IPO Analysis: IRM Energy Ltd

IPO Rating: Apply for the long-term

About the Issue: 

IRM Energy Ltd is a prominent figure within the energy sector, catering to a wide range of customers, spanning industrial, commercial, domestic, and automotive sectors. The company operates a robust city gas distribution network that effectively links various customer segments within their established geographical areas. 

The company is gearing up to launch its Initial Public Offering (IPO) for equity shares, each having a face value of Rs 10. The IPO price range is set between Rs 480 and Rs 505 per equity share, resulting in a total issue size of Rs 545.40 crore at the upper price band. 

The IPO is scheduled to commence on October 18, 2023, and will conclude on October 20, 2023. The anticipated listing on the exchange is set for October 31, 2023. The market lot size for the IPO is 29 shares, with the option to apply for multiples of this lot. Individual retail investors have the opportunity to apply for a maximum of 13 lots, equivalent to 377 shares or a total investment of Rs 1,90,385 assuming the upper price band.  

Objects of the Issue 

The company plans to allocate the net proceeds raised from the issue for the following purposes: 

1. Funding capital expenditure requirements for the development of the City Gas Distribution network in the geographical areas of Namakkal and Tiruchirappalli (Tamil Nadu) in Fiscal 2024, Fiscal 2025, Fiscal 2026 and Fiscal 2027  
2. Prepayment or repayment of all or a portion of certain outstanding borrowings availed by the company 
3. General corporate purposes 

Promoter holding 

Dr Rajiv Indravadan Modi, Cadila Pharmaceuticals Limited, and IRM Trust are the promoters of the company. The promoters currently hold a pre-issue shareholding stake of nearly 68 per cent in the company. 

About the company 

IRM Energy Ltd is a prominent player in the energy sector, with a keen focus on creating value through the development of natural gas distribution projects in multiple regions across the country. These projects serve a diverse array of customers, including those in the industrial, commercial, domestic, and automotive sectors. With over 6 years of expertise in the field, IRM Energy Ltd has established itself as a leading city gas distribution company. They have successfully built robust city gas distribution networks that seamlessly connect different customer segments within their existing geographical areas.  

These areas encompass Banaskantha District in the state of Gujarat, Fatehgarh Sahib in the state of Punjab, and Diu & Gir-Somnath in the Union Territory of Daman & Diu and the state of Gujarat. As of March 31, 2023, the company’s extensive supply network spans more than 3,665 inch-kilometers of pipelines. This network includes approximately 3,000 inch-kilometres of MDPE pipelines and 665 inch-kilometres of steel pipelines, underscoring their commitment to delivering natural gas efficiently and effectively. The company, as of March 31, 2023, serves the natural gas needs of more than 48,000 domestic customers, 179 industrial units, and 248 commercial establishments within its operational geographical areas.  

Furthermore, they have strategically positioned a network of 62 CNG retail outlets to cater to the growing demand for natural gas across these regions. IRM Energy Limited has achieved a significant milestone by securing exclusive rights from the Petroleum & Natural Gas Regulatory Board (PNGRB) to spearhead the development of city gas distribution infrastructure and the provision of natural gas services in the Tiruchirappalli and Namakkal districts within the state of Tamil Nadu.  

Financials 

Outlook and Valuation  

When assessing the financial performance of the company, it's evident that it has achieved impressive revenue growth over the last three years, marked by a remarkable growth of over 90 per cent in FY23 compared to FY22. However, the picture changes when examining net profit, which experienced a significant drop of more than 50 per cent in FY23 when compared with FY22. This decline can be attributed to the challenging landscape brought about by escalating gas and petroleum product prices, primarily caused by the disruptions in global markets stemming from the Russia-Ukraine conflict. 

The issue is priced with a P/BV ratio of 4.09 times, calculated using its Net Asset Value (NAV) of Rs 123.38 as of June 30, 2023. At the upper price cap, it is priced at a P/BV ratio of 2.33, considering its post-IPO NAV of Rs 216.95 per share.  

When we compute the PE ratio for the company by considering annualized Q1FY24 earnings to the post-IPO fully diluted paid-up equity capital, the resulting PE ratio stands at 18. In its official documents, the company has identified Gujarat Gas Ltd, Indraprastha Gas Ltd, Mahanagar Gas Ltd, and Adani Total Gas Ltd as its listed peers in the market. As of the latest available data, these peers are trading with price-to-earnings (PE) ratios of 18, 19, 12 and 125 respectively. Hence, it appears that the issue is reasonably valued.   

Considering the company's robust market presence, sound financial position, well-defined growth strategy, and the prevailing trend of businesses shifting from coal to natural gas, it is clear that the company holds significant growth prospects. Therefore, we recommend that investors consider subscribing to the issue with a long-term perspective.