IPO Analysis: IRM Energy Limited

IPO Analysis of IRM Energy Limited

IRM 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. They are an integrated value driven energy enterprise, developing natural gas distribution projects in the geographical areas (“GAs”) allotted to for industrial, commercial, domestic and automobile customers, and have built their competency as a CGD company by development of existing GAs since 2017.  Company focus on meeting the energy needs of customers in GAs through pipelines and CNG station network at a competitive price, while maintaining high safety standards. Company has positioned themselves 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. Company distribute CNG for use in motor vehicles and PNG for use by domestic households as well as for commercial and industrial units. They were recognized as the ‘City Gas Distribution - Growing Company of the Year 2020’ by Federation of Indian Petroleum Industries (“FIPI”). Due to their competitive gas price and optimized operational expenditure, company can offer gas to PNG industrial customers at a viable price in the market and enable the PNG industrial customers to switch from other alternate fuels (coal and furnace oils) to natural gas. Compared with competitive fuels, company provide a more reliable and environment-friendly alternative fuel to all customer segments, and hence have been able to tap potential customer segments in the respective GAs. Further, they are committed to health and safety and have established safety management systems which ensures safe, reliable and uninterrupted distribution of natural gas to customers, with a focus on systemic minimization of health and safety risks.

Company commenced its operations in July 2017, pursuant to the receipt of authorizations for the GAs awarded for Banaskantha and Fatehgarh Sahib, in the sixth round of bidding conducted by the Petroleum and Natural Gas Regulatory Board (“PNGRB”) in July 2016.

In July 2016, in the sixth round of bidding, they received authorization to lay, build, operate and expand the city or local natural gas network with a minimum work permit (“MWP”) to create an infrastructure of 1,800 inch kms gas pipeline (consisting of medium density polyethene (“MDPE”) pipelines and steel pipelines) and 28,021 PNG domestic connections in Banaskantha; and 650 inch kms gas pipeline (consisting of MDPE pipelines and steel pipelines), and 5,905 PNG domestic connections in Fatehgarh Sahib. Thereafter, they received the authorization for the GA of Diu & Gir Somnath in the ninth round of bidding conducted in September 2018, for creating the infrastructure of 188 inch kms gas pipeline (consisting of steel pipelines), 91,000 PNG domestic connections and 35 CNG stations in Diu & Gir Somnath. More recently, they have received the authorization for the GA of Namakkal & Tiruchirappalli in the eleventh round of bidding conducted by PNGRB in January 2022 for creating the infrastructure of 1,450 inch kms gas pipeline (consisting of steel pipelines), 17,74,000 PNG domestic connections and 290 CNG stations in Namakkal & Tiruchirappalli.

Company served 168 industrial customers, 88 industrial customers, 96 industrial customers, 59 industrial customers and 30 industrial customers as at September 30, 2022, September 30, 2021, March 31, 2022, March 31, 2021, and March 31, 2020, respectively. Further, they served 202 commercial customers, 145 commercial customers, 179 commercial customers, 125 commercial customers and 90 commercial customers as at September 30, 2022, September 30, 2021, March 31, 2022, March 31, 2021 and March 31, 2020, respectively; and 43,183 domestic customers, 29,237 domestic customers, 35,725 domestic customers, 25,626 domestic customers and 18,382 domestic customers as at September 30, 2022, September 30, 2021, March 31, 2022, March 31, 2021 and March 31, 2020, respectively.

They have established a network of 56 CNG filling stations, comprising 2 stations owned and operated by the Company (“COCO Stations”), 30 CNG stations owned and operated by dealers (“DODO Stations”) and 24 CNG stations owned and operated by oil marketing companies (“OMC Stations”) as at September 30, 2022. Further, their network consisted of (i) 2 COCO Stations, 25 DODO Stations and 22 OMC Stations as at September 30, 2021; (ii) 2 COCO Stations, 27 DODO Stations and 23 OMC Stations as at March 31, 2022; (iii) 2 COCO Stations, 22 DODO Stations and 21 OMC Stations as at March 31, 2021; and (iv) 2 COCO Stations, 15 DODO Stations and 16 OMC Stations as at March 31, 2020. In aggregate, they have (i) 216 CNG station dispensing points across all GAs as at September 30, 2022; (ii) 188 CNG station dispensing points across all GAs as at September 30, 2021; (iii) 205 CNG station dispensing points across all GAs as at March 31, 2022; (iv) 170 CNG station dispensing points across all GAs as at March 31, 2021; and (v) 139 CNG station dispensing points across all GAs as at March 31, 2020. The COCO Stations and DODO Stations include the ‘IRM Energy’ branding to position and strengthen thier corporate identity.

Industry Research:

India is expected to grow at a faster clip than its peers, driven by stronger domestic demand. Investment prospects are optimistic given the government’s capex push, progress of the Production-Linked Incentive (PLI) scheme, healthier corporate balance sheets, and a well-capitalized banking sector with low non-performing assets (NPAs). That said, CRISIL MI&A Consulting has recently revised its real GDP growth projection for India to 7% this fiscal, with downside risks of heightened geopolitical tensions. It still expects India to remain the fastest-growing economy. Consumer price index (CPI) inflation moderated to 5.5% in fiscal 2022 from 6.2% the previous year. However, the fall was largely driven by food (3.8% vs 7.7%). The other two components, viz., fuel (11.3% vs 2.7%) and core (6.0% vs 5.5%) saw inflation rise. Fuel inflation is projected to stay high due to the sharp rise in crude oil prices. CRISIL expect CPI inflation to come in at 6.8%, on average, this fiscal.

India is not only third-largest energy consumer in the world after China and the US but also one of the fastest growing energy consumers among its peers. Moreover, India has annually been reiterating its commitment to bring down carbon emissions as pledged at the Paris Agreement. The share of natural gas in India’s primary energy mix has increased from 6.3% in 2020 to 6.7% 2021. This is still way below the global average share of 24%, in the global energy use. The Indian government has been consistently taking steps to develop natural gas infrastructure across the country. As of June 30, 2022, the country had 21,946 km of natural gas pipelines in operation. It also plans to develop a vibrant gas market across the country through 13,262 km of additional pipelines, to complete the National Gas Grid (NGG). Development of the NGG would connect all the major demand and supply centres in India. In addition, the government is taking various measures to promote use and distributorship of liquified natural gas (LNG) through establishment/capacity enhancements of LNG terminals and regasification. It aims to create regasification capacity of 70 mmtpa (million metric ton per annum) by 2030 and 100 mmtpa by 2040. 

Natural gas consumption in India clocked a compound annual growth rate (CAGR) of 3.8% between fiscals 2016 and 2020, rising to ~176 MMSCMD in fiscal 2020. However, it dipped 5% in fiscal 2021 due to pandemic related challenges such as constrained transportation and industrial activities.Demand rose again ~4.8% in fiscal 2022. Growth was driven by higher offtake from end-use industries as economic and industrial activity and personal mobility gained traction. Segments such as CGD saw healthy growth. However, demand from the power segment declined as higher LNG prices affected the load factor (PLF) of gas-based power plants. Natural gas demand is estimated to increase in fiscal 2023, driven by strong growth in the CGD and fertiliser sectors.

The petrochemical sector is one of the fastest growing sectors primarily because of increasing use of plastics, which is also the major demand driver for the sector. A strong demand profile indicates robust gas demand potential from the sector. However, the sector does not receive any priority allocation of domestic gas production and hence primarily relies on LNG. CRISIL Research expects demand for natural gas from the petrochemical sector to increase 9-11% between fiscals 2022 and 2030, because of capacity addition at HMEL, Bhatinda (a dual-feed cracker with ethylene capacity, which is expected to come online by the end of fiscal 2023), and HPCL, Barmer (dual-feed capacity expected to be commissioned in fiscal 2025) during the forecast period.

Over the next five years, capacity additions in petrochemicals and methanol by Assam Petro-Chemicals would support demand for natural gas from petrochemicals. In fiscal 2023, gas consumption is expected to decline 19-21% as higher gas prices will reduce gas competitiveness vis-à-vis naphtha, thereby restricting any steep rise in gas demand from the petrochemical segment. Since refineries come under non-priority sectors for domestic gas allocation, we believe gas demand from this sector will be entirely met through imports by fiscal 2030. India’s total proven reserves of natural gas were estimated at 1,373 billion cubic meters (bcm) as of fiscal 2021, with 64% located in offshore gas fields. Moreover, natural gas discoveries have been made by Reliance Industries Ltd. (RIL), ONGC and Gujarat State Petroleum Corporation Ltd (GSPC) in the offshore Krishna-Godavari (KG) basin area of Andhra Pradesh. Onshore reserves are primarily located in Rajasthan and the north-eastern states of Assam, Nagaland, Arunachal Pradesh, and Tripura.

Domestic natural gas production is expected to rise 5-7% to 123-128 MMSCMD during the forecast period of fiscals 2022 to 2027 driven by new production from the Daman and KG fields of ONGC and deep-water fields of ONGC and RIL on the eastern offshore. This will include production from the KG basin from Vashistha, KG-D5, R-cluster and satellite fields (a part of KG D6 field). The government's steps to attract investments and improve production through the new gas-pricing mechanism are expected to expedite the development of new fields. The mechanism provides pricing freedom for gas produced from HPHT deep-water and ultra-deep-water areas. New discoveries are expected in KG basin post fiscal 2027 from RIL (UDW1 block under exploration), as well as ONGC (Clusters 1 & 3 of 98 DWN/2 block). Despite new discoveries, production will stagnate post fiscal 2027 as existing fields peak and start declining in terms of output.

Demand for natural gas is expected to rise in the future, propelled by environmental concerns, implementation of gas exchange and support from domestic energy companies to grow infrastructure. In 2009, Indian gas regulator PNGRB started authorising entities for laying, operating, and expanding (City Gas Distribution) CGD infrastructure for supplying gas to end-users in identified authorised GAs. To date, the PNGRB has granted authorisation to entities for developing CGD infrastructure in ~295 geographical areas through 12 rounds (including 11A) of auctions under competitive bidding. Over the years, private and public player participation has increased CGD coverage to 632 districts. Most of the northern and western states, and some parts along the coastal southern and eastern regions of the country have been covered under CGD infrastructure.

Investment Rationale:

Exclusivity in CNG and PNG supply in the awarded Geographical Areas (GAs):

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. They have marketing exclusivity until June 2023 for the Banaskantha GA, until September 2023 for the Fatehgarh Sahib GA, until September 2028 for the Diu & Gir Somnath GA, and until March 2030 for Namakkal & Tiruchirappalli GA, recently acquired in the eleventh round of bidding. They have also been granted network exclusivity rights of 25 years for infrastructure creation for all our GAs, including laying down of pipelines and CNG distribution network within their GAs pursuant to the authorization received.

Successful development and operation of CGD business:

They have successfully built and operated CNG and PNG distribution system in the GAs awarded to them, and also set up thier supplementary network of pipelines and CNG stations. The image below represents the details in relation to the minimum work permit (“MWP”) commitments fulfilled by the Company as at September 30, 2022.

Diverse customer portfolio and distribution network of CNG and PNG:

Company has established strong relationships through collaborative efforts to a diverse customer base including industrial, commercial and domestic customers. They provide competitive offerings while maintaining a customer-centric approach and making continuous efforts to upgrade their services, by leveraging technology across all customer operations. They have successfully established a distribution network of CNG and PNG to customers and served 168 industrial customers, 88 industrial customers, 96 industrial customers, 59 industrial customers and 30 industrial customers as at September 30, 2022, September 30, 2021, March 31, 2022, March 31, 2021, and March 31, 2020, respectively. Further, thay served 202 commercial customers, 145 commercial customers, 179 commercial customers, 125 commercial customers and 90 commercial customers as at September 30, 2022, September 30, 2021, March 31, 2022, March 31, 2021 and March 31, 2020, respectively; and 43,183 domestic customers, 29,237 domestic customers, 35,725 domestic customers, 25,626 domestic customers and 18,382 domestic customers as at September 30, 2022, September 30, 2021, March 31, 2022, March 31, 2021 and March 31, 2020, respectively. Their dynamic business model ensures that they are abreast of the changing needs of customers, with a focus on innovation and technology adaptation. Their customer base across various industries and at varied geographies reduces dependence on any one industry or location and also provides a natural hedge against market instability in a particular industry or location. Further, we believe that the strong emphasis of the Government on the expansion of the CGD network across the country will result in a favourable demand outlook among their customers.

Technology adoption and digital initiatives for efficient and optimal operations:

Company has laid an optimal capacity steel pipeline network from the cross-country pipeline available in all their GAs, to cater to both CNG and PNG demands in the respective GAs. They are focused on implementing the latest engineering practices in business. For instance, They have implemented supervisory control and data acquisition (“SCADA”) at all operational CNG stations, to establish automation at the CNG stations. They have implemented Radio Frequency Identification (“RFID”) Writing, Detection and Annunciation System, which aids in digitally identifying the hydrotesting due date of CNG cylinders installed on-board vehicles and helps in reducing the probability of fatal incidents at CNG stations. They have developed a web-based application for capturing geo-tagged points and gas assets and their attributes in real time including an incident report module. For the fast adoption of PNG in steel re-rolling mills in Mandi Gobindgarh, Fatehgarh Sahib, they awarded the technology study assignment to Punjab State Council for Science and Technology, for setting up three model steel re-rolling plants of small, medium and large sizes running on PNG for identification of optimal burners, recuperators and automation to increase the fuel efficiency and reduce per ton fuel cost.

Connectivity to gas pipelines and establishing cost-effective gas sourcing arrangements:

They have strategically acquired GAs with connectivity to cross-country natural gas pipelines within the GA boundary, which reduces the cost of transportation. For instance, GAIL’s Dadri-Bawana Nangal gas pipeline passes through Fatehgarh Sahib, whereas the Gujarat State Petronet Limited (“GSPL”) gas pipeline passes through Banaskantha and Diu & Gir Somnath, and the Indian Oil Corporation Limited’s Ennore Tuticorin pipeline passes through Namakkal & Tiruchirappalli. Their mid to long- term GSPAs with gas suppliers such as GAIL and RIL enable them to source gas at reasonable pricing as well as seamless supply of gas to their downstream CGD networks.

Continue to focus on sourcing reliable and cost-effective gas from leading Gas Suppliers:

Company have a strategic gas sourcing policy in place, which encompasses index linkages, gas procurement from high pressure high temperature fields, reliance on diversified portfolio of gas contracts, and enables them in efficient cost management. They will continue to monitor the cost of natural gas and endeavour to source natural gas in the most cost- effective manner from various vendors. They have also entered into mid to long-term gas souring agreements with GAIL and RIL. Further, company intend to explore gas sourcing opportunities from ShizGas, for sourcing of gas from outside of India. They are evaluating the opportunities with ShizGas to import LNG into, and wholesale R-LNG, within India through bilateral contracts and on gas exchange platform. company believe that this will not only help them to source R-LNG at competitive price, but also will open up new growth opportunities to tap the natural gas market in India.

Key Management Personnel:

Maheswar Sahu

Maheswar Sahu is a Non-Executive Director of our Company and the Chairman of the Board of Directors of our Company. He holds a Bachelor of Science degree in electrical engineering from Regional Engineering College, Rourkela. He also holds a Master of Social Science degree from the University of Birmingham. He joined Indian Administrative Service (IAS) in 1980. He has served the Government of India and Government of Gujarat in various capacities for more than three decades before retiring as Additional Chief Secretary to Government of India, Industries and Mines Department (Industries & Mines), Sachivalaya, Gandhinagar, Gujarat. He has 33 years of active involvement in government departments handling various profiles and PSU management. At present he is on the board of directors of listed companies as an Independent Director.

Dr. Rajiv Indravadan Modi

Dr. Rajiv Indravadan Modi is the Promoter and Non- Executive Director of our Company. He holds a Bachelor of Technology in chemical engineering from Indian Institute of Technology, Bombay. He also holds a diploma in Biochemical Engineering form University College London and a degree of a Doctor of Philosophy (Biological Sciences) from University of Michigan. He is a fellow member at Indian National Academy of Engineering. He also serves as the Chairman of Board of Governors of IIT Guwahati and Chairperson of the Board of Governors of IIT Gandhinagar, Gujarat. He is also a member of the Board of Governors of the Academy of Scientific and Innovative Research. He has more than thirty years of experience as an industrialist in the pharmaceuticals industry and at present he is the chairman and managing director of Cadila Pharmaceuticals Limited.

Amitabha Banerjee

Amitabha Banerjee is a Non- Executive Director of our Company. He holds a Bachelor of Commerce Honours and Master of Commerce degrees from the University of Calcutta. He is an associate member of the Institute of Cost Accountants of India and an associate member of the International Institute of Management Sciences. He is currently associated with Cadila Pharmaceuticals Limited and was previously associated with Tyre Corporation of India Limited as a Manager (Finance and MIS) and Rajinder Steels Limited as General Manager (Finance and Accounts). He has 42 years of experience in finance and accounts.

Badri Narayan Mahapatra

Badri Narayan Mahapatra is a Non- Executive Director of our Company. He holds a Masters Diploma in Personnel Management and Industrial Relations from Symbiosis Institute of Management Studies. He also holds a Professional Diploma in Human Resource Development from Centre for Management Education, All India Management Association. He was previously associated with Gujarat Venture Finance Limited as an Assistant Vice President. He is the managing director of Sanguine Management Service Private Limited and he is also on the Board of Directors of Enertech Distribution Management Private Limited. He has 22 years of experience with 7 years of experience in personnel and administration and 15 years of experience in entrepreneurship.

Chikmagalur Kalasheety Gopal

Chikmagalur Kalasheety Gopal is a Non- Executive Independent Director of our Company. He holds a Bachelor of Fisheries Science and a Master of Fisheries Sciences degrees from the University of Agricultural Sciences, Bangalore. He is a Certified Associate of the Indian Institute of Bankers. He was previously associated with Corporation Bank in the role of a General Manager. He has experience of over 35 years in banking, at various levels, including over 4 years of experience as a General Manager in the erstwhile Corporation Bank (now merged with Union Bank of India).

Anand Mohan Tiwari

Anand Mohan Tiwari is a Non- Executive Independent Director of our Company. He holds a Bachelor of Science and Master of Science degrees from Banaras Hindu University. He also holds a Master of Business Administration from University of Ljubljana. He joined Indian Administrative Service (IAS) in 1985 and he has served for 15 years in the social sector including in areas of women’s empowerment, rural development, tribal development and education. He also has experience in the Petro- Chemical Industry by serving as the Managing Director of Gujarat Narmada Valley Fertilizer Company, Gujarat Alkalies & Chemicals Limited, and Gujarat State Fertilizer & Chemicals Ltd.

Geeta Amit Goradia

Geeta Amit Goradia is a Non- Executive Independent Director of our Company. She holds a Bachelor of Commerce degree from Maharaja Sayajirao University of Baroda. She holds a Master of Arts degree in Economics from Maharaja Sayajirao University of Baroda. She also holds a degree of LL.B. from Maharaja Sayajirao University of Baroda. She is the Chairperson of the FICCI Gujarat State Counsel for the year 2022. She held the post of President for Federation of Gujarat Industries (FGI) from April 2010 to March 2013 and also, she was recognized as the first woman President of the FGI since its foundation in 1918. She is a member of the finance committee of the Bhaikaka University and a member of the governing body of the GSFC University. She is also a member of the governing body of the Charutar Arogya Mandal. She has been awarded with the Women Entrepreneur award by Vibrant VCCI Exhibition Awards, 2009. She has also been awarded with the Outstanding Business Woman Award of the district by Lions Club International, 2014. She has been felicitated by Federation of Gujarat Industries, Vadodra. She was awarded with the Best Performing Female Entrepreneur at Plasticon Awards, 2018. She was awarded with Women Achievers Award 2021 by OTT India TV. She received the Lifetime Achievement Entrepreneurship Award in the FMCG Sector by Swaavlambika Samman. She has been awarded with the IWEC Award 2022 from IWEC Foundation, held in Madrid, Spain. She is currently associated with Jewel Consumer Care Private Limited in her capacity as the Managing Director. She has over 21 years of experience in entrepreneurship.

Financials:

Balancesheet

Profit & Loss:

Cash Flow:

Key Risks:

1. Financial Market Risks

Market risk is the risk of loss related to adverse changes in market prices, including interest rate risk. We are exposed to interest rate risk, inflation and credit risk in the normal course of our business.

2. Interest Rate Risk

 Financial results are subject to changes in interest rates, which may affect their debt service obligations and access to funds.

3. Liquidity risk

Liquidity risk is the risk that company will encounter difficulties in meeting the obligations associated with financial liabilities that are settled by delivering cash or another financial asset. Their approach to managing liquidity is to ensure, to the extent possible, that they will have sufficient liquidity to meet liabilities when they are due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to reputation.

4. Credit Risk

Company is exposed to credit risk on monies owed to them by their customers. If customers do not pay promptly, or at all, company may have to make provisions for or write-off such amounts.

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