In a move aimed at streamlining its energy business, the Gujarat government on Friday announced plans to merge several of its key energy companies. The proposed amalgamation would bring together Gujarat Gas Ltd., Gujarat State Petroleum Corp., and Gujarat State Petronet Ltd. under a single corporate entity.
Gujarat Gas' management expects the plan to simplify the corporate group structure and provide a more unified platform for funding future growth. However, brokerages remain cautious on the business volatility the scheme exposes the company to.
The Scheme Of Arrangement
The scheme involves merging Gujarat State Petroleum Corp. and GSPC Energy Ltd. (both unlisted) and Gujarat State Petronet (listed) into Gujarat Gas. After the merger, a new entity—GSPL Transmission Ltd.—will be created for gas transmission. Gujarat Gas will focus on city gas distribution, gas trading, exploration, production, and renewables, while GSPL Transmission will handle gas transmission and related investments. The process is expected to be completed by August 2025.
As per NDTV Profit calculations, Gujarat Gas will have to issue a total of 78.66 crore new equity shares. However, issuance of 53.7 crore shares get cancelled out due to Gujarat State Petroleum Corp's stake in Gujarat State Petronet, and Gujarat State Petronet's stake in Gujarat Gas.
Are Valuations Fair?
NDTV Profit estimates that the share exchange ratios value Gujarat State Petroleum Corporation at around Rs 21,000 crore and Gujarat State Petronet Ltd. at Rs 26,000 crore.
B&K Securities values GSPC's gas trading, exploration, and production business at approximately Rs 11,400 crore, while its stakes in Gujarat State Petronet Ltd. and Sabarmati Gas are valued at Rs 10,600 crore. The company reported gas trading volumes of 11 million metric standard cubic meters per day and an Ebitda of Rs 11,000 crore for fiscal 2024, giving its gas trading business a 7 times EV/Ebitda multiple, consistent with industry standards, according to Jefferies.
Gujarat Gas management values Gujarat State Petronet's core business at Rs 3,500-4,000 crore, implying a 2 times EV/Ebitda multiple. The higher total value of the company actually primarily reflects its various investments, estimated at Rs 24,000-25,000 crore. As per Emkay, Gujarat Gas' Rs 3,500-crore valuation for its core business stands only 5 times of the current net profit run-rate, which seems low due to the company's Rs 3,500-crore capex plan.
The Benefits
Gujarat Gas' management sees the scheme of arrangement as a way to streamline the corporate structure and create synergies between GSPC and Gujarat Gas. It will enhance cash flows for future growth and improve pricing power, the management said.
The scheme could boost Gujarat Gas’s earnings and margins by removing trading expenses paid to GSPC, according to Jefferies. IIFL Securities Ltd. pointed out that gas costs are a significant value driver. While, B&K Securities highlighted that the merger primarily benefits Gujarat State Petronet shareholders, as the company's current value reflects a discount on its 54% stake in Gujarat Gas. Additionally, the merger will eliminate related party transactions and avoid double taxation.
The merger implies over a 50% accretion for Gujarat Gas' earnings per share, according to Emkay. Gujarat State Petronet's outlook is hereon linked to Gujarat Gas, and the stock could see a 4-5% upside due to the Rs 460 per share target assigned to the counter, the brokerage said.
The Drawbacks
The scheme mainly benefits the government of Gujarat, Gujarat State Petronet Corporation, and Gujarat State Petronet. It may expose Gujarat Gas shareholders to the more volatile and regulated sectors of gas trading, pipelines, exploration, and production, according to brokerages.
Gujarat State Petronet's transmission business is valued at Rs 3,500 crore, limiting potential for arbitrage, according to IIFL Securities.
Jefferies projects that once the scheme is implemented in 2025, Gujarat Gas’ fair value could rise to Rs 513 per share, reflecting a 15% downside from the current market price. This would result in elevated forward price-to-earnings valuations of 28 times.
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