Motilal Oswal has issued a Buy rating for Gujarat Gas (GUJGA) with a target price of INR 715, representing an 18% upside from the current market price. The positive outlook is driven by the recently announced merger scheme involving Gujarat State Petroleum Corp. (GSPC), Gujarat State Petronet (GUJS), and GSPC Energy (GEL) with Gujarat Gas, followed by a demerger of the transmission business. The brokerage believes this restructuring will unlock value for both GUJGA and GUJS shareholders.
Key takeaways from the report:
- Merger expected to be completed by August 2025.
- Estimated EPS of the combined entity at INR 28.7, a 39% increase over Motilal Oswal's FY25 estimate for GUJGA standalone.
- Potential tax benefits for the merged entity due to accumulated losses at GSPC.
- Volume growth expected to pick up in 2HFY25 and beyond, driven by increased competitiveness against propane.
- Valuation based on 30x FY26E EPS.
Motilal Oswal highlights several crucial aspects of the merger. Firstly, it simplifies the corporate structure and eliminates related-party transactions, leading to improved margins and return ratios for GUJGA. Secondly, it provides GUJS shareholders with shares in both the merged Gujarat Gas entity and the newly formed GSPL Transmission Limited (GTL), unlocking value. Thirdly, the accumulated tax losses at GSPC could shield the merged entity from paying taxes for the next four years, significantly boosting profitability.
The report also acknowledges the near-term challenges faced by Gujarat Gas. The second quarter of FY25 is expected to witness weak volume growth due to high spot LNG prices and a temporary shutdown in the Morbi industrial cluster. However, the analysts anticipate a rebound in volumes during the second half of FY25 and beyond, as the company’s competitiveness improves against propane.
Looking ahead, Motilal Oswal remains optimistic about Gujarat Gas's long-term prospects. The company is aggressively expanding its infrastructure to increase industrial gas adoption in various regions, including Thane rural, Ahmedabad rural, and newly acquired areas in Rajasthan. This strategic expansion, combined with the benefits from the merger, underpins the brokerage's positive outlook.
The valuation methodology used by Motilal Oswal is based on a 30x multiple of the estimated FY26 EPS. While this might appear high compared to current valuations, the analysts justify it based on the expected strong earnings growth and the potential for value unlocking from the merger and demerger.
While the report paints a positive picture, investors should consider potential risks. The successful completion of the merger and demerger processes is subject to regulatory approvals and shareholder consent. Furthermore, the company’s performance is dependent on gas prices and industrial demand, both of which can be volatile.
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