IRM Energy Limited IPO (Subscribe)

Highlights

Cadila Pharmaceuticals Limited backed IRM Energy Limited incorporated in 2015, is an Indian city gas distribution (“CGD”) company with operations in Banaskantha (Gujarat), Fatehgarh Sahib (Punjab), Diu & Gir Somnath (Union Territory of Daman and Diu/Gujarat), and Namakkal & Tiruchirappalli (Tamil Nadu).

The company is a value-driven energy enterprise that integrates energy and develops natural gas distribution projects in the geographical areas (GAs) assigned to it for industrial, commercial, residential, and automotive clients. Since 2017, the company has developed their current GAs to strengthen their position as a CGD company. 

According to Crisil report, the company has positioned itself as a source of one of the safest, cleanest, and most cost-effective fuels for households, commercial enterprises, and industrial units, as well as for transportation fuel requirements. The Company was recognized as the ‘City Gas Distribution – Growing Company of the Year 2020’ by Federation of Indian Petroleum Industries (FIPI).

The Company CNG customers comprises of public transport vehicles such as taxis, autorickshaws, and private vehicles such as cars, buses, light goods vehicles and heavy goods vehicles. PNG customers are broadly classified into three segments, which are, industrial PNG (small, medium and large-sized enterprises), commercial PNG (such as hotels, restaurants, bakeries, hostels and community halls) and domestic PNG (predominantly using PNG as cooking gas). As of 30^th June 2023, CNG segment contributes 49.43 pct revenue and PNG segment contributes 46.86 pct revenue.

IRM Energy had 184 Industrial customers, 269 Commercial customers, and 52,454 Domestic clients as of June 30, 2023. The company had 66 CNG fuelling stations throughout its GAs as of June 30, 2023.

Out of Rs. 5,454 mn, the Company would utilize Rs. 3,072 mn of the net proceeds of the new equity issuance for Funding capital expenditure requirements for development of the City Gas Distribution network in the Geographical Areas of Namakkal and Tiruchirappalli (Tamil Nadu) in Fiscal 2024, Fiscal 2025, Fiscal 2026 and Fiscal 2027 and Rs. 1,350 mn towards prepayment or repayment of all or a portion of certain outstanding borrowings availed by the Company.

Key Highlights

• Between Fiscals 2016 and 2020, natural gas consumption in India increased at a compound annual growth rate (CAGR) of 3.8 pct, reaching 176 MMSCMD in Fiscal 2020. Natural gas demand from the CGD industry is expected to expand at a 19-20 pct CAGR between fiscal years 2023 and 2030, reaching 117-120 MMSCMD. With the addition of additional cities to the gas network, demand from each sub-segment, including CNG and PNG (domestic and industrial), is expected to expand at a healthy rate throughout the forecast period. By looking at the industry growth, there is a tremendous opportunity for the company to expand.
• The Company provides a more reliable and environmentally friendly alternative fuel to all of its client segments when compared to rival fuels, and as a result, the company has been able to reach prospective customer segments in the relevant GAs.
• As of June 2023, the Company has two Company-owned and company-operated stations (COCO), 36 Dealers owned and dealers operated stations (DODO), 28 Oil Marketing Companies owned and operated stations also the company has 262 multiple CNG dispensing points across all the CNG filling stations established by them.
• The Company has formed a strategic alliance with Shizuoka Gas Co. Ltd (ShizGas) which is Japan’s 4th largest company by natural gas volume. Pursuant to Their association with ShizGas, the company intend to implement good practices related to natural gas distribution, system engineering, operation and maintenance, and energy saving and CO2 reduction, and share know-how in relation to LNG trailer and satellite tanks.
• IRM Energy also has signed a MoU with Mindra EV Private Limited on August 24, 2022, for setting up an electric vehicle (“EV”) charging infrastructure at DODO Stations and COCO Stations for a period of five years. The Company believes this will enable the creation of an efficient ecosystem for EV charging.
• The Company is the sole distributor of CNG and PNG in the GAs awarded to them, for the period of exclusivity granted pursuant to the PNGRB authorizations. The company has marketing exclusivity for the Diu & Gir Somnath GA through September 2028, and for the Namakkal & Tiruchirappalli GA until March 2030. Marketing exclusivity for the Banaskantha GA and Fatehgarh Sahib GA ended in June 2023 and September 2023, respectively. In addition, the company has been granted network exclusivity rights for all of its GAs for a period of 25 years.
• The Sales of the company has grown by 127 pct CAGR during the period FY21-23 while EBITDA and Profit increased by 28 pct CAGR and 34 pct CAGR over the same period. During FY23, company reported revenues of Rs. 9,800 mn which increased by 93 pct YoY while EBITDA declined by 40 pct YoY to Rs. 1,189 mn as EBITDA margin declined sharply from 39.6 pct in FY22 to 12.1 pct in FY23 due to increase input cost of gas. Profit after tax in FY23 stood at Rs. 631 mn, which declined by 50 pct YoY. During Q1FY24 company sales, EBITDA, Profit increased YoY.

Key Risk

• The Company is dependent on Government policies for allocation of natural gas and cost of gas supplied for our CNG and domestic PNG customers (the Priority Sector). Any reduction in allocation of natural gas or any increase in the cost of gas could adversely affect company’s business, reputation, operations and cash flows.
• The price of natural gas supplied depends on the cost of material consumed and certain external factors. A significant increase in the cost of material consumed or in these external factors will result in an increase in the price of gas supplied.
• The Company’s existing GAs could be open to access for others, following the end of infrastructure and marketing exclusivity as prescribed under the PNGRB authorizations, post which period company would no longer be the sole distributor in these regions, resulting in a potential loss of customers and decrease in its profit margins.

Valuation

At the upper end of the price band, the issue is quoting at PE of 18.62x its FY24 annualized earnings. Considering that it is an emerging player in the CGD space, the Company holds potential and can be held for the long term. Subscribe.

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Disclaimer: The views expressed in the blog are purely based on our research and personal opinion. Although we do not condone misinformation, we do not intend to be regarded as a source of advice or guarantee. Kindly consult an expert before making any decision based on the insights we have provided.