Gujarat Gas, GSPL shares rally up to 14% on merger news; here are stock price targets

Shares of Gujarat Gas Ltd rallied 14 per cent while those of Gujarat State Petronet Ltd (GSPL) also gained in Monday's trade following the announcement of a scheme of amalgamation and arrangement, under which Gujarat State Petroleum Corporation (GSPC), GSPL and GSPC Energy (GEL) will merge with Gujarat Gas. This, analysts noted, would be followed by the merged entity de-merging the transmission business into a new entity, GSPL Transmission Limited (GTL). The exercise is expected to be completed by August 2025. 

Gujarat Gas shares climbed 13.69 per cent to Rs 689.45. GSPL shares advanced 1.45 per cent to Rs 448.80. "Gains in GSPL have already started reflecting the declared swap ratio, but EPS accretion and strategic benefits for Gujarat Gas will only gradually reflect in the stock. Raise GSPL to 'Hold' and Gujarat Gas to Buy," ICICI Securities said.

Apart from the city gas distribution (CGD) business, Gujarat Gas will get profitable gas trading and other business of E&P, renewables, gas-based power generation, and LNG terminals. On the other hand, GSPL will be a pure transmission business post the restructuring. 

Approval from SEBI and stock exchanges is likely by December 2024. Approval of shareholders, regulatory authorities and MCA is expected by Ma 2025. Shares pursuant to the scheme will be issued within one month of the receipt of all the approvals, after which trading of GSPL will be suspended. The listing of additional shares of Gujarat Gas and the listing of GTL will be completed by August 2025.

After the recent run up in GSPL, the transaction is 5-6 per cent more positive for GSPL minorities (versus Gujarat Gas minorities), based on our estimates. Until de- listing (likely till June-2025), GSPL should move in tandem with GGL, rather its own fundamentals. We suspend our rating (earlier BUY) on GSPL," said Kotak Institutional Equities. 

Based on the proposed share swap, MOFSL sees 5 per cent upside for GSPL. For Gujarat Gas shareholders, it estimates a combined value of the business at Rs 633 per share, implying 4.7 per cent upside over Friday's closing price.

"EPS is estimated to be Rs 28.70, up 39 per cent against our FY25 EPS estimate. The company may not pay taxes for the next four years due to Rs 7,200 crore of accumulated tax losses at GSPC (based on FY24 PBT)," it noted.

Analysts noted that GSPL Transmission will be carrying the pipeline assets carved out of GSPL. The objective of the merger is mainly to solve the slightly complex holding structure, mainly to unlock the value of GGL's shares being held by GSPL currently. 

"We believe that the merger is value accretive from day one for Gujarat Gas as: 1) It will enable GGL to make quick use of the Rs 7,200 crore carry-forward losses lying with GSPC; Rs 2 per scm trading margin being charged by GSPC from GGL will now be valued at a higher multiple of the CGD business; and There is a higher intrinsic value of both GSPC and GSPL's business (as per our estimate) than being assigned," Antique said. 

Some synergy benefits are also expected from cost savings and lower indirect taxes, but that is expected to be very small. 

"We reiterate BUY recommendation on Gujarat Gas and increase our target price to Rs 726 (based on a PE multiple of 23 1HFY27 earnings) from Rs 690 on account of the value accretion from the scheme," it said.

GSPC's shareholders will get 10 shares of Gujarat Gas for every 305 shares while GSPL's shareholders will get 10 shares of Gujarat Gas for every 13 equity shares. Subsequently, Gujarat Gas's gas transmission business will be demerged into GTL, which will be listed.

One share of GTL will be issued for every three shares of Gujarat Gas. The appointed date for the merger is April 1, 2024 and for the demerger is April 1, 2025.