IRM Energy: A deep dive into its business, how it earns money, and whether you should invest

While analysts believe that IRM Energy is fairly priced, dropping margins in FY23 have raised questions about its future

Cadila Pharmaceuticals-backed IRM Energy’s Rs 545.4 crore initial public offering (IPO) is nearing closure. The price band of the IPO, which opened on October 18 and will close on October 20, is fixed at Rs 480-505 per share.

The company had already raised Rs 160.35 crore from anchor investors like Quant Mutual Fund, DSP Mutual Fund, HDFC Life Insurance, and SBI General Insurance. Promoters of the company are Rajiv Indravadan Modi, Cadila Pharmaceuticals and IRM Trust.

While analysts believe that IRM Energy is fairly priced, dropping margins in FY23 have raised questions about its future. Let’s delve into the key aspects of the company’s business model, financials, and the factors influencing performance.

What is IRM Energy’s business?

IRM Energy is in the business of city gas distribution (CGD). The company’s revenue derives from selling both compressed natural gas (CNG) and piped natural gas (PNG) in the allotted geographical areas (GAs).

CNG serves a wide range of vehicles, from taxis to heavy goods vehicles, while PNG caters to various sectors - industrial, commercial, and domestic use.

IRM Energy develops natural gas distribution projects in its respective GAs. It recently received authorisation in two GAs -- Diu and Gir, Somnath, in Gujarat, and Namakkal and Tiruchirappalli districts in Tamil Nadu, expanding its presence to four GAs. The other two GAs are Banaskantha in Gujarat and Fatehgarh Sahib in Punjab.

Also Read: IRM Energy IPO: Should you subscribe to the Rs 545.4 crore issue?

Gas prices

IRM Energy gets most of its natural gas supply from the government through the Administered Price Mechanism (APM).

APM gas prices are determined by the government and are often lower, compared to market-driven or non-APM gas prices.

During Q1FY24, the company received an APM allocation of 0.25 million metric standard cubic metres per day (mmscmd), which translates into 84.14 percent of the company’s total requirement. The rest is blended high-pressure, high-temperature (HPHT) gas.

The APM gas price is currently fixed for two years at 10 percent of the Indian crude basket, with a ceiling of $6.50 per million metric British thermal units (mmbtu) and a floor price of $4/mmbtu. HPHT gas has a ceiling of $9.96/mmbtu.

In FY23, PNG contributed 57.34 percent to the total revenue while CNG constituted about 42.33 percent. CNG sales stood at Rs 472.3 crore in FY23, compared to Rs 296.7 crore in FY22. PNG sales came in at Rs 563 crore against Rs 346.5 crore in the same period.

Financial performance

So far, so good. However, a deeper dive into the company’s P&L statement showed that its profit and EBITDA margins fell drastically in the financial year 2023.

The profit margin came down to 5.4 percent in FY23 from 20.8 percent in FY22 while the EBITDA margin dropped to 10 percent from 31 percent in the same period.

The return ratios and debt figures tell a story of decline. The return on capital employed (RoCE) slipped from 45.4 percent in FY22 to 16.3 percent in FY23 and the return on equity (RoE) fell to 18.2 percent from 52.5 percent.

Simultaneously, total debt rose 53.8 percent to Rs 393.3 crore in the year ended March 2023 from Rs 255.7 crore in the year-ago period.

‘Low allocation of APM, higher non-APM gas prices behind fall in margins’ 

As per IRM Energy, the fall in margins and rise in debt in FY23 were due to the low allocation of APM and higher non-APM gas prices, owing to the global headwinds and as the company was in the transition phase for enrolling industries in Fatehgarh Sahib, it did not pass on the entire increase in the gas cost to customers to boost conversions and volumes.

According to Nishtha Dhawan, Research Analyst, Unlisted Assets, Russia- Ukraine war and other geopolitical events had impacted the prices of gas and other petroleum products. This has put pressure on margins and impacted volumes.

Analysts optimistic

Going forward, she believes that the markets have stabilised and the Israel- Palestine war will not have any major impact on the business. IRM Energy’s margins are poised to get back on track over FY24.

Harshal Anjaria, CFO, of IRM Energy, said: “Since FY23, the government's pricing guidelines have benefited the CNG sector. Cheaper APM gas availability has boosted margins of CGD companies in Q1.”

In Q1FY24, the company’s consolidated revenue rose 6.5 percent to Rs 245.2 crore, primarily driven by a 1.8 percent rise in the overall sales volume of CNG, which increased from 22.2 mmscm in Q1FY23 to 22.6 mmscm.

The EBITDA margin also increased by 321 basis points YoY to 17.2 percent, owing to lower operating costs. Furthermore, the PAT margin expanded in line with the operating margin, rising 205 bps to 11 percent.

Also Read: IRM Energy IPO: 10 things to know before you buy into Rs 545.4-cr issue

The EV factor

Despite improving margins, Shivani Nyati, Head of Wealth, Swastika Investmart, believes that IRM Energy is still in the early stages of growth and may be impacted by unforeseen factors and other risks like limited geographic reach, government policies, delayed revenue generation, etc.

The booming electric vehicle (EV) market also poses a risk as the transition towards clean and renewable energy and a shift in the market sentiment towards EVs could result in a decline in the usage of natural gas by IRM Energy’s customers.

However, according to Dhawan, EV should not be a significant deterrent to the business of IRM. While the PNG business should expand with an increase in CGD opportunities, the CNG business should continue to have a significant market share among various fuel alternatives.

CNG stations

Karan Kaushal, CEO of IRM Energy, said that while the electrification of public transport poses a risk, in rural areas, EV penetration will take 8-10 years. CNG penetration is on the rise in areas where the company operates.

As of June 30, 2023, the company had 262 CNG dispensing points. The CNG segment, according to the RHP, is expected to register a healthy CAGR of 26-27 percent between fiscals 2023 and 2027, driven by the cost competitiveness of CNG vis-à-vis petrol.

CNG stations witnessed a YoY growth of 32 percent between fiscal 2022 and 2023. CNG adoption in three-wheelers surged from 26 percent in fiscal 2022 to 29 percent in fiscal 2023. In the light commercial vehicle (LCV) category, CNG adoption increased to 14 percent in fiscal 2023 from 5 percent in 2021.

Nyati said that it is still too early to say how the transition will impact IRM Energy's financials. The company's performance will depend on a number of factors, including the pace of EV adoption, government policies, and the company's own ability to adapt to the changing market landscape.

Peer comparison

In the fiscal year 2023, IRM Energy stood out with a robust 30.04 percent rise in volume, outperforming industry peers. When it comes to market capitalisation, IRM Energy is valued at Rs 2,074 crore, while Adani Total Gas takes the lead at Rs 66,154 crore, followed by Indraprastha Gas at Rs 33,075 crore, Gujarat Gas at Rs 29,374 crore and Mahanagar Gas at Rs 11,147 crore.

In terms of volume growth, ATGL, Indraprastha Gas, and Mahanagar Gas reported an increase of 8.03 percent, 15.7 percent, and 14.11 percent in FY23, respectively.

In the context of the Price-to-Earnings (P/E) ratio, IRM Energy has a ratio of 15.4, while Gujarat Gas stands at 21.5, Indraprastha Gas at 23.3, Mahanagar Gas at 11.6, and Adani Total Gas at 118.1.

When comparing itself to peers, IRM Energy highlighted, "While there is no difference in terms of our business model when compared to ATGL, IGL, and MGL, our nimble, agile, and efficient operations allow us to run with optimal operating expenses across all segments, outperforming our counterparts."

Also Read: IRM Energy IPO: Financials, shareholding and comparison with peers in 5 charts

Several brokerage houses, including Anand Rathi, Reliance Securities, Mehta Equities, and Swastika Investmart, have recommended investors to subscribe the issue and hold the stock for the long term.

Despite being a new company, IRM Energy has a strong parentage of Cadila Pharmaceuticals Ltd. According to Nyati, the company has a diverse customer portfolio and exclusivity in CNG and PNG supply in key GAs. The company is also strategising for further expansion in new areas and plans to be a complete energy solution provider. All these factors indicate positive growth for the company.

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