IPO: IRM Energy Limited

IRM Energy, a city gas distribution company, has come out with its IPO (initial public offering). Here's a breakdown of the company's strengths, weaknesses, and growth prospects to help investors make an informed decision.

In a nutshell

• Quality : The three-year average ROE and ROCE of IRM Energy are 33.5 and 24.4 per cent, respectively. For the trailing 12 months ended June 2023, the company's ROE and ROCE were 18.2 and 14.2 per cent, respectively.
  
• Growth : Its topline and PAT has grown at 121.9 and 34.2 per cent per annum, respectively between FY21-23.
  
• Valuation : The stock will be priced at a P/E and P/B of 29.8 and 2.3 times, respectively, as compared to its peer's median and average of 19.7 and 9.3 times, respectively.
  
• Overview : The regulatory push for cleaner fuel and the government's plans to connect new cities to the CGD network are expected to drive demand for natural gas. The company is poised to benefit from this trend.

About IRM Energy

IRM Energy is a city gas distribution (CGD) company in India. It has operations at Banaskantha (Gujarat), Fatehgarh Sahib (Punjab), Diu & Gir Somnath (Union Territory of Daman and Diu/Gujarat), and Namakkal & Tiruchirappalli (Tamil Nadu). The company is engaged in the business of laying, building, and operating a local natural gas distribution network. It has positioned itself as the provider of one of the most cost-effective fuels in both PNG (piped natural gas) and CNG (compressed natural gas).

Strengths of IRM Energy

• Exclusivity in CNG and PNG supply in the awarded Geographical Areas (GAs): When new geographical areas are allotted to CGD companies, they enjoy exclusivity for a period until the licence expires. Even after the expiry of the licence, they do not suffer much since new players have to make significant investments. This gives almost all CGD players an advantage in their GAs.
  
• Diverse customer portfolio and distribution network of CNG and PNG: The company has established strong relationships through collaborative efforts to a diverse customer base including industrial, commercial and domestic customers. Its customer base across various industries and at varied geographies reduces its dependence on any one industry or location and also provides a natural hedge against market instability in a particular industry or location.

Weaknesses of IRM Energy

• Dependence on licences: The company requires various licences and approvals for undertaking its businesses. The failure to obtain or retain such licences or approvals in a timely manner, or at all, may adversely affect its operations.
  
• Vulnerable to price fluctuations: Fluctuations in gas prices can have an effect on the company's profitability. Moreover, since a new price band with both floor and ceiling price have been established, the company cannot take advantage of lower price too. Besides, it depends on other parties for supply of gas for its daily operations.

Risk report

Company and business

• Are earnings before tax of IRM Energy more than Rs 50 crore in the last 12 months?
  Yes. The company's profit before tax was Rs 85 crore in the 12 months ending June 2023.
• Will IRM Energy be able to scale up its business?
  Yes. The company was recently allotted two new GAs in Tamil Nadu where it has started its work. It plans to spend Rs 307 crore out of the total IPO proceeds in these new areas.
• Does IRM Energy have recognisable brands with client stickiness?
  Yes. As the company has achieved a remarkable growth in the number of customers it caters to in the last three years.
• Does the company have a credible moat?
  Yes. The company enjoys exclusivity in the geographical areas allotted to it and is, thus, free from competition until licence expires.

Management

• Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
  Yes. Post-IPO, promoters' stake will be 50.1 per cent.
• Do the top three managers have more than 15 years of combined leadership at IRM Energy?
  Yes. The top three managers have been with the company since its incorporation in 2015.
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. No information to suggest otherwise.
• Is the company's accounting policy stable?
  Yes. No information to suggest otherwise.
• Is IRM Energy free of promoter pledging of its shares?
  Yes. No shares have been pledged.

Financials

• Did the company generate a current and three-year average return on equity of more than 15 per cent and a return on capital employed of more than 18 per cent?
  Yes. The company's three-year average ROE and ROCE are 33.5 per cent and 24.4 per cent respectively. Its ROE and ROCE for FY23 are 18.2 per cent and 14.2 per cent.
• Was the company's operating cash flow positive during the last three years?
  Yes. The company reported positive cash flows from operations during the last three years.
• Is the company's net debt-to-equity ratio less than one?
  Yes. The company's net debt-to-equity ratio stood at 0.85 times as of June 2023.
• Is IRM Energy free from reliance on huge working capital for day-to-day affairs?
  Yes. The company does not require high working capital for its day-to-day operations. Plus, since it is consumer facing, it also gets paid for the gas supplied right away.
• Can the company run its business without relying on external funding in the next three years?
  Yes. The company has reported strong growth in profit, and is cash flow positive. Since they will be using IPO proceeds for capex, they will not need external funding for expansion too.
• Is IRM Energy free from meaningful contingent liabilities?
  No. Contingent liabilities as a percentage of equity stood at around 64 per cent.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock will offer a 4.2 per cent operating earnings yield on its enterprise value.
• Is the stock's price-to-earnings less than its peers' median level?
  No. The company will trade at a price-to-earnings ratio of 29.8 times compared to peers' median level of 19.7 times.
• Is the stock's price-to-book value less than its peers' average level?
  Yes. The company will trade at a price-to-book ratio of 2.3 times compared to peers' average of 9.3 times.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

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