Gujarat Gas merger: Nomura lists 2 key benefits but keeps target price at Rs 470

Nomura India said the merger of under Gujarat State Petroleum Corporation (GSPC), GSPL and GSPC Energy (GEL) with Gujarat Gas, will offer two key benefits to Gujarat Gas. The first is the GSPC's significant tax credits of Rs 7,200 crore, which will accrue to Gujarat Gas, and will allow the company to not have any tax incidence for the next 6-8 years following completion of the merger. The Gujarat Gas management has indicated that the tax credits are valid for a total period of 8 years on completion of the merger.

Besides, there could be incremental synergies for Gujarat Gas that stem from a reduction of gas sourcing costs and other indirect tax liabilities — GGL’s cost for sourcing gas will decline in the coming years as the trading business is included within GGL; in addition, management has indicated there will be some benefits from indirect tax savings under the merged entity.

"We note, Gujarat Gas' FY26 Ebitda and EPS will have a sensitivity of 8 per cent and 9 per cent, respectively, to every Re 0.5 per scm reduction in gas sourcing costs," Nomura India said.

Nomura India's analysis suggests that GSPC’s tax credits can lead to EPS accretion of 51 per cent for Gujarat Gas in FY26; and in the absence of tax credits, EPS accretion would be 13 per cent. That said, the brokerage has maintained its 'Reduce' rating on the stock with a target of Rs 470. The target at Tuesday's intraday price of Rs 678.90 suggests a potential 31 per cent downside.

Apart from the city gas distribution (CGD) business, Gujarat Gas will get profitable gas trading and other business of E&P, renewables, gas-based power generation, and LNG terminals. On the other hand, GSPL will be a pure transmission business post the restructuring.

The merger approval from SEBI and stock exchanges is likely by December 2024. Approval of shareholders, regulatory authorities and MCA is expected by Ma 2025. Shares pursuant to the scheme will be issued within one month of the receipt of all the approvals, after which trading of GSPL will be suspended. The listing of additional shares of Gujarat Gas and the listing of GTL will be completed by August 2025.

GSPC's shareholders will get 10 shares of Gujarat Gas for every 305 shares while GSPL's shareholders will get 10 shares of Gujarat Gas for every 13 equity shares. Subsequently, Gujarat Gas's gas transmission business will be demerged into GTL, which will be listed.