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Shareholders in city gas distributor Gujarat Gas can consider tendering their shares in the open offer by the GSPC-led consortium. GSPC, controlled by the Gujarat Government, acquired a majority stake (65.12 per cent) in Gujarat Gas from the BG Group in October. According to SEBI rules, the GSPC consortium has announced an open offer to acquire an additional 26 per cent stake from the public shareholders of Gujarat Gas, between November 30 and December 13.
The offer price of Rs 314.17 a share is around 5 per cent higher than the prevailing market price of Rs 299. The price-to-earnings (trailing 12 months) ratio of the Gujarat Gas stock is around 16 times, lower than the levels it has traded at in the past (around 18 times). But considering the challenges being faced by the company, this does not seem out of place.
Business challenges
Our recommendation to tender shares is based on factors which could drag down the performance of Gujarat Gas and its stock price. One, there continues to be regulatory overhang on the company’s tariffs. Adverse developments on this front could crimp its profit and margins. Two, Gujarat Gas’ volumes have suffered over the last year due to its increasing dependence on costlier imported gas (47 per cent currently) to substitute declining domestic supplies.
With price-sensitive industrial customers forming a chunk of the company’s customer base, costlier gas could mean muted business growth. Lastly, while Gujarat Gas under the BG Group took price hikes regularly to tackle cost pressure, the company under a Government-run management may find it more difficult to do so.
Besides, the BG Group which controlled Gujarat Gas from 1997 sold its majority stake at Rs 295 a share — much lower than the price of around Rs 400 in November 2011 when news about BG Group’s plans to exit started doing the rounds. The lower-than-expected sale price suggests a challenging business environment ahead for Gujarat Gas.
Acceptance ratio
With around 35 per cent of the shares held by the public, the acceptance ratio in the open offer — ratio of shares accepted to those tendered — should be around 75 per cent, if all non-promoter shareholders tender their holdings.
After the open offer, GSPC could hold around 91 per cent in Gujarat Gas, if the offer is fully subscribed to the extent of 26 per cent.
GSPC will then either have to delist Gujarat Gas or reduce its shareholding in the company to 75 per cent (according to SEBI rules) by issuing shares to the public. But betting on the possibility of delisting (and getting a higher price in the process) could be risky for shareholders.
Many companies these days are choosing to reduce their stake through the easier-to-implement offer-for-sale route than to pay a high price in the delisting process. GSPC could do the same with Gujarat Gas.
Volume concerns
After many quarters of decline, the profit of Gujarat Gas in the recent September quarter grew around 24 per cent over the same period last year. Price hikes by the company in the beginning of the quarter, along with a dip in the cost of imported gas price, helped the company post high gross spreads. But volumes sold (295 mmscm) during the quarter were sharply lower than in the year-ago period (326 mmscm).
While volumes were a tad higher than the 289 mmscm in the June quarter, this could be attributable to the September quarter traditionally being a strong one for the company. Volumes may remain muted or fall in the coming quarters, especially if prices remain high.
On the other hand, price cuts to boost volumes will crimp margins. Cost pressure may also return due to a weakening rupee. Operating margin is currently 19 per cent compared to 27 per cent in the June 2011 quarter, while net margin has fallen from 17 per cent to 12 per cent in the same period.
Tariff worry
Despite its troubles, Gujarat Gas has negligible debt, a healthy dividend paying record and strong return on equity (ROE) at over 30 per cent. But the high ROE could make the company vulnerable to tariff reduction directions from downstream regulator Petroleum and Natural Gas Regulatory Board, along the lines of what it ordered for Delhi-based city gas distributor Indraprastha Gas.
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