IRM Energy sees no threat to CNG from the EV value chain

"Good project implementation and a presence in various geographies sets the company apart from its peers, such as Adani, IGL, and MGL," said Karan Kaushal, the company’s CEO, in an exclusive pre-IPO interview with Moneycontrol.

Edited excerpts from conversation with Karan Kaushal, and Harshal Anjaria, CFO.

How different is your company’s business model compared to peers like IGL, MGL, etc.? What’s the competitive advantage?

Karan Kaushal: Our business model closely resembles that of listed companies like Adani, IGL, and MGL. However, our differentiator is our project implementation capabilities. In just seven years, we have developed substantial city gas distribution infrastructure. Currently, we boast 66 CNG stations and over 4,000 kilometres of pipelines, a remarkable achievement in such a short time frame.

Furthermore, our licenses cover four distinct regions, setting us apart from well-established companies. These areas are strategically located in the heartland of the country, including Banaskantha and Gir Somnath in Gujarat, Diu, Punjab's Fatehgarh Sahib, and Namakkal and Tiruchirappalli in Tamil Nadu.

We operate away from major metropolitan centres, focusing on the heartland, where there is a burgeoning demand for CNG. This offers a significant upside for our company.

How do you intend to utilise your IPO proceeds? Lay out your expansion plans for us for the next three years — what kind of capex would you require?

Harshal Anjaria: We are going to spend close to Rs 307 crore in Tiruchirappalli and Namakkal. This will be 100 percent funded out of the IPO proceeds.

We are going to create close to 66 CNG stations in Namakkal and Tiruchirappalli over the next three years. Apart from that, we will also have a fair bit of pipeline infrastructure in and around these areas. We are in the process of laying the pipeline network in Tiruchirappalli city.

We have already commissioned three CNG stations there, and seven stations are under construction. The CGS city gas station (CGS), that distributes gas across the city (added), is also under construction. An LNG hub is being constructed in Namakkal.

Over the next three years, we are looking at a capex of Rs 450 to 500 crore .

In FY22-23, your margins were under pressure due to the Russia-Ukraine war. Do you foresee any impact from the current Israel-Palestine situation?

Harshal Anjaria: In terms of margin, FY21-22 was an aberration. Energy prices had bottomed out globally. In FY22-23, the reverse was true. Due to the Ukraine-Russia war, LNG prices were very high. But we have moved away from that situation and the government has also intervened. It has announced pricing guidelines, and that has helped the CNG sector in a big way.

There is visibility on the availability of cheaper gas under the administered pricing mechanism (APM)  for catering to the CNG demand. And that's why all these city gas distribution (CGD)  entities have improved their margins in Q1. We have also improved our margins, and our EBITDA per standard cubic metre  (SCM) of gas has improved to Rs 9 from Rs 6 in FY22-23.

We are not allowed to give any forward-looking statements per SEBI regulations, but historically, we have been able to demonstrate double-digit EBITDA per SCM, and we'll try to maintain that.

How do you intend to scale your volumes relative to your peers?

Karan Kaushal: This is a high-growth company. We have grown at a CAGR of over 65 percent over the last three years. In the next four years, we will triple our output of an average of 5 lakh 40 thousand SCM per day, and grow at a CAGR of 36-37 over 30 percent. By FY27, we will be doing 15 lakh SCM per day, and 30 percent of our volumes will be coming from Tamil Nadu.

By FY30, we expect to clock around 10 lakh SCM from Tamil Nadu itself. So that is the kind of growth we are looking at.

However, the growth will reduce as the company matures. That’s how it is with other CGD entities as well.

The exclusivity period for Banaskantha and Fatehgarh Sahib came to an end in June and September 2023. How is the business stacking up in those two geographical areas? Also, talk about the areas that you're yet to explore or you've identified for expansion?

The policy permits a new CGD operator to enter the areas where our exclusivity has ended, but this has not happened yet. We have to give them 20 percent of our network capacity. But it is very difficult for a new operator to come and use our infrastructure. For your information, our marketing exclusivity has expired, but the infrastructure exclusivity is with us for the next 20 years.

So a newcomer has to rely upon our infrastructure. That makes it a bit of an entry barrier. You can say that it's a quasi-monopoly, and in the coming future, we don't foresee any other operator coming and asking us for network capacity to operate in our areas.

How does growing demand from electric vehicles affect your business?

Karan Kaushal: For a CGD firm like us, the electrification of public transport poses the biggest risk, but in these upcountry areas, there’s no public transport network as such. These are rural, quasi-rural kind of areas, and EV penetration here will take a lot of time, maybe around 8 to 10 years. Where we operate, CNG penetration is on the rise.

PNGRB is inviting bids for seven geographical areas. How many of these GAs fit into your plans? What is your inorganic plan looking like?

Karan Kaushal: Although these new areas are in the far-flung parts of northeast and north India, and their capex would be on the higher side, we are looking at the details and will be aggressively bidding for areas which can have synergies with our northern geographic area (GA) of Fatehgarh Sahib. Also, we believe the sector is ripe for consolidation, and we will look to acquire GAs close to our existing areas, if they are on sale.

How do you plan to deal with higher gas prices, which pose a challenge to your margins?

Harshal Anjaria: We have tied up long-term volumes, and do not rely on spot prices. Global LNG prices also have tapered compared to the peak in March 2023. So we don't foresee any major challenge in terms of retaining our margins.

The company is backed by Cadila Pharmaceuticals. What is their stake expected to come down to post the IPO? What kind of promoter lock-in do you have?

Harshal Anjaria: The promoters currently own 67.94 percent. Post-listing, it will go down to 50 percent. Per SEBI regulations, 20 percent of the promoter’s holding will be locked in for three years (please see if this is what was meant).