Gujarat Gas Co Ltd will be merged with the city gas distribution business of the State-owned GSPC Group to create Asia’s largest listed gas distributor — GSPC Distribution Networks Ltd (GDNL) — this fiscal.

There are concerns about the profitability of the new venture, given the high debt and other operational woes of GSPC Gas, the distribution arm of the GSPC Group. At the same time, there are chances of GDNL emerging stronger in the medium to long term.

Various options

Till a couple of years ago, Gujarat Gas, then a BG Group company, was an investors’ darling, earning the best margins in the gas distribution sector. But things have changed a lot since then.

A change in the way domestic gas is allocated saw Gujarat Gas depending on costly LNG (liquefied natural gas) for meeting nearly two-third of its 2.5-3 million standard cubic metre (mscmd) sales a day.

Though the stock is quoting at a higher price, the company is now as profitable as its peer Indraprastha Gas Ltd. On the brighter side, Gujarat Gas has a debt-free balance sheet with around ₹500 crore in reserve.

But things are different in GSPC Gas, which is more dependent on LNG to market over 5 mscmd gas. The company lost money in the first three quarters of the last fiscal due to the twin impact of the falling rupee and a spurt in LNG prices. The company failed to pass on the rising costs to consumers.

To add to the problem, GDNL (the merged entity) will inherit nearly ₹2,400 crore of debt accumulated by GSPC.

Clearly, GDNL will start the journey with a stretched balance sheet. Of course, the company has the option of either diluting some stake or tying up with a strategic partner to pare debt. But market sources say no such plan is under consideration at this juncture.

LNG sourcing advantage

But GDNL may emerge stronger even without exercising any such option.

To start with, GSPC Gas may come back in black this fiscal. This is due to recent allocation of 0.9 mscmd domestic gas, to cater to the regulated auto-fuel (compressed natural gas) and household (piped natural gas) segments. This, coupled with a strengthening of the rupee and a meltdown in spot LNG prices, may reduce the pressure on the company’s balance sheet.

The cost of gas may further come down if the merged entity starts flexing its muscle as the single largest buyer of LNG in the country. Together, Gujarat Gas and GSPC Gas now require 5.5-6 mscmd of LNG. With the scheduled expansion of services by GDNL, the procurement will shoot up to 7 mscmd.

There is another perspective to this story. As an unlisted entity, GSPC Gas may have had to shoulder social obligations by keeping prices low. But a listed GDNL may not have that luxury, if it is to avoid taking a hit on market capitalisation.

Related Topics
comment COMMENT NOW