GAIL's Rs 1,083 crore buyback offer kicks off: Should you tender shares?

The company has prescribed a buyback ratio of 2 shares for 25 equity shares for reserved category whereas 2 shares for 179 equity shares for general category.

The Rs 1,083 crore buyback by state-run GAIL (India) opened today and will run till June 7. The 14-day long buyback offer is priced at Rs 190 per share, representing a premium of 28.28 per cent on the BSE and 29.20 per cent on the NSE.

The state gas utility plans to buyback 57 million shares of face value of Rs 10 each. It intends to buyback shares through two different categories: reserved category for small shareholders, who have held shares of not more than Rs 2 lakh, and general category that is applicable for all eligible shareholders other than small shareholders.  Of this, the government intends to tender shares up to an extent that the minimum shareholding post buyback remains at least 51 per cent.

The company, which aims to optimize its capital structure and improve return on equity through the buyback, has prescribed a buyback ratio of 2 shares for 25 equity shares for reserved category whereas 2 shares for 179 equity shares for general category. 

As the buyback offers over 25 per cent premium to its price, analysts expect the retail entitlement ratio to be in the range of 8-10 per cent. According to Abhijeet Bora, energy analyst at Sharekhan by BNP Paribas, the potential return range can be from 2 per cent to 4.3 per cent, assuming a base acceptance ratio of 30 per cent and exit price of Rs 140-150 for untendered shares.

The entitlement ratio is the ratio of shares a retail investor has offered in the buyback process, whereas, acceptance ratio represents how many shares the company will be able to accept in the buyback offer for every 100 shares tendered by shareholders.

Gaurang Shah, senior vice president at Geojit Financial Services, meanwhile, suggests investors shouldn't tender their shares as he sees the stock as a long-term value bet.

“We are bullish on the fortunes of oil-exploration companies due to pent-up demand for alternative fuel. Aggressive price hike in natural gas and changes in gas exploration guidelines will bode well for the company. We can expect 15 per cent upside for GAIL in the long haul,” he said.

That apart, analysts anticipate the company's gas and marketing business to witness steady cash-flows, buoyed by spot LNG prices, during FY23-24.

“We expect volumes of the gas transmission business to improve after the completion of Eastern gas pipeline. With fertilizer plants coming up in the country, it is possible that the entire LNG volume of the US is consumed by India itself. We expect the stock to perform well in the long-term with a target price of Rs 196,” Abhijeet Bora of Sharekhan said.

GAIL (India) is a PSU with a presence along the entire natural gas value chain that includes gas transmission or marketing, LPG transmission, gas processing, petrochemical, LNG imports, and city gas distribution. It supplies to major consumers, fertilizer industries, steel plants, petrochemical plants, and small industries. The company has also diversified into renewable energy business and is exploring business opportunities in green hydrogen.

The management believes the buyback will not impair the ability of the company to pursue growth opportunities or meet its cash requirements for business operations. Neither do they expect the buyback to cause any material impact on the earnings of the company.

Meanwhile, the company is scheduled to report its January-March quarter (Q4FY22) result on May 27, 2022. Analysts expect the company to report 44.8 per cent growth year-on-year (YoY) in net profit to Rs 2,7616.6 from Rs 2,564.83 in Q3FY21. Net sales are expected to increase by 56.9 per cent YoY to Rs 24,391.5 crore.

Shares of GAIL have surged over 16 per cent this year as against 8 per cent decline in BSE S&P Sensex. Earlier, the stock had touched a 52-week high of Rs 173.45 on April 19, 2022. It has outperformed peers like Gujarat State Petronet and Gujarat Gas that bled over 12 per cent and 14 per cent, respectively this year.