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Merger on the horizon

* Gujrat State Petronet’s (GUJS) 2QFY26 revenue/EBITDA stood 9%/13% below our estimate at INR2.3b/INR1.7b, as total volumes came 8% below our estimate at 28.5mmscmd. Volumes continue to remain soft amid weak demand from the refining/petchem and power sectors. Implied tariff came in 8% below our estimate at INR839/mmscm.

* Following the company’s announcement of the scheme of amalgamation and arrangement in Sep’24, under which GSPC, GUJS, and GEL will amalgamate with GUJGA, the swap ratio for GUJS was fixed at 10:13 (i.e., 10 shares of GUJGA (at an FV of INR2) will be issued for every 13 equity shares of GUJS, at an FV of INR10). Shareholder approval has been received w.r.t the scheme, the petition has been filed with the MCA, and the process is expected to be completed by end-Dec’25.

* Based on this swap ratio, we derive our TP of GUJS at INR355/share. We reiterate our Neutral rating on the stock.

Beat driven by robust transmission volumes

* GUJS’s 2QFY26 revenue/EBITDA stood 9%/13% below our estimate at INR2.3b/INR1.7b, as:

* Total volume came 8% below our estimate at 28.5mmscmd, down 4% QoQ.

* Tariff came in line with our estimate at INR839/mmscm.

* EBITDA was also lower due to higher-than-estimated opex.

* CGD and fertilizer volumes increased YoY, whereas ref-petchem and power volumes declined YoY.

* PAT came in 15% above our estimate at INR3.8b.

Valuation and view

* We believe the company will post a 5% CAGR in transmission volumes over FY25-28, and expect volumes to jump to ~32.5/35mmscmd in FY27/28, 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 our TP of INR311. We reiterate our Neutral rating on the stock.

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