new entity, GSPL Transmission Limited (GTL). Gujrat Gas management expects to complete the transactions by Aug’25.

Based on the proposed share swap, we see ~5% upside for GUJS. For Gujarat Gas shareholders, we see the following key implications after the merger:

* We estimate a combined value of the business at INR633/share, implying 4.7% upside on CMP.

* EPS is estimated to be INR28.7, up 39% vs. our FY25 EPS estimate.

* The company may not pay taxes for the next four years due to INR72b of accumulated tax losses at GSPC (based on FY24 PBT).

We maintain our BUY rating on Gujarat Gas with a TP of INR715. While 2QFY25 volume momentum is expected to be weak QoQ amid high spot LNG prices and a one-month shutdown in the Morbi cluster, we believe volumes should pick up in 2HFY25-FY26 amid improved competitiveness vs. propane. We keep our estimates unchanged as the scheme is expected to be completed in Aug’25.

Details of the scheme of amalgamation

In a meeting held on 30th Aug’24, the board of GUJS approved the composite scheme of arrangement and amalgamation among the group companies – GSPC, GUJS, GEL and Gujarat Gas (GUJGA). The scheme results in amalgamation of GSPC, GUJS and GEL with GUJGA, followed by the demerger of the gas transmission business into GTL.

Following are the key details pertaining to the scheme:

* Share exchange ratio:

* GSPC shareholders will receive 10 shares of GUJGA (FV INR2) for every 305 equity shares of GSPC (FV INR1).

* GUJS shareholders will be issued 10 shares of GUJGA (FV INR2) for every 13 equity shares of GUJS (FV INR10).

* In the demerger of the gas transmission business into GTL, GUJGA shareholders will receive 1 equity share (FV INR10) of GTL for every 3 equity shares of GUJGA (FV INR2). GTL will be listed subsequently.

* Timeline

Approval from SEBI and stock exchanges is expected by Dec’24. Approval of shareholders, regulatory authorities and MCA is expected by May’25. Shares pursuant to the scheme will be issued within one month of the receipt of all the approvals, after which trading of GUJS will be suspended. The listing of additional shares of GUJGA and the listing of GTL should be completed by Aug’25, marking the completion of the scheme.

* Objectives of the scheme

The objective of the scheme is to simplify the complex structure and boost business synergies and growth opportunities by merging interconnected operations of GSPC and GUJGA. Removing related-party transactions will further improve GUJGA's EBITDA and RoCE. The management aims to expand the group’s market share and competitiveness in the gas trading business, and improve operational scale and efficiency through optimal resource use.

* Benefits for the shareholders:

GUJGA is expected to see improved margins and return ratios, along with enhanced cash flows. Additionally, related-party transactions between GSPC and GUJGA will be eliminated. Shareholders of GUJS will witness value unlocking as they receive shares of both GUJGA and GTL. Moreover, the demerger will facilitate an independent, market-driven valuation of GTL.

Valuation and View

* GUJGA’s long-term volume growth prospects remain robust, with the addition of new industrial units and the expansion of the existing units. It is aggressively investing in infrastructure to push industrial gas adoption in Thane rural, Ahmedabad rural, and newly acquired areas in Rajasthan.

* We reiterate our BUY rating on the stock with a TP of INR715, valuing it at 30x FY26E EPS.

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SEBI Registration number is INH000000412