IRM Energy

Rising CGD Company

Expanding city gas distribution network in Namakkal and Tiruchirappalli, Tamil Nadu

Incorporated in December 2015, IRM energy (a group company of Cadila Pharmaceuticals) is a city gas distribution (CGD) company in India developing natural gas distribution projects across various districts in the country for industrial, commercial, domestic, and automobile customers. The company has been granted exclusive rights for laying, building, operating and expanding a city or local natural gas distribution network in the authorised four GAs (geographical areas) - the Banaskantha GA (Gujarat), the Fatehgarh Sahib GA (Punjab), the Diu and Gir Somnath GA (Union Territory of Daman and Diu/Gujarat) and the Nammakkal Tiruchirapalli GA (Tamil Nadu). The network exclusivity rights for infrastructure creation, including laying down of pipelines and CNG (compressed natural gas) distribution outlets, for these GAs would extend up to 25 years. Cadila Pharmaceuticals Limited (CPL) is the flagship company of the Cadila group. CPL is one of the largest privately held pharmaceutical companies in India.

The company distribute CNG for use in motor vehicles and PNG (piped natural gas) for use by domestic households as well as for commercial and industrial units. IRM energy 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 in the sixth round of bidding in July 2016. Thereafter, it 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. It has 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

The company CNG customers include operators of public transport vehicles such as taxis, auto-rickshaws, and private vehicles such as cars, buses, light goods vehicles and heavy goods vehicles. PNG (piped natural gas) customers are broadly classified into three segments, which are, industrial PNG (small, medium and large-sized enterprises), commercial PNG (such as hotels, restaurants, bakeries, hostels and community halls) and domestic PNG (predominantly using PNG as cooking gas).

As of June 30, 2023, IRM Energy supply network across all GAs consists of over 3898 inch-kms of pipelines, including approximately 3210 inch-kms of MDPE pipelines, and 688 inch-kms of steel pipelines. As of June 30, 2023, it is catering to the natural gas requirements of 52454 domestic customers, 184 industrial units and 269 commercial establishments across its operating GAs.

As of June 30, 2023, the company has also established a strategically located network of 66 CNG retail outlets which includes 2 COCO stations, 36 DODO stations and 28 OMC stations. COCO Stations represents stations owned and operated by the Company, DODO Stations represents stations owned and operated by the dealers and OMC Stations represents stations owned and operated by oil marketing companies. Further, the company has 262 CNG dispensing points across all the CNG filling stations.

As of June 30, 2023, CNG formed 50.73% of total revenues while PNG formed 49.27%. Total volumes stood at 45.69 mmscm (million metric standard cubic meters) which included CNG volumes of 22.58 mmscm and PNG volumes of 23.1 mmscm.

IRM energy sources its natural gas from two primary types of sources - priority gas allocation from government to supply PNG to households and CNG to vehicles (volume of priority gas provided is subject to quantity allocated by the MOPNG from time to time) and LNG and RLNG sourced under various long-term, medium-term and short-term commercial contracts for meeting industrial and commercial PNG demand. The company mid to long-term gas sale and purchase agreements (GSPAs) with gas suppliers such as GAIL and RIL enable it to source gas at a reasonable cost. It has also entered into certain gas transportation agreements (GTAs) for transportation of natural gas from its suppliers pursuant to its GSPAs. Further, it has subscribed to a proprietary membership from Indian Gas Exchange (IGX) in August 2022, through which it source natural gas on a need basis for its short-term requirements. Pursuant to the IGX membership, it gets access to the natural gas free market, where prices are discovered by a free exchange mechanism. It was the first CGD entity to undertake a transaction (through a trading partner) on the Indian Gas Exchange to source RLNG.

Shizuoka Gas Co. Ltd, Japan (ShizGas) has undertaken equity infusion in IRM energy in March 2022 and in December 2022. ShizGas is the fourth largest gas company in Japan by natural gas sales volume in 2021, with vast experience in the CGD sector.

In order to achieve business integration, it has interests and ownerships in certain complementary businesses. For instance, it hs invested in Farm Gas Private Limited on December 9, 2019, a biomass and waste to energy solution company with a vision to convert biomass as well as municipal solid waste to compressed biogas (CBG) and bio-fertilizer, which aims to provide cost-effective and economically viable renewable energy through waste and biomass management. It has also invested in Venuka Polymers Private Limited, a company engaged in the production of polyethylene (PE) pipelines, on December 19, 2019 with a vision to provide cost-effective and economically viable products for creating the infrastructure of gas and water pipelines and in Ni Hon Cylinders Private Limited, a company engaged in the supply of imported type one cylinders for retro fitment of CNG cylinders on March 30, 2022, with an intention of manufacturing cylinder cascades for sale to other CGD companies. Additionally, it has signed a memorandum of understanding (MoU) with Mindra EV Private Limited on August 24, 2022 for setting up an electric vehicle (EV) charging infrastructure at DODO Stations and COCO Stations for a period of five years.

The company also intend to make a transition towards being an energy company and implement its proposed renewable (solar) energy projects envisaged for sale of renewable power to reputed industrial, commercial customers and green hydrogen generating/producing companies through long term power purchase agreements through its subsidiary, SKI-Clean Energy Private Limited with a stake of 70.00%, incorporated on September 21, 2022.

The Offer and the Objects

The offer comprises fresh issue of 10800000 equity shares aggregating up to Rs 545 crore at upper price band of Rs 505 and Rs 480 crore at lower price band of Rs 480 by the company.

Dr Rajiv Indravadan Modi, Cadila Pharmaceuticals, and IRM Trust are the promoters of the company, holding 67.94 percent shares. And the remaining stake is held by public shareholders including Enertech Distribution Management with 28.65 percent shares and Shizuoka Gas Company with 2.94 percent shares.

The company proposes to utilize the net proceeds of the fresh issue towards funding capital expenditure requirements for development of the city gas distribution network in the GAs of Namakkal and Tiruchirappalli (Tamil Nadu) in fiscal 2024 (from December 1, 2023 to March 31, 2024), fiscal 2025, fiscal 2026 and fiscal 2027 (from April 1, 2026 to September 30, 2026) amounting Rs 307.26 crore, prepayment or repayment of all or a portion of certain outstanding borrowings availed by the company amounting Rs 135 crore and balance towards general corporate purposes.

The total estimated cost for funding capital expenditure requirements for development of the city gas distribution network in the GAs of Namakkal and Tiruchirappalli (Tamil Nadu) is Rs 388.48 crroe, out of which Company has incurred Rs 51.06 crore in fiscal 2023 and fiscal 2024 (until August 31, 2023).

Total loan amount outstanding as on August 31, 2023 stood at Rs 164.90 crore.

Strengths

Natural gas demand from the CGD sector is expected to be 19-20% CAGR (compounded annual growth rate) between fiscal 2022 and fiscal 2030, growing to 117-120 mmscmd (million metric standard cubic meters per day). Demand from each sub-segment, including compressed and piped natural gas (domestic and industrial), is likely to grow at a healthy pace over the forecast period, with the expansion in the gas network to more cities. Increase in penetration is expected to be a key demand driver for the PNG and CNG segment.

The share of natural gas in India’s primary energy mix has increased from 6.3% in 2020 to 6.5% currently which 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, 2023, the country had 23,478 km of natural gas pipelines in operation. It also plans to develop a vibrant gas market across the country through 12,037 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.

The company sees growth potential in and around the GAs it operate in, due to the expected growth in the number of CNG equipped vehicles due to the cost effectiveness of CNG as a fuel over other fuels, potential growth in the number of households in its areas of operation and presence of industrial clusters in Mandi Gobindgarh (Fatehgarh Sahib) and in Namakkal & Tiruchirappalli (Tamil Nadu).

The company is the sole distributor of CNG and PNG in the authorised GAs. While marketing exclusivity rights for the Banaskantha GA and Fatehgarh Sahib GA is over, the company has marketing exclusivity rights till february, 2027 for Diu and Gir Somnath GA and till March, 2030 for Nammakkal & Tiruchirapalli GA. IRM Energy has also been granted network exclusivity rights of 25 years for infrastructure creation, including laying down of pipelines and CNG distribution outlets, thus providing sufficient revenue visibility over the medium to long term.

The company is backed by the strong parentage of an Indian multinational entity, Cadila Pharmaceuticals Limited (Cadila Pharma), which has a legacy of over three decades in the domestic pharmaceutical industry. Cadila Pharma holds 49.50% of its equity shares.

ShizGas’s technical expertise and good practices as an energy provider in Japan will add value to business operations of IRM energy.

Ban by the National Green Tribunal (NGT) on the usage of polluting fuels, primarily in the Mandi Gobindgarh, Fatehgarh Sahib has spurred overall growth in volumes from the industrial segment. On account of this, its industrial customers have grown from 56 to 170 from fiscal 2021 to fiscal 2023.

The company has positioned itself 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

The company is in position to offer gas to its industrial PNG customers at a viable price in the market due to its competitive gas price and optimized operational expenditureand which enable the industrial PNG customers to switch from other alternate fuels (coal and furnace oils) to natural gas.

The company provide a more reliable and environment-friendly alternative fuel to all its customer segments compared with competitive fuels, and hence has been able to tap potential customer segments in the respective GAs.

The company is committed to health and safety and have established safety management systems which ensure safe, reliable and uninterrupted distribution of natural gas to its customers, with a focus on systemic minimization of health and safety risks.

Weaknesses

Transporting natural gas is hazardous and could result in accidents, which could adversely affect its reputation, business, financial condition, results of operations and cash flows.

The company require various licenses and approvals for undertaking its businesses and the failure to obtain or retain such licenses or approvals in a timely manner, or at all, may adversely affect its operations.

Any breakdown in the network infrastructure through which it source and supply natural gas could adversely affect business, reputation, results of operations and cash flows.

The company is subject to risks associated with delays in construction and commissioning of its existing and new gas distribution pipelines, including any delay in meeting its MWP targets.

There are two criminal litigations, 29 regulatory actions and 12 material tax litigations involving promoters. In the event of any adverse outcome, the company and promoter business operations and reputation may be affected.

The company is dependent on government policies for allocation of natural gas and cost of gas supplied for its CNG and domestic PNG customers (the Priority Sector). Any reduction in allocation of natural gas or any increase in the cost of gas could adversely affect business, reputation, operations and cash flows.

The price of natural gas which it supply to customers depends on the cost of natural gas. The cost of natural gas for CNG segment and PNG domestic segment is fixed under the pricing guidelines. The cost of natural gas also depends on the quantum of domestic gas allocated to the company by the MoPNG. If it is allocated a lower quantum of gas by the MoPNG, it has to procure natural gas from other sources, which may allocate natural gas at a higher price. Additionally, the cost of natural gas for the industrial PNG segment and commercial PNG segment is also linked to procurement of RLNG from various suppliers under various contracts which it enter into with such suppliers. It also avail PNG from such RLNG suppliers on a spot basis, which leads to higher cost. This leads to increase in the price at which it supply natural gas to customer, which may affect its brand, results of operations and profitability.

The company existing GAs could be open to access for others, following the end of infrastructure and marketing exclusivity as prescribed under the PNGRB authorizations, post which period it would no longer be the sole distributor in these regions, resulting in a potential loss of customers and decrease in its profit margins.

Expansion of business is primarily dependent on GAs awarded by governmental authorities. If it is unable to enter new markets, or if there is any adverse change in the policies of the Government, its growth prospects will be adversely affected.

While gas supply is benchmarked to global indexes in USD, the revenues of the company are in INR. Accordingly, its cash flow is indirectly exposed to currency rate fluctuations.

The number of entities participating in the CGD sector has increased over the past decade. CGD infrastructure is attracting not only domestic but also foreign investors. Singapore-headquartered companies such as Atlantic Gulf and Pacific (AG&P) and Think Gas Distribution Private limited have established CGD companies in India, while France-based Total Energies SE has partnered with Adani Gas Limited to form Adani Total Gas Limited (ATGL). US-based I Squared Capital and Japanese Osaka Gas Co., Ltd., forayed into the CGD sector by investing in AG&P in 2021.

Valuation

For FY2023, consolidated sales were up by 93% to Rs 980.09 crore led by 30.04% increase in overall volume from 151.06 mmscm in fiscal 2022 to 196.43 mmscm in fiscal 2023. Further, the company has increased the selling price to pass on the increase in input gas cost of APM and RLNG. OPM fell 2530 bps to 11.5% due to significant increase in input gas cost which led to 40% decrease in operating profit to Rs 112.24 crore. Other income increased 96% to Rs 5.97 crore while interest cost rose 4% to Rs 22.90 crore and depreciation increased 39% to Rs 20.9 crore. PBT decreased 51% to Rs 74.4 crore. Tax expenses were 54% lower at Rs 17.96 crore. Net profit decreased 51% to Rs 63.14 crore.

For Q1FY2024, consolidated sales were up by 7% to Rs 230.04 crore led by 30.04% increase in overall volume from 151.06 mmscm in fiscal 2022 to 196.43 mmscm in fiscal 2023. Further, the company has increased the selling price to pass on the increase in input gas cost of APM and RLNG. OPM rose 330 bps to 18.3% due to significant increase in input gas cost which led to 31% increase in operating profit to Rs 42.07 crore. Other income increased 86% to Rs 3.38 crore while interest cost rose 3% to Rs 6.04 crore and depreciation increased 20% to Rs 5.77 crore. PBT decreased 45% to Rs 33.64 crore. Tax expenses were 9% higher at Rs 5.81 crore. Net profit increased 31% to Rs 26.91 crore.

For TTM period ended June 2023, the consolidated net profit was Rs 69.5 crore on a sales of Rs 995.47 crore. The TTM EPS was Rs 16.9 and the PE on upper price band of offer price works out to 32 times.

As of 11 October 2023, its listed peers such as Gujarat Gas trades at TTM P/E of 21.4, Indraprastha Gas trades at TTM P/E of 22, Mahanagar gas trades at TTM P/E of 11.3 and Adani Total Gas trades at TTM P/E of 124.4.

For FY2023, IRM Energy Ebitda margin and ROE stood at 11.5% and 18.2% respectively, compared to 14.6% and 24.2% for Gujarat Gas, 16.1% and 21.1% for Indraprastha Gas, 18.7% and 20.4% for Mahanagar Gas and 19.7% and 20.4% for Adani Total Gas respectively.