IRM Energy IPO - Investment Rationale, Issue Details, Strengths, Key Strategy, Risks, Financials: Anand Rathi

Anand Rathi's IPO Report

IRM Energy Ltd. will launch its initial public offering on October 18 and the bid closes on October 20. The company has fixed a price band in the range of Rs 480 to Rs 505 per share. The minimum order quantity is 29.

The city gas distribution company plans to raise Rs 545.40 crore via a fresh issue.

Objects of the Issue

Fresh issue:

• Rs 545.40 crore funding capital expenditure requirements for development of the city gas distribution network in the geographical areas of Namakkal and Tiruchirappalli (Tamil Nadu) in FY24-27.

• Prepayment or repayment of all or a portion of certain outstanding borrowings availed by the company.

• General corporate purposes.

Strengths:

• Successful development and operation of CGD business.

• Technology adoption and digital initiatives for efficient and optimal operations.

• Exclusivity in CNG and PNG supply in the awarded Gas.

• Technology adoption and digital initiatives for efficient and optimal operations.

• Connectivity to gas pipelines and establishing cost-effective gas sourcing arrangements.

Key Strategies:

• Technology adoption to increase operational efficiency and enhance customer .

• Expand the presence in existing and newer GAs through an improved captive distribution channel.

• Infrastructure roll-out for development and operation of the new licensed GA of Namakkal and Tiruchirappalli, Tamil Nadu.

• Expand the presence in existing and newer GAs through an improved captive distribution channel.

• Continue to focus on sourcing reliable and cost-effective gas from leading gas suppliers.

About the company

IRM Energy is a CGD company in India, with operations at Banaskantha (Gujarat), Fatehgarh Sahib (Punjab), Diu and Gir Somnath (Union Territory of Daman and Diu/Gujarat), and Namakkal and Tiruchirappalli (Tamil Nadu), engaged in the business of laying, building, operating, and expanding the city or local natural gas distribution network.

They develop natural gas distribution projects in the geographical areas allotted to them for industrial, commercial, domestic and automobile customers.

IRM Energy focuses on meeting the energy needs of customers in their GAs through their pipelines and CNG station network at a competitive price, while maintaining high safety standards.

Valuation

Their successful track record of the company in building and operating distribution systems and their diverse customer portfolio are strong points.

Additionally, the company’s strong parentage and experienced leadership, along with their emphasis on technology adoption, bolster their growth potential.

Furthermore, their strategic acquisition of GAs with connectivity to gas pipelines and a consistent financial performance offer a stable foundation for expansion.

At the upper price band company is d at price/earning of 33 times with a market cap of Rs 20,735 million post issue of equity shares and return on net worth of 18.2%.

Compared with competitive fuels, they provide a more reliable and environmentally friendly alternative fuel to all their customer segments, and hence have been able to tap potential customer segments in the respective gas.

On the valuation front, we believe that the company is fairly priced. Thus, we recommend an 'Subscribe – Long Term' rating to the IPO.

Key Risks

• 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 requires 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.

• Its CNG and industrial PNG supply operations account for 49.43 % and 46.86 % of its total operations (in terms of volume) for the three months ended June 30, 2023. They are heavily reliant on its CNG and industrial PNG supply operations and any decrease in the sales, may have an adverse effect on the business, operation, financial condition and cash flows of the company.

• Cadila Pharmaceuticals Ltd., one of its promoters, has provided corporate guarantees to third parties for the loans availed by the Company. In the event company defaults on any of the loans availed, its promoters will be liable for the repayment obligations.

• They typically require 15-18 months to generate revenue in its GAs. Any further delay in realising revenue may affect its projections, results of operations and cash flows.

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DISCLAIMER

This report is authored by an external party. BQ Prime does not vouch for the accuracy of its contents nor is responsible for them in any way. The contents of this section do not constitute investment advice. For that you must always consult an expert based on your individual needs. The views expressed in the report are that of the author entity and do not represent the views of BQ Prime.

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