GSPL stock: Gujarat Gas stake buy if funded via debt to impact bottom line

Gujarat State Petronet’s (GSPL) decision to acquire a 28.4 per cent stake in Gujarat Gas and thereby, becoming a majority shareholder in the company did not go down well with the Street. Reacting to the news, the stock shed 6.25 per cent on Tuesday.

GSPL, which has a 25.8 per cent stake in Gujarat Gas, will acquire another 28.4 per cent stake from its parent Gujarat State Petroleum Corporation (GSPC). The transaction is likely to be smooth as no regulatory approval will be required. While the value of the deal is still not known, analysts feel the transaction is likely to be an all-cash one. Based on Monday’s closing price of Gujarat Gas (Rs 828.90), GSPL may need to shell out around Rs 33 billion.

Though GSPL, which is in the business of natural gas transmission, could benefit from the stake acquisition in Gujarat Gas, a gas distribution company, near-term concerns over funding of the deal has impacted the Street’s sentiment.

Analysts at Nomura said to fund the transaction, GSPL would need to raise at least Rs 25 billion in fresh debts (cost of acquisition less cash on books) and thus become a net-debt company from being a net-cash one. 

Those at ICICI Securities said if the acquisition was fully funded by debt it would increase the interest cost to Rs 2.26 billion in FY19 and Rs 2.04 billion in FY20 and hit the firm’s bottom line by 18 per cent and 16 per cent, respectively. Further, if the cost of funding is pegged at 10 per cent, FY19 earnings will take a hit of 11-16 per cent.

For GSPC, despite the GSPL transaction and the 80 per cent stake sale in Deen Dayal KG basin gas block for Rs 77 billion about a year ago to ONGC, the company’s debt will still remain high at about Rs 130 billion. 

Analysts say that GSPC can look at selling its other businesses, including its stakes in power assets, a few exploration and production blocks, and its gas marketing business, to pare debt.

But if GSPC divests stake in any other business and GSPL is used to further bail out the parent, Nomura said this might take a toll on the latter’s financials.

Given the synergies between the gas transmission and distribution businesses of the two companies — GSPL and Gujarat Gas, the former could benefit in the long term. 

Gujarat Gas, which has a strong distribution network in Gujarat, Daman and some parts of Maharashtra, will gain from strong institutional gas demand and the initiative to push cleaner fuels.