Gujarat Gas Sell Target Price: Rs305 :: Centrum

Gujarat Gas

Sell

Target Price: Rs305

CMP: Rs336

Downside: 9.1%

From global to local

GSPC is all set to buy BG’s 65.12% stake in Gujarat Gas (GujGas) for Rs246.4bn. After long negotiations and bidding, GSPC is paying Rs295/share for BG’s stake in GujGas. However, the price paid is at about 12% discount to the closing price on October 3, 2012. Earlier, BG expected higher valuations from the deal but had to settle for less given the regulatory environment for CGD business in India. We remain skeptical on GujGas’ volume growth and hence urge investors to sell in the open offer.

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m  Volume growth concern on GujGas: Due to lower domestic gas availability, higher LNG prices, rupee deprecation and sourcing issues GujGas’s volume growth was impacted in CY11. This is expected to continue in CY12E as well. Easing LNG prices and rupee appreciation will lead to volume growth in CY13E though at a relatively lower pace.

m  Open offer: GSPC has made an open offer for 26.0% stake of GujGas at a price of Rs314.17/share based on SEBI’s formula.

m  Maintain Sell: The entire sale process will take 3 to 6months. Although the buyer knows the business, it will take time to streamline the operations and hence its strategy will be in place only after the entire process is completed. We remain skeptical on significant volume growth for GujGas. We are also waiting for the new management to assume charge to ascertain their strategy. We have revised our estimates based on current LNG prices and rupee appreciation. Our revised EPS estimate for CY12E and CY13E stands at Rs22.2 and Rs21.3 (lower as other income was higher in CY12E due to sale of assets) respectively. We maintain sell on the stock with a revised target price of Rs305 (Rs282). We believe the open offer is beneficial to shareholders and hence urge investors to sell in the open offer.

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