Event Analysis: BG sells controlling stake in Gujarat Gas

Should you still stay invested in this scrip?

Gujarat Gas Company has dipped nearly 10 per cent to Rs 306 today, after British Gas (BG) sold controlling stake in the company in a deal valued at Rs 2,464 crore, or Rs 295/share to the state-owned Gujarat State Petroleum Corporation (GSPC). This is around 12 per cent discount to the Wednesday’s closing price.

“On Wednesday, GSPC signed an agreement for acquisition of 65.12 per cent stake in Gujarat Gas Company from BG Group at Rs 295 per share. BG’s shareholding is being acquired by Gujarat Distribution Networks Limited, a company in which 100 per cent is held by GSPC Group," the company said in a filing.

The impact

Deepak Pareek, research analyst – institutional equities at Prabhudas Lilladher suggests that based on the listing agreement, GSPC would be required to dilute its stake post the open offer (assuming its holding rises above 75 per cent). Thus, the possibility of direct delisting does not exist.

“Given the fact that GSPC has other city gas distribution ventures, reverse merger of those entities with GGAS cannot be ruled out (in turn, benefiting GSPL). Exit of BG from GGAS is likely to erode the management quality premium over the longer term, particularly given the fact that GSPC is a State-controlled entity. We expect stock price to languish at around Rs 300/share (based on open offer dynamics and time value of money),” he said in a note.

“The valuation has been reduced to 14-15x vis-à-vis 18-20x historically on one year forward earnings on the back of uncertainty over regulatory hit on the margins, post drastic reduction in IGL’s tariff by PNGRB,” states a Karvy research report.

“We believe that the core margins are already under pressure on account of reducing competitiveness against alternative fuels. The year-on-year volume has reduced significantly first time in previous quarter (2QCY12), as frequent price hike reduces its competitiveness against alternative fuels. We expect volume growth to be lower than 5 per cent and margins to be under pressure in CY12 and CY13,” it adds.

Stock strategy

Most analysts/brokerages are not too bullish on the stock given the developments and the road ahead.

"On fundamental basis we don’t see any major event in near term which could drive company’s earnings and valuations. We reduce our multiple to 12x (10 per cent discount to last 5 years average multiple of 13.2x) and downgrade the stock to hold with revised target price of Rs 315," says and Emkay report.

Based on the acceptance ratio assuming deal value as fair value, Prabhudas Lilladher believes the stock would fall to Rs 309/share. However, given the time involved in the deal (6-9 months), it could hover around around Rs 300/share.

Karvy, on the other hand, maintains “SELL” recommendation, with price target of Rs 307.