Gujarat Gas shares skyrocket 13% after announcing restructuring of group entities. Should you invest?

Shares of Gujarat Gas surged 13.6% to its new all-time high of Rs 689.45 on BSE after the company on Friday announced the restructuring of its group entities Gujarat State Petroleum Corporation (GSPC), Gujarat State Petronet (GSPL), and Gujarat Gas, following which the brokerages have upgraded the stock’s target price up to Rs 715.

Under the restructuring, the merger of GSPC with GGL will witness an issuance of 10 equity shares of GGL for every 305 shares of GSPC held by the shareholders while under the merger of GSPL with GGL, 10 shares of GGL will be issued against every 13 shares of GSPL held.

Additionally, under the demerger scheme of the gas transmission business from GGL into the newly incorporated entity GSPL Transmission (GTL), 1 new share of the GTL will be issued for every 3 shares of GGL held.

“The merger of GSPC with GGL, by combining the inter-linked businesses, will unlock business synergies, amplifying the scale of operations and improving efficiency due to optimum utilisation of resources. The elimination of related party transactions will improve GGL’s EBITDA and RoCE. The synergistic benefit will also increase the market share of gas trading business while enabling focused growth strategies in other Energy sectors,” said the company in a filing to the exchanges.

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Here is what brokerages said on the update:

Motilal Oswal: Buy| Target price: Rs 715

Motilal Oswal maintained a buy rating on Gujarat Gas with a target price of Rs 715.

The company’s long-term volume growth prospects remain robust, with the addition of new industrial units and the expansion of the existing units. It is aggressively investing in infrastructure to push industrial gas adoption in Thane rural, Ahmedabad rural, and newly acquired areas in Rajasthan.

The objective of the scheme is to simplify the complex structure and boost business synergies and growth opportunities by merging interconnected operations of GSPC and Gujarat Gas. Removing related-party transactions will further improve Gujarat Gas’ EBITDA and RoCE.

The management aims to expand the group’s market share and competitiveness in the gas trading business, and improve operational scale and efficiency through optimal resource use.

Emkay: Reduce| Target price: Rs 600

Emkay has upgraded Gujarat Gas to a ‘reduce’ rating from ‘sell’ while hiking the target price to Rs 600 from Rs 500

Estimated proforma of the merged Gujarat Gas PAT is seen at Rs 3,500 cr or Rs 38/sh, implying >50% EPS accretion. GSPL’s outlook hereon is linked to Gujarat Gas and the merged entity would benefit from size, simple structure, and synergies.

Challenges likely being faced are complexity of business with global gas exposure, capital allocation, and numerous Gujarat government entities are still holding sizable stake.

Equirus: Add| Target price: Rs 667

Equirus has upgraded the stock to ‘Add’ from ‘Reduce’ and hiked the target price to Rs 667 from Rs 580

Gujarat Gas to emerge as one of the largest integrated players as there will be a huge cash flow generation and there is already an existing Rs 3500 crore of cash. EPS accretive from 1st year.

Kotak Equities: Rating suspended

Domestic brokerage firm Kotak Equities has a contrary opinion on the company’s merger update.

After the recent outperformance (1M: GSPL +30%, GGL -8%), the share swap ratio provides a further 5-6% upside to GSPL minority shareholders (over GGL). After this, GSPL should trade in tandem with GGL. Thus, Kotak Equities has suspended coverage on the stock.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)