IRM Energy
IPO Size: Rs. 545 cr, Entirely Fresh Issue
- Part-fund Rs. 388 cr capex in Tamil Nadu, worth Rs. 307 cr, to be incurred till FY27
- Debt Repayment worth Rs. 135 cr, of Rs. 320 cr gross debt, Rs. 218 cr net debt
Price band: Rs. 480-505 per share
M cap: Rs. 2,074 cr, implying 26% dilution
IPO Date: Wed 18th Oct to Fri 20th Oct 2023, Listing Tue 31st Oct 2023
Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.
City Gas Distributor (CGD)
49.5% owned by privately-held Cadila Pharmaceuticlas (not to be confused with the listed Cadila Healthcare, now renamed Zydus Lifesciences), IRM Energy undertakes city gas distribution in 4 geographical areas (GAs) of Banaskantha (Gujarat), Fatehgarh Sahib (Punjab), Diu and Gir Somnath (Union Territory of Daman and Diu/Gujarat), and Namakkal and Tiruchirappalli (Tamil Nadu).
The Tamil Nadu GA will start contributing to revenue from Q2FY24, and at peak capacity, its potential is more than the other 3 GAs, given its presence in one of most industrialised states of the country, being the 4th largest city in Tamil Nadu and located in an industrial cluster, leading to a healthy demand mix of both industrial piped natural gas (PNG) from anchor client BHEL and compressed natural gas (CNG) demand from vehicles.
Growing Financials
Since FY20, company’s gas supplied volume has increased 4x from 45 mmscm to 196 mmscm in FY23, implying 63% CAGR, on a low base. During this 3 year period, revenue grew at 84% CAGR to Rs. 1,039 cr. However, due to sharp fluctuations in gas prices on Russia-Ukraine war, PAT for FY23 halved to Rs. 63 cr, from Rs. 128 cr in FY22. Since IRM procures gas on the cost-effective contracted prices (no spot purchases), EBITDA margins have historically been healthy, standing at 18% in Q1FY24. For Q1FY24, revenue and PAT stood at Rs. 245 cr and Rs. 27 cr respectively in Q1FY24, on sale of 46 mmscm, leading to an EPS of Rs. 8.9, as against Rs. 20.9 in FY23.
Healthy Growth Projections
Post ban on polluting fuels (furnace oil and pet coke) by the National Green Tribunal in Punjab, demand for PNG has sharply increased, reflected in company’s volume. This growth is likely to continue, and with Tamil Nadu volumes also scaling, company guides tripling volumes over the next 3.5 years i.e. 37% volume CGAR till FY27E. This will lead to similar profit boost, as gas sourcing is in place.
Attractive Pricing
Annualising Q1FY24 earnings, shares are being issued at an EV/EBITDA multiple of 10x, which is lower than the average of 12x for peers Indraprastha Gas and Gujarat Gas. Mahanagar Gas rules lower at 7x, but it has always enjoyed lower discounting despite higher margins. IRM’s volume growth visibility is much superior to the listed peers and its 28% RoE makes the IPO pricing attractive.
Company had raised Rs. 41 cr last year from Japan’s 4th largest City Gas Distributor USD 0.5 billion Shizuoka Gas, at a blended price Rs. 464 per share (Rs. 26 cr at Rs. 425 per share in Sep 2022 and Rs. 15 cr at Rs. 550 per share in Dec 2022). This implies a premium of 9% to the last transaction price about a year ago, which is justified for the expected growth in FY24 and the time lapse.
Promoters Cadila Pharmaceuticals and IRM Trust hold 67.94% stake, while group company Enertech Distribution Management’s 28.65% stake is classified as public shareholding. Shizuoka Gas Company holds the balance 2.94%.
