Why Did Gujarat Gas Shares Skyrocket Today?

Gujarat Gas stock saw good move on Monday, 2 September 2024, with shares rallying by 13.63% to reach an intraday high of ₹689.45 per share. This surge follows positive sentiment from brokerages after the board approved a merger and demerger plan involving Gujarat State Petroleum Corporation (GSPC) and Gujarat State Petronet Limited (GSPL).

Restructuring Overview

The restructuring plan aims to simplify the existing complex structure of these Gujarat based companies. Under the proposed scheme, GSPC (10 Gujarat Gas shares for 305 GSPC shares) and GSPL (10 Gujarat Gas shares for 13 GSPL shares) will first be amalgamated into Gujarat Gas Limited (GGL). Following this, the gas transmission business will be spun off and listed as a new entity called GSPL Transmission Limited (GTL). Gujarat Gas will continue to operate its city gas distribution (CGD) business while also incorporating GSPC’s gas trading, exploration and production (E&P), renewables, and other investments.

Brokerage’s Insights

Nuvama

Analysts at Nuvama have projected a 39% increase in Gujarat Gas’s earnings per share (EPS). They highlighted that the merger will allow GGL to utilize GSPC’s ₹7,200 crore in tax losses over eight years, resulting in approximately ₹300 crore in annual indirect tax savings. Additionally, Gujarat Gas will benefit from improved pricing for propane in Morbi, estimated at ₹1.3 per SCM or 3.2%. Nuvama has maintained a ‘Buy’ rating on GGL with a target price of ₹745, representing a 23% upside. Regarding GSPL, Nuvama has maintained a hold rating and increased its target price by 45% to ₹467, maintaining a ‘Hold’ rating.

Motilal Oswal

Motilal Oswal analysts have also maintained their ‘Buy’ rating on Gujarat Gas setting a target price of ₹715 reflecting an 18% upside. Despite anticipating weak volume momentum in Q2FY25 due to high spot LNG prices and a temporary shutdown in the Morbi cluster, they expect volume recovery in the second half of FY25 and FY26. The scheme is projected to be completed by August 2025. Analysts also noted that Gujarat Gas is likely to see improved margins, return ratios and cash flows with the elimination of related-party transactions between GSPC and Gujarat Gas. Furthermore, shareholders of GSPL are expected to benefit from value unlocking as they receive shares of both Gujarat Gas and GTL, with the demerger facilitating an independent, market-driven valuation of GTL.

Kotak Institutional Equities

In contrast, Kotak Institutional Equities has suspended its previous ‘Buy’ rating, citing concerns that the transaction favors GSPL minorities by 5-6% more than GGL minorities. Until GSPL’s expected delisting in June 2025, Kotak anticipates that GSPL’s stock will closely follow GGL’s performance rather than reflecting its fundamentals. Post-restructuring, GSPL will operate as a pure transmission business, while GGL will benefit from the CGD business along with profitable ventures in gas trading, E&P, renewables, gas-based power generation and LNG terminals.