Street cautious on Gujarat Gas after BG sellout

After a wait of nearly a year, the British Gas group (BG), promoter of city gas distribution (CGD) company Gujarat Gas, has sold its 65.12 per cent stake in the company to Gujarat State Petroleum Corporation (GSPC). The deal was done at Rs 295 a share (Rs 2,464 crore), reasonably lower than Gujarat Gas’ closing price of Rs 336.70 on Wednesday.

Not surprisingly, the stock plunged 11.6 per cent on Thursday before closing down 8.5 per cent at Rs 308, on a day when the BSE oil & gas index gained a little over one per cent. Experts believe the lower deal price is an indication that regulatory concerns around trimming of gas companies’ marketing margins / rates are serious and, hence, could impact Gujarat Gas’ profitability in the longer run. This, along with a change in ownership, has turned some analysts cautious on the stock.

“On a fundamental basis, we don’t see any major event in the near term which could drive Gujarat Gas’ earnings and valuations. More, the low valuations imply the regulatory concern still persists in the CGD business and we don’t see it to resolve soon. A lower acquisition price affirms regulatory headwinds. We reduce our multiple to 12 times (a 10 per cent discount to the past five years’ average multiple of 13.2 times) and downgrade the stock (Gujarat Gas) to hold with the revised target price of Rs 315,” believes Dhaval Joshi of Emkay Global Securities.

EXPERT SPEAK

• The lower deal price could impact Gujarat Gas' profitability in the long run
   
• This, along with a change in ownership, has turned some analysts cautious on the stock
   
• The deal will strengthen GSPC group's CGD business and make Gujarat Gas part of a larger network
   
• Financial implications of the deal would be known after clarity on the deal funding structure by GSPC

The deal, however, will strengthen GSPC group’s CGD business, while making Gujarat Gas a part of a larger network. Operationally, though, there is no material impact on Gujarat Gas.

After this buyout, GSPC has made an open offer to acquire a further 26 per cent in Gujarat Gas for Rs 314.17 a share, marginally higher than the current price. After the open offer, assuming full subscription, GSPC’s stake would inch up to 91.1 per cent – wherein it can either de-list Gujarat Gas or bring down its shareholding to 75 per cent. Analysts believe the stock is likely to fall further or languish at current levels before the open offer starts, indicating investors should exit the stock.

“The exit of BG from Gujarat Gas 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 the stock price to languish at Rs 300/share, based on open offer dynamics and time value of money”, says Deepak Pareek of Prabhudas Lilladher Research.

Meanwhile, analysts are awaiting further clarity on the deal funding structure by GSPC, after which the financial implications would be known. Some analysts feel GSPC could tap its listed subsidiary, Gujarat State Petronet (GSPL), to fund the deal.

“Awaiting clarity on the consortium funding structure, we have kept our GSPL estimates under review. Given GSPC’s weak balance sheet, it is likely to rope in GSPL to the extent of 25 per cent of the consortium’s equity funding requirement. Assuming a 12 per cent cost of debt for funding, GSPL’s post tax cost of funding would be eight per cent, mostly at par with the acquisition yield of eight per cent, implying limited downside,” believe Mayur Patel and Vishnu Kumar A S, analysts at Spark Capital.