Gujarat State Petronet to buy 28.4% stake in Gujarat Gas, funding via debt

Gujarat State Petronet Ltd, the Natural gas transmission company is slated to buy 28.4% stake in Gujarat Gas from Gujarat State Petroleum Corporation, taking their stake to 54% from current 25.8%, making it a subsidiary.

Throwing more light on the development, Manish Seth, CFO of Gujarat State Petronet Ltd told CNBC-TV18 that the deal was not with a motive to bail out GSPC.

“The company will have to take short-term debt to fund the deal and will be paying Rs 3200 crore for the deal”, he said.

“Post the deal, the debt will increase from Rs 250 crore to Rs 3500 crore”, he said.

Below is the verbatim transcript of the interview.

Latha: The market is reading this as an effort on your part to bail out the parent Gujarat State Petroleum Corporation (GSPC). Is that right?

A: I do not think that is the right perspective. Gujarat State Petronet (GSPL) is already a promoter of Gujarat Gas (GGL). We are a complimentary business, we enjoy a lot of synergy in the group. GSPC, it wants to cut down its stake in GGL and it comes at a time when we also enjoy a lot of synergy. So it makes a lot of sense to buy this asset at this point of time.

Sonia: How much will you be paying to buy the asset?

A: Roughly it should be in the range of Rs 3,200 crore.

Sonia: How will you fund this Rs 3,200 crore?

A: We have internal accruals, plus we will be borrowing money in the short term which will be refinanced subsequently.

Latha: Since this is all a group company, you would have had synergies anyway. However, now you will have to take on debt. So immediately how much of an EPS hit will that be?

A: You are right, in the short term we will have to take some debt. In fact if you remember, when we took over GGL, the same thing had played out that time also. In the short term, any buyout would require some amount of debt infusion, but given our strong balance sheet and strong cash flows, I think we can easily take that debt. I think we in the past also, a lot of investors have been telling us that it would make better sense if GGL were to be under the full control of GSPL.

Latha: What will be the gains if you take over, how will it add, after all the debt is over what extra will it add and by when?

A: Broadly I can tell you that GGL, currently from the last reported figures, roughly 6 million is the gas that they transport and with the new circles that they have got and the new circles that are bidding, I think volumes can easily double within next 6-8 years. So that is the order of volume business. All that volume which goes through GGL automatically comes into GSPL network. So, I think those numbers will speak for themselves.

Sonia: In terms of debt, how much will the debt on GSPL’s books be post this transaction?

A: Right now we have hardly any debt. We have only Rs 250 crore of debt. So after this, debt will be roughly Rs 3,500 crore. We will still be below 1: 1 debt equity.

Latha: After this takeover, or rather this stake buy, it has already become 54 percent subsidiary of yours. Will there be any interest in buying more stake?

A: I do not think. Basically the stake which was available in the market was this, so, this is what we were interested in.

Sonia: You said you will be at 1:1 debt equity even after this.

A: Below 1.

Sonia: Below 1:1 on GSPL, right?

A: Yes.

Sonia: Will GSPC get reverse merged with GSPL at any point in time?

A: I have not heard any specific such thing.

Sonia: What will the debt on GSPC be? What is the debt currently on GSPC?

A: I will not be having those figures right now.

Latha: Now with Gujarat Gas becoming your subsidiary, that will have some implications on your balance sheet, isn’t it?

A: It was already associate company. So, figures were already reflected in our balance sheet. So they will continue.

Latha: Dividend wise you will have more gains?

A: Surely, Gujarat Gas has been paying healthy dividend. In fact after it becomes our subsidy 50 percent plus, we will get setup of the dividend that we get from our subsidiary and which we pay to the others.

Sonia: You are currently buying 28 percent stake, will you at any point in time look to buy more?

A: I do not think right now we are looking for any further stake.

Sonia: Since your debt will pile up quite a bit, we are looking at higher interest costs as well. What would the average be right now, you are hardly sitting on any debt on GSPL, but going ahead, what are we looking at in terms of high interest costs and the impact that it could have on overall earnings?

A: As I mentioned, roughly Rs 250-300 crore will be the interest implication on account of the debt we will take.

Latha: And that would likely be a five year debt or something like that? You will have a Rs 300 crore coming in.

A: Yes. So immediately we will be borrowing for short term and then we will look for replacement of funds through our internal accruals plus debt.