Gujarat Gas Soars 10% After Merger Announcement; IIFL Says There Is No Material Arbitrage

welcome back to midcap radar well the top story of the day is Gujarat gas and the stock is buzzing today as the board has approved the merger as well as the Dem merger plans harandi senior vice president of institutional equities at IFL joins us uh good afternoon Mr D thank you so much for joining us first up you know what is your take on the situation uh you know some the analyst Community is quite divided a few of them have actually gone ahead and upgraded Gujarat gas saying that this particular deal is EPS AC creative but I believe you have a more moderate view of this particular development so I think the deal is great if you view it from shareholders of gspl and government of Gujarat because what it enables is it eliminates the holding company discount that otherwise gspl you know shareholders were cripping about and it also eliminates the web of complex shareholding uh through various and Gujarat state owned entities into the underlying cash generating value operative business of Gujarat gas and to that extent I must congratulate uh the architect of this deal it's a great deal from Gujarat government and gspl shareholders perspective so all full marks to them however if you value the deal or perceive the deal from a minority shareholder of Gujarat gas uh for them uh the merger can be be greatly value ative provided uh there is a sustainability in terms of gas sourcing and apart from the tax shelter which the company might enjoy for a couple of years if the other businesses can add Great Value to it as of now based on the initial discussions with the management over the conference call and our cursory reading it appears that the merger synergies or what you may call as levers for Value creation seem to be quite limited and therefore we prefer to take a more cautious view rather than taking a blindfold view or rather a leap of faith we would like to evaluate the situation as it unfolds over the next few quarters that's the summon substance of our view I think it's a great deal from GSL shareholders perspective but not so great deal when it comes to shareholder of Gujarat gas but Gujarat gas share price H has gone up close to about 10% so the street is clearly you know cheering this transaction uh so you know what is it that you know the street is missing and what would your own Target price be I know you've explained it that why it's negative for minority shareholders but it's it odds with the way the market is reacting today sure so uh uh you know clearly if you were to build in the tax shelter and some amount of ta tax essentially leakages which otherwise were happening on account of gspc selling gas to Gujarat gas there is definitely some accretion to the Ia and to that extent it will be unfair to say that uh there is no gain to Gujarat gas and which is what we have articulated in our note that if you assume a seamless execution that you know 3 four rupees of gas saving Aur to Gujarat gas then fair value for the total Amalgamated entity can be in excess of 700 rupees however for that to unfold one has to Source Gas very efficiently retain the entire benefit not pass it on to price sensitive customers like Mori and uh you know give a very liberal price price to earnings or Eva Bida multiple so probably some investors would like to price such benefit up front rather than uh you know uh they unfolding over a period in time it's it's a perspective haran you know one question from you know when you're talking about the valuation multiple currently Gujarat gas enjoys a valuation multiple based on the regulated CNG business now however you know there is now a volatile trading business that comes into its fold so would you go ahead and temper down the valuation multiple that you give to Gujarat gas as this particular earnings comes into the picture and number two currently on ground how is the situation when you compare Gujarat gas to other sources that Mor players can actually enjoy so uh Gujarat gas traditionally has been trading at a significantly higher multiples for its a great Revenue model for example it is insulated from the EV risk which otherwise igl or mgl were susceptible to here is an industrial portfolio which enjoys relatively higher pricing in terms of uh uh rather pricing freedom in terms of sourcing the gas and pricing it that however may change over a period in time and therefore in my opinion the long-term Eva multiple May converge to that of igl or ml so that something is you know we'll keenly watch out for as to how the amalgamation plays out in terms of sourcing of gas and eventual pricing of the gas as far as other businesses are concerned we it's uh uh you know let's see you know what additional information emerges uh is to how do they restructure the LG terminal where currently they are a minority shareholder and how uh can they unlock value for the minority shareholders so we'll keep a watch we'll gather more data points and take more educated call rather than uh reacting based on a sketchy information which is available so you know which are what is the pecking order for you as far as the oil and gas space is concerned which are topics and which are the ones you don't prefer so at the moment we find extremely high value in terms of the psus which is the Upstream as well as the downstream omcs you find the payoffs to be asymmetric the uh upside to downside ratio is extremely favorable for an value investor and to that extent we like all the five if I were to pick two probably I will pick bpcl and OMC at this price okay as we leave the conversation here thank you very much for joining in uh the nift's