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Merger key event to watch for in FY26

* After a strong 1Q, 2Q will likely be a weak quarter for GUJS owing to fading power demand, a one-month shutdown at Morbi, and the full-quarter impact of the tariff cut. We build in EBITDA of INR2.4b and transmission volume of 34mmscmd (down 7% QoQ). We estimate EBITDA/PAT to decline by 21%/10% QoQ. However, we estimate transmission volumes to reach 38.5mmscmd by FY26 (12% CAGR over FY24-26), driven by upcoming LNG terminals in Gujarat and improved demand owing to the focus on reducing the industrial pollution.

* As part of the company’s merger with Gujarat Gas (GUJGA), the swap ratio for GUJS was fixed at 10:13, i.e., 10 shares of GUJGA (FV INR2) will be issued for every 13 equity shares of GUJS (FV INR10). Based on this swap ratio, we revise our TP for GUJS to INR472/share and downgrade the stock to Neutral.

2Q likely to be a weak quarter for GUJS

* Amid fading power demand, a one-month shutdown at Morbi and the fullquarter impact of the tariff cut, 2Q is likely be a weak quarter for GUJS.

* We estimate transmission volumes to decline 7% QoQ and EBITDA/PAT to decline 21%/10% QoQ.

* We build in EBITDA of INR9.7b/INR10.3b for FY25/FY26.

* We estimate transmission volumes to reach 38.5mmscmd by FY26 (12% CAGR over FY24-26), driven by upcoming LNG terminals in Gujarat and improved demand owing to the focus on reducing the industrial pollution.

Tariff-related uncertainty remains

* On 20th Apr’24, the PNGRB issued a tariff order for GUJS’s HP gas network. The tariff was reduced to INR18.1/mmBtu from INR34.0/mmBtu (provisional), which was a major disappointment. Following the tariff order, we had cut our FY25E/FY26E EPS by ~41% each.

* However, GUJS has filed an appeal with APTEL challenging the tariff order and seeking to set aside the order. Even though we do not expect an early resolution in this matter, we understand that GUJS will continue to pursue a revision of this tariff order.

Start of new LNG terminals in Gujarat

* The available LNG capacity in Gujarat is expected to grow 55% to ~42.5mmtpa over the next two years and GUJS will be a key beneficiary of higher volume growth.

* HPCL’s 5mmtpa Chhara terminal (expandable to 10mmtpa) would also be commissioned in Nov’24/Dec’24. Similarly, PLNG’s Dahej terminal expansion from 17.5mmtpa to 22.5mmtpa is expected to be completed by Mar’25.

* Swan LNG’s upcoming LNG regasification terminal at Jaffrabad is also a 5mmtpa terminal (expandable to 10mmtpa). A recent media article states that Swan Energy is planning to sell its stake in the floating LNG terminal through the sale of FSRU. This transaction is expected to be executed in six months, which is likely to cause further delay in the commissioning of the terminal.

GSPC, GUJS and GEL to amalgamate with GUJGA

In the board meeting held on 30th Aug’24, the board of GUJS approved the composite scheme of arrangement and amalgamation among the transferor companies - Gujarat State Petroleum Corporation Limited (GSPC), Gujarat State Petronet Limited (GUJS) and GSPC Energy Limited (GEL), transferee company - Gujarat Gas (GUJGA), and resultant company - GSPL Transmission Limited (GTL). The scheme results in the amalgamation of GSPC, GUJS and GEL with GUJGA, followed by the demerger of Gas Transmission Business Undertaking into GTL. Following are the key details pertaining to the scheme:

* Share Exchange Ratio:

* To shareholders of GSPC, 10 shares of GUJGA (FV INR2) shall be issued for every 305 equity shares of GSPC (FV INR1).

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

* Post amalgamation, gas transmission business shall be demerged into GTL, and GUJGA’s shareholders shall receive 1 equity share (FV INR10) of GTL for every 3 equity shares of GUJGA (FV INR2). GTL shall get 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 shall be issued within one month of receipt of all the approvals, post which, trading of GUJS shall be suspended. Listing of additional share of GUJGA and listing of GTL is expected to complete by Aug’25, marking completion of the scheme.

* Benefits for the shareholders: Related-party transactions between GSPC and GUJGA will be eliminated. Shareholders of GUJS will experience value unlocking as they receive shares of both GUJGA and GTL. Also, the demerger shall facilitate an independent, market-driven valuation of GTL.

Valuation and View

* The available LNG capacity in Gujarat is expected to grow 55% to 42.5mmtpa over the next two years. Most of this volume is likely to flow through GUJS’s network. We believe the company could post a 12% CAGR in transmission volumes over FY24-26.

* We expect volumes to jump to ~38.5mmscmd in FY26, as it is a beneficiary of: a) the upcoming LNG terminals in Gujarat, and b) an improved demand owing to the focus on reducing industrial pollution (Gujarat has five geographical areas identified as severely/critically polluted).

* Based on the announced share swap ratio of 10:13 (GUJS:GUJGA), we arrive at a TP of INR472 (basis 2nd Oct’24 price). Hence, we downgrade our rating on the stock to Neutral with a potential upside of 10%.

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