Will BG's exit affect Gujarat Gas? - Views on News from Equitymaster

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Will BG's exit affect Gujarat Gas?

Nov 23, 2011

The recent reports of British Gas (BG) selling a stake in Gujarat Gas (GGAS), the country's largest private sector gas distribution company in terms of sales volume, has created ripples in the energy sector. It is important to note that BG Energy controls 65% stake in Gujarat Gas, which it intends to liquidate over a period of time. Gujarat Gas currently distributes approximately 3.5 million metric standard cubic meter per day (mmscmd) of natural gas in Bahruch, Ankleshwar and Surat (all three regions in Gujarat). The company caters to around 0.35 m consumers in industrial, domestic and CNG segment, operates 40 odd CNG stations and manages a pipeline network close to 4,000 km.

Let us view how this will change the dynamics of the game for the major players in the Indian gas sector.

Fundamentally, it's a setback for Gujarat Gas that was enjoying premium on account of having a promoter like BG Group. Especially because domestic gas sources are on a decline. Due to this the company needs to go for spot and long term regasified liquid natural gas (RLNG) contracts from foreign suppliers. The exit of BG Group will certainly take away some of the bargaining power of Gujarat Gas. It would also hamper the inherent advantage in contracting LNG supplies that it has been enjoying in the past.

Gas Authority of India Ltd. (GAIL), the country's largest gas transmission company, has expressed interest in buying the stake. Acquiring an interest in Gujarat Gas could be a good strategic fit for GAIL, which already has a distribution system at Vadodara in Gujarat in partnership with local civic body. If GAIL manages to grab a share, it will get access to Gujarat Gas's strong network of pipelines and customers, thus strengthening its position in city gas distribution (CGD) domain. Besides, it will be a befitting response to its competitor Reliance Industries Ltd.'s (RIL) attempt to enter the CGD through its joint venture with BP (British Petroleum).

GAIL is expected to face tough competition from Adani Gas and Gujarat State Petroleum Corporation (GSPC) for the purchase of stake. It is important to note here that GSPC being majorly owned by Gujarat Government is expected to gain state government's support in the matter.

To conclude, we believe that this development is a huge negative for Gujarat Gas's business operations. The concern is evident from the fact the stock price slipped by 6% within a day of the confirmation of stake sale by Gujarat Gas. As far as potential owners are concerned, while having a stake in GGAS will be positive from operational point of view, with suitors like GAIL, Adani Gas, Reliance Group, GSPC gas and BP, we believe that owning a stake in Gujarat Gas will not come cheap.

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