Gujarat Gas Limited (GGL) hosted an investor and analyst conference call on August 31, 2024, to discuss a significant corporate restructuring involving the merger of Gujarat State Petroleum Corporation (GSPC) and Gujarat State Petronet Limited (GSPL) into GGL, followed by a demerger of the gas transmission business into a new entity, GSPL Transmission Limited (GTL). This move aims to simplify the group structure, unlock shareholder value, and create a more integrated energy player.
a. Financial Performance:
The call did not focus on specific quarterly financial results for GGL. However, it did shed light on the financial performance of GSPC, which will be merged into GGL. GSPC's gas trading business generated INR 1,100 crores EBITDA in the previous year, with margins ranging from 6% to 12%. The company also reported a profit of INR 683 crores in Q1 FY25, driven by higher demand from the power sector and city gas distribution companies due to subdued gas prices.
GSPC has accumulated tax losses of approximately INR 7,200 crores, which will be carried forward to the merged entity. These tax losses are expected to provide significant tax benefits for the next eight years.
b. Operational Updates:
The call provided insights into the operational performance of various business segments:
- GSPC's Gas Trading: Volumes have declined in recent years due to higher spot LNG prices but are expected to recover with the upcoming increase in global liquefaction capacity. GSPC has two long-term oil-linked LNG contracts, one valid till 2030 (1.5 million tons) and the other till 2028 (0.3-0.4 million tons). They also source gas from domestic fields and the spot market.
- GSPC's E&P: GSPC has moved out of loss-making E&P assets, retaining 11 profitable onshore and marginal fields. Future capex is expected to be limited, primarily focused on maintaining production.
- GSPL's Transmission: The Mehsana-Bhatinda pipeline has seen slow volume ramp-up due to delays in the Rohtak-Panipat pipeline. However, with anticipated approvals, volumes are expected to increase from 1.5 million to 3.5 million in the next two years.
- GSPC's Power Plants: The two gas-based power plants, GSPC Pipavav (98% stake) and Gujarat State Energy Generation (54% stake), primarily operate under PPAs with GUVNL, ensuring fixed cost recovery. Their utilization increased to 44% PLF in Q1 FY25 due to higher demand during the summer months.
c. Management Insights:
Management emphasized the strategic rationale behind the restructuring:
- Simplification: "The ultimate objective of the scheme of arrangement is to simplify the layered group structure, merge various inter linked business into one entity, eliminate related party transactions and unlock value for our shareholders." – Milind Torawane, Managing Director, GGL
- Value Unlocking: "This strategic decision represents a giant leap forward in our pursuit of sustainable growth and increased shareholder value." – Milind Torawane
- Enhanced Profitability: "The cash flow generated by the combined businesses can be deployed more efficiently in future to fund organic/inorganic opportunities." – Milind Torawane
- Synergies: "GGL will be able to better leverage the combined assets and expanded capital base all put together, enhancing profitability and return ratios on account of varied gas sourcing portfolios." – Milind Torawane
- Market Leadership: "The management's business growth projections for GGL estimate it to become one of India's largest integrated players with presence in gas trading & city gas distribution business." – Management
d. Strategic Initiatives and Future Plans:
The restructuring is expected to empower GGL and GTL to pursue independent growth strategies:
- GGL: Will focus on expanding its CGD business and leveraging the combined gas sourcing expertise of GGL and GSPC. It will also explore inorganic growth opportunities in the wider energy sector, including renewables.
- GTL: Will focus on expanding the gas transmission network across Gujarat, leveraging the growing demand for natural gas in the state.
- GSPC's Non-Core Assets: Management indicated they are not currently considering expanding power assets. However, they may consider opportunities in renewables.
e. Q&A Session Highlights:
The Q&A session provided further clarity on several key aspects:
- Valuation: GSPC was valued at approximately INR 21,000 crores, with the gas trading business contributing around 35% of the value. GSPL was valued at around INR 26,000 crores, including INR 3,500-4,000 crores for the core business and INR 25,000 crores for investments.
- EPS Accretion: The merger is expected to be EPS accretive for Gujarat Gas shareholders, with an estimated increase of around 50%.
- Tax Savings: The tax losses carried forward from GSPC will result in significant tax savings for the merged entity over the next eight years.
- Future Capex: GSPL's planned capex of INR 3,500 crores over the next two years will focus on expanding the gas transmission network in Gujarat.
- Inorganic Growth: GGL will explore inorganic growth opportunities in the wider energy sector, potentially including renewables, after the merger is completed.
Conclusion:
The proposed merger and demerger represent a transformational step for the GSPC Group. The simplified structure, combined with the synergies and growth opportunities identified by management, is expected to unlock significant value for shareholders. While challenges remain, particularly in the gas trading and transmission segments, the overall outlook for the merged entity appears positive, with the potential for GGL to become a leading integrated energy player in India.
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