Investors sulk as GSPL takes debt load off GSPC’s back

One man’s gain is another man’s loss. Gujarat State Petroleum Corp. Ltd (GSPC) is selling its stake in Gujarat Gas Ltd, the country’s largest city gas distribution company, to pay off about a fifth of its debt. But for the buyer, Gujarat State Petronet Ltd (GSPL), this means taking on debt to fund the deal and stretching its balance sheet in the process.

It’s little wonder that GSPL shares have shed 4.7% since the deal was announced on Monday. The deal is expected to be worth about Rs3,200 crore.

In an interview to CNBC-TV18, Manish Seth, chief financial officer of GSPL, said post this deal, the company’s debt will be to the tune of Rs3,500 crore, an increase from about Rs250 crore currently. “We will still be below 1:1 debt-to-equity ratio,” pointed out Seth.

Still, investors will have to cope with the negative near-term impact on earnings as a result of this deal given that interest costs would rise. According to Nomura Financial Advisory and Securities (India) Pvt. Ltd’s calculations, assuming even a 20% growth in fiscal year 2019 earnings, the transaction would be 16% earnings decretive for GSPL. This is assuming the cost of funding at 10%.

From a long-term perspective, GSPL can be expected to gain from the deal. Gujarat Gas’s city gas distribution business could offer synergies that will prove helpful to the gas transmission business of GSPL.

So far in 2018, the GSPL stock has underperformed the broad market. Currently, it trades at about 10-times estimated earnings for the next fiscal year, according to Bloomberg data. That seems reasonable, although investors may be worried about a drop in power demand. The company saw strong power demand in the September and December quarters, which is expected to soften from this quarter onwards.

Moreover, demand from Reliance Industries Ltd is expected to drop, as it commissions its petcoke gasification project. Investors, thus, would have to watch whether demand from other pockets can compensate. But if, as some analysts expect, there is a better-than-expected increase in tariffs, it would aid profit growth.

From the seller GSPC’s perspective, the deal doesn’t really end its debt woes. The unlisted firm that owns 38% stake in GSPL is still expected to be left with a debt of around Rs13,000 crore after this transaction.

And for Gujarat Gas shareholders, nothing much changes. The deal will merely be a transfer of 28.4% stake from GSPC to GSPL. Post this transaction, GSPL will own 54% in Gujarat Gas.

What about an open offer? Some analysts believe an open offer will not be triggered, as the transaction is modelled on the lines of the Oil and Natural Gas Corp. Ltd (ONGC)-Hindustan Petroleum Corp. Ltd (HPCL) deal. In January, ONGC agreed to purchase the government’s 51% stake in HPCL, and the deal was exempted from the need to make an open offer.livemint


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