Having announced a controlling stake acquisition in Gujarat Gas Company Ltd (GGCL), Gujarat government-owned Gujarat State Petroleum Corporation (GSPC) is set to become the largest city gas distribution company in terms of customers in India.
The GSPC Group, through its subsidiary GSPC Distribution Networks Ltd, has signed a definitive agreement with the British Gas Group to acquire 65.12 per cent stake in GGCL. The deal, however, was not warmly received by the market. GGCL stock dived nine per cent on the Bombay Stock Exchange.
Analysts said they were not bullish on GGCL. "On a fundamental basis, we don’t see any major event in the near term which could drive the company’s earnings and valuations. We have reduced our multiple to 12x (10 per cent discount to the last five years’ average multiple of 13.2x) and downgraded the stock to ‘hold’ with a revised target price of Rs 315," said an Emkay report.
GSPC provides piped natural gas (PNG) to domestic customers through its wholly-owned subsidiary, GSPC Gas. The acquisition of controlling stake in GGCL would double the number of customers for the group to 700,000 across the state. The customer base would outnumber that of the existing leading city gas distribution (CGD) companies in India. Currently, GSPC Gas is supplying PNG to 370,000 across Gujarat, while GGCL has a domestic customer base of about 350,000, located mainly in Surat. Now, the group will have a consumer base of 350,000 million in south Gujarat.
New Delhi-based Indraprastha Gas Limited (IGL) has 355,000 domestic customers, while Mahanagar Gas Limited, which supplies PNG to households in Mumbai, has 585,000. "It makes a good business proposition for GGCL, as its dependence on RLNG and GAIL would reduce once it starts getting gas from GSPC's wells 2014 on," said Rajeev Shah, managing director, RBSA Valuation Advisors LLP, a merger and acquisition advisory firm. Having a large area under its coverage will give an advantage to GSPC in getting additional licences for other locations in the country, he added.
GSPC Gas has a daily gas sales volume of 4.3 million standard cubic metres per day (mscmd) in PNG and CNG. After the acquisition, GSPC has emerged as the country's largest gas distributor with total gas sales volume of close to eight mmscmd, far more than IGL or MGL’s.
More From This Section
"There is a natural monopoly for a gas distribution company, as there will not be multiple gas connections in a household. In the case of GSPC’s acquisition of GGCL, it will not make much impact on the gas consumers in the respective areas, as both companies had different operational areas," said Amitabh Kumar, partner, J Sagar Associates, a leading national law firm. Kumar was the first director-general of the Competition Commission of India.
| THE MARKET GSPC’s domestic customer base is set to double | |||||
| Company | Domestic* | Industrial* | Commercial* | No of CNG stations | Gas sales (mscmd) |
| IGL | 355,000 | 223 | 640 | 266 | 3.5 |
| MGL | 585,000 | 1,700 | - | 150 | 2.5 |
| GSPC Gas | 374,000 | 1,685 | 1,440 | 45 | 4.3 |
| GGCL | 350,000 | - | - | 28 | 3.2 |
| *Base of customers Source: Company websites | |||||
GSPC Group is one of the leading oil and gas exploration, development and production companies in India, and also one of the largest gas trading companies in the country. The group has a significant presence in the gas transmission and distribution businesses. The government of Gujarat, with its public sector undertakings, are majority shareholders in the group.
Rs 295 a share, the deal value, said analysts, implied BG had not received as attractive a valuation on the stake sale as was expected in November 2011, when the deal was announced. Before the regulatory issue, the scrip was trading at Rs 410, later coming down to Rs 320.
"The valuation is much lower than anticipated in the streets due to uncertainties on the regulatory front and declining demand for industrial gas," said Karvy Broking. "The valuation has been reduced to 14-15 times compared to 18-20 times historically on one-year forward earnings on the back of uncertainty over regulatory hit on the margins, after a drastic reduction in IGL's rate by PNGRB," it added.
GSPC on Thursday said on the BSE it would announce an open offer of 26 per cent, in line with the takeover code of Securities Exchange Board of India. The deal is expected to conclude during the first half of next year. Under Indian stock market rules, GSPC will have to make a mandatory open offer for a minimum of 26% of Gujarat Gas.
"It is at 12 per cent discount to closing market price of Rs 336, which implies that the regulatory concern still persists. Lower acquisition price affirms regulatory headwinds," said Deepak Pareek, research analyst – institutional equities at Prabhudas Lilladher.
Pareek added that, "Exit of BG from GGAS is likely to erode the management quality premium over the longer term, particularly given the fact that GSPC is a state-controlled entity."