More legs to rally in Gujarat Gas scrip

Merger with GSPC could further add to earnings and volumes

Gujarat Gas Company’s scrip has outperformed the benchmark BSE Sensex over the past six months. Likely synergies and operational gains from the coming merger with Gujarat State Petroleum Corporation (GSPC) are reasons for this rally. Robust expansion plans of the merged entity and expected improvement in demand are others. In this backdrop, most analysts polled by Bloomberg in April so far are positive on the company. Given their average target price of Rs 788, this rally has more legs and indicates an upside potential of 18 per cent from Monday's closing price of Rs 667.

The merger, to be effective in a few months, will create the country's largest city gas distribution company, with estimated volumes of about seven million standard cubic metres per day (mscmd) in FY15. The combined entity will be called GSPC Distribution Networks (GDNL).

Notably, volumes are set to rise in the coming years. In addition to its presence in 12 districts/cities in Gujarat, the combined entity has entered four new areas — Bhavnagar, Hazira, Kutch (West) and Jamnagar. Recently, it also bagged licences to start operations in Thane (on April 10) and Dadra & Nagar Haveli, which will enable geographic diversification and aid volume growth. It also has strong chances to bag new licences in Silvassa, believe analysts.

Further, the new management has cut prices thrice in six months to pass on lower RLNG prices to end-consumers. Besides, GDNL plans to expand its compressed natural gas (CNG) retail outlets aggressively and could also tie-up with oil marketing companies. This approach is positive and will boost top line growth. Analysts believe volumes could inch up to 7.6 mscmd in FY16 and 8.3 mscmd in FY17.

The government's push to CNG and domestic piped natural gas (PNG) will only benefit city gas distributors such as GDNL. Usage of CNG by public transport buses, auto-rickshaws and taxis, is not mandated in Gujarat, unlike in Mumbai or Delhi; the state has only one-third of CNG volumes compared to Delhi. This means huge potential for GDNL to increase penetration in the existing areas as well. Softening LNG prices and downward revision in domestic prices will further push CNG demand and augment volumes and margins.

Apart from volume gains, the merger would also help reduce costs by rationalisation of shared resources. According to analysts' estimate, the merged entity is likely to have earnings per share (EPS) of Rs 60-62, double that of Gujarat Gas' EPS of Rs 32.6 in FY14. Any unprecedented rise in LNG prices, intensifying competition (as exclusivity ends) and significant falls in prices of alternative fuels remain key downside rises, which could lead consumers away from CNG.