Gujarat Gas To Achieve Rs 1,000-Crore Ebitda After Merger: ICICI Securities' Probal Sen

Gujarat Gas Ltd. is likely to witness a dip in earnings in the September quarter, but the merger with Gujarat State Petroleum Corp. and Gujarat State Petronet Ltd. is expected to bring a northward swing, according to Probal Sen, senior research analyst at ICICI Securities Ltd.

“Earnings will be weak in the September quarter, and we have had a ‘sell’ rating on the company for a while now,” Sen said.  

However, Sen told NDTV Profit the merger would result in Rs 1,000 crore Ebitda.

“If you look at the gas trading portfolio of GSPC, about 45% of the gas was being sold or transposed to Gujarat Gas itself, on which they would make Rs 2.5 to Rs 3 per unit. They have not disclosed the exact merging mix of what they were selling to Gujarat Gas vs someone else. But, broadly speaking, of the 11-12 million metric standard cubic metres per day of the trading portfolio, they (Gujarat Gas) can sustainably make about Rs 1,000 crore of Ebitda,” the analyst said.

As per the proposed merger scheme, Gujarat Gas, Gujarat State Petroleum Corp. and Gujarat State Petronet Ltd. will be merged into a single entity. Gujarat Gas informed the stock exchanges on Friday that the Boards of the companies have approved the merger scheme. The gas transmission business of Gujarat Gas will also be demerged and listed as a separate entity, GSPL Transmission Ltd. The merger and demerger scheme is aimed at streamlining the company holding structure and to unlock value for shareholders.  

Gujarat Gas will see better volume growth as well as a stronger margin in three to four years following the merger, according to Sen.

“If you look at the savings that Gujarat Gas could make in terms of margins that they no longer have to pay GSPC, there is a sustainable improvement in gas cost. Whichever way you look at it, it can result in better volume growth, stronger margins or a mix of both as we go along. That is something we think will be more structural in nature over the next three to four years.”

The volumes are inherently volatile because they are competing against propane prices, which have also been up and down, he said. Therefore, that makes earnings' predictability very difficult, he said.

However, the merger will allow the company to address propane volatility more effectively due to the leverage gained in sales pricing.

The trading business has also been stable for GSPC, which is expected to provide an edge in terms of Ebitda potential in the next two to three financial years. 

“If you look at the margin trends for GSPC, the pricing that we expect for LNG and spot LNG going forward suggests that trading business will do well and add an edge in terms of overall Ebitda potential for the next two to three years. The tax benefit is a tangible cash benefit because you don't have to pay tax. As per the merger rule, you are allowed to offset this for the next seven to eight years, and it is a powerful tool as far as earnings is concerned,” Sen said.