Gujarat State Petronet — GSPC Group Merger Scheme, Improved Risk Reward Drives Nirmal Bang's 'Buy' Upgrade

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HDFC Securities Institutional Equities

We are raising Gujarat State Petronet Ltd. from Hold to Buy due to improved risk reward based on 27% correction in the stock in the last three months, and our unchanged estimates and SOTP-based target price at Rs 364. This is derived with 10% discount for policy risk in GSPL standalone transportation valuation using DCF (risk factor added due to policy uncertainty/risk to volume due to volatile gas prices).

This also includes the unchanged value of its 54.17% stake in Gujarat Gas Ltd. at Rs 371/share based on our target price for Gujarat Gas (~nil Hold-Co. Discount). The stock trades at 1.28x FY27E price/book)

GSPL is a Buy also based on Gujarat State Petroleum Corporation Ltd. group merger scheme. This is based on the value implied for GSPL post the merger and demerger (next year) transaction (GSPLpt).

The value of GSPLpt is derived by adding up-

1. the value of 100 Gujarat Gas shares (at current market price), and

2. 33 GSPL transmission Ltd shares, to be allotted to a GSPL shareholder, and reducing the cost of acquiring 130 GSPL shares at the CMP.

GSPL is worth Rs 344/share based on the above method. The stress valuation of GSPL of Rs 287 under this method assuming a 20% downside in Gujarat Gas CMP also implies upside of 6% from GSPL’s CMP.

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