Stock Fundamentals

Adani Gas open offer: Right time to exit

Anand Kalyanaraman | Updated on October 20, 2019 Published on October 19, 2019

The stock’s run-up seems to have more than factored in the positives

Last week, French energy major Total announced it will acquire 37.4 per cent stake in city gas distributor Adani Gas. This acquisition will be done in two steps — first through a tender offer to public shareholders to acquire up to 25.2 per cent of shares at ₹ 149.63 a share and then through purchase of the residual shares from the Adani family.

As of September 2019, the promoter group, ie, the Adani family, owns 74.8 per cent stake in Adani Gas, and public shareholders own the remaining 25.2 per cent. According to a press release, the Adani family and Total ultimately shall hold 37.4 per cent each, and public shareholders shall hold the remaining 25.2 per cent.

What this means is that after Total acquires an aggregate of 37.4 per cent — first from the public shareholders (up to 25.2 per cent) and then the remaining from the Adani family — the family will again sell some of it shares to the public to reinstate public shareholding to 25.2 per cent. The last step — the Adani family selling its shares to the public — is likely necessitated by the SEBI rule that public shareholding in a listed company has to be at least 25 per cent.

In the near term, public shareholders in Adani Gas will be given the option of selling their shares to Total at ₹ 149.63 a share in an open offer. Should public shareholders tender their shares to Total in this offer? The answer seems yes. Here’s why.

Runaway rally

Since its listing last November at ₹72 a share, the Adani Gas stock has had a runaway rally — more than doubling to ₹ 151 now. Compared with its peers in the city gas distribution (CGD) business, Adani Gas listed at a valuation premium that has only widened sharply since then. At the current price level, the Adani Gas stock trades at about 66 times its trailing 12-month earnings, far higher than that of peers such as Indraprastha Gas (31 times), Mahanagar Gas (16 times) and Gujarat Gas (29 times).

The stock’s rally accelerated over the past few months when news about the stake sale to Total started doing the rounds. The deal announcement last week led to another spike in the stock price, taking it above the open offer price of ₹149.63 a share.

 

While Adani Gas has strong business prospects, as reflected in its declared results for the year-ended March 2019 and the June 2019 quarter, the positives seem to have been more than factored in the stock price. Investors can consider booking profits, given the high valuation premium. With the ongoing market volatility, the stock price and its high valuation premium could correct after the open offer is over.

Public shareholders can tender their shares in the open offer at ₹149.63 a share. Alternatively, if the market price is higher than the open offer price, as it is now (₹ 151), they could also consider selling in the secondary market. The tax on gains will likely be the same, given that the open offer is also expected to be through the stock exchange platform and subject to securities transaction tax (STT). In case the open offer is not through the stock exchange platform and thus not subject to STT, investors might be better off selling directly in the market (depending on the market price) for more favourable tax treatment.

If Total later acquires shares from the promoters (Adani family) at a price higher than the open offer price, public shareholders who tender their shares in the open offer will be paid the difference.

Good performance

Adani Gas has performed quite well in the past. In FY 19, the company’s volumes grew 13 per cent y-o-y and net profit rose 39 per cent to ₹ 229 crore. In the June 2019 quarter, volumes grew 9 per cent y-o-y and net profit increased 43 per cent y-o-y to ₹79 crore.

 

The company operates in five geographical areas (GAs), including Ahmedabad, Faridabad and Vadodara. It struck big in the ninth and 10th round of CGD bids, winning 14 GAs. Adani Gas also has a joint venture with Indian Oil that operates in eight GAs and has won bids for 11 GAs. In all, Adani Gas has a presence in 38 GAs — 13 operational and 25 bids won. The company plans to invest about ₹ 10,000 crore in the CGD business over the next eight years.

While Adani Gas is well-positioned, growth from the new GAs will take a few years to pan out. As it stands, the company’s revenue and profit still have a lot of catching up to do to match up to that of peers. But the stock’s valuation has run far ahead. It’s a good time for public shareholders to take profits and wait for attractive entry points.

Published on October 19, 2019
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