Motilal Oswal Gives Neutral Rating to Gujarat State Petronet, Sets Target Price at Rs 472

Motilal Oswal has recommended a Neutral rating for Gujarat State Petronet (GUJS) with a target price of Rs 472 in their research report dated October 5, 2024.

Key Event: Merger by FY26

After a strong first quarter, GUJS is expected to face a weaker second quarter due to lower power demand, a temporary shutdown at Morbi, and the full effect of a tariff cut. For Q2, the company is expected to see a 7% drop in gas transmission volume, along with a 21% and 10% decline in EBITDA and profit after tax (PAT) respectively.

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However, GUJS’s transmission volumes are projected to increase by FY26, with a 12% growth rate from FY24 to FY26, driven by new liquefied natural gas (LNG) terminals opening in Gujarat and a push to reduce industrial pollution.

Merger with Gujarat Gas

A merger between GUJS and Gujarat Gas (GUJGA) is on the horizon, with a share swap ratio set at 10 shares of GUJGA for every 13 shares of GUJS. This merger will create synergies between the companies, while also giving GUJS shareholders value by offering shares of both GUJGA and a newly listed company, GSPL Transmission Limited (GTL), which will handle the gas transmission business.

Q2 to Be Weak for GUJS

Q2 is expected to be weak for GUJS due to lower demand and a tariff cut. Transmission volumes are estimated to decline by 7% quarter-on-quarter. EBITDA for FY25 and FY26 is forecasted at Rs 9.7 billion and Rs 10.3 billion, respectively, with transmission volumes expected to rise to 38.5 million metric standard cubic meters per day (mmscmd) by FY26.

Uncertainty Around Tariffs

In April 2024, a new tariff order significantly reduced GUJS’s tariffs, which was a big disappointment. The company has appealed the decision, but no quick resolution is expected. GUJS continues to push for a revision of this order.

Growth from New LNG Terminals

The LNG capacity in Gujarat is expected to grow by 55% over the next two years, and GUJS is likely to benefit from this growth. Several new LNG terminals are set to open, including HPCL’s Chhara terminal and expansions of existing facilities at Dahej and Jaffrabad. However, delays in the Jaffrabad terminal could push back some of this growth.

Merger and Demerger Details

As part of the merger plan, Gujarat State Petroleum Corporation (GSPC), GUJS, and GSPC Energy Limited (GEL) will merge with GUJGA. Afterward, the gas transmission business will be separated into a new company, GTL, which will be listed on the stock exchange. Shareholders will receive new shares in both GUJGA and GTL.

Outlook

GUJS is expected to benefit from increasing LNG capacity and rising demand for cleaner energy. The company is projected to achieve 12% volume growth over the next two years. However, due to the merger and tariff-related uncertainties, Motilal Oswal has set a target price of Rs 472 and downgraded the stock to a Neutral rating, with a potential upside of 10%.