IRM Energy Limited IPO

About the company:

IRM Energy is a city gas distribution (“CGD”) company in India, with operations at Banaskantha (Gujarat), Fatehgarh Sahib (Punjab), Diu & Gir Somnath (Union Territory of Daman and Diu/Gujarat), and Namakkal & Tiruchirappalli (Tamil Nadu), engaged in the business of laying, building, operating and expanding the city or local natural gas distribution network. It develops natural gas distribution projects in the geographical areas (“GAs”) allotted to them for industrial, commercial, domestic and automobile customers.
The company supplies natural gas to two primary set of customer segments. The customer segments are as set out below:

CNG (Compressed Natural Gas): The customers include operators of public transport vehicles such as taxis, auto-rickshaws, and private vehicles such as cars, buses, light goods vehicles and heavy goods vehicles.
PNG (Piped Natural Gas): The 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).
IRM Energy has positioned itself as the provider of one of the safest, cleanest and most cost-effective fuels for households, commercial establishments and industrial units as well as for fuel requirements in transport segment. (Source: CRISIL Report).

Competitive Strengths of the company includes:

- Exclusivity in CNG and PNG supply in the awarded Gas
- Successful development and operation of CGD business
- Diverse customer portfolio and distribution network of CNG and PNG
- Strong parentage, experienced board and management team and strong execution team
- Technology adoption and digital initiatives for efficient and optimal operations
- Connectivity to gas pipelines and establishing cost-effective gas sourcing arrangements
- Strong financial performance with consistent growth and profitability supported by healthy operating efficiency and favourable regulations

Business Strategies

- Expand the company’s presence in existing and newer GAs through an improved captive distribution channel
- Infrastructure roll-out for development and operation of the new licensed GA of Namakkal &     Tiruchirappalli, Tamil Nadu
- Technology adoption to increase operational efficiency and enhance customer value
- Business integration for transition into a complete energy solution provider
- Continue to focus on sourcing reliable and cost-effective gas from leading Gas Suppliers
- PNGRB Bidding and Authorization Process

Certain key performance indicators of the company’s financial performance are listed below:

The company is experiencing an upward trend in its revenue from operations. In FY23, its sales saw a remarkable 90% year-on-year increase. However, when it comes to profits, there was some improvement in FY22, but FY23 was a disappointment as it declined by 50%. This fall can be attributed to a significant increase in input gas costs as well as lower profits earned by joint control entities. The company's borrowings are gradually increasing, but it is essential to determine that Rs 135 crores from the IPO proceeds will be used for loan repayment, which will reduce their debt.

Risks

- The company is dependent on third parties for sourcing and transportation of natural gas, with the top seven suppliers accounting for 100% of total purchases. Any disruption in the supply chain could lead to a failure in the supply of natural gas.

- The company requires 15-18 months to generate revenue in our GAs. Any further delay in realizing revenue may affect its projections, results of 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.

- Expansion of the company’s business is primarily dependent on GAs awarded by governmental authorities. Any inability to enter new markets or changes in government policies could affect the company's growth prospects.

IRM Energy is the smallest player among its listed peers, with a topline of just over Rs 1,000 crore. In terms of valuation, the company is trading at a PE ratio of 24 times as of FY23 (at upper price band), while its listed peers have PE ratios ranging between 12-19 times. It’s important to exclude Adani Gas, which operates at a much larger scale.

Conclusion

IRM Energy operates in a promising industry, with the demand for natural gas expected to continue rising. The company's financial performance has generally been strong, barring FY23, where it faced challenges due to high input costs. In terms of valuation, IRM Energy appears to be on the expensive side when compared to its listed peers. For long-term investors, it is advisable to exercise patience and consider investing in the company when its valuations become more favorable.