IRM Energy Limited (An IPO Analysis)

Summary

Incorporated in 2015, IRM Energy Limited is a gas distribution company. The company is involved in developing, operating, and expanding of local natural gas distribution network. IRM Energy is a value-driven energy enterprise serving industrial, commercial, domestic, and automobile customers.

About The Company

Incorporated in 2015, IRM Energy Limited is a gas distribution company. The company is involved in developing, operating, and expanding of local natural gas distribution network. IRM Energy is a value-driven energy enterprise serving industrial, commercial, domestic, and automobile customers.

The company has marked its presence in 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.

The company is fulfilling the natural gas requirements of 48172 domestic clients, 179 industrial units, and 248 commercial clients.

The company has received an award of City Gas Distribution- Growing Company of the Year 2020 from the Federation of Indian Petroleum Industries.

As of September 2022, the company has 216 CNG gas stations across its operating geographical areas.

Company Overview

Company's city gas distribution (“CGD”) company in India, with operations at Banaskantha (Gujarat), Fatehgarh Sahib (Punjab), Diu & Gir Somnath (Union Territory of Daman and Diu/Gujarat), and Namakkal & Tiruchirappalli (Tamil Nadu), engaged in the business of laying, building, operating and expanding the city or local natural gas distribution network. The company is an integrated value driven energy enterprise, developing natural gas distribution projects in the geographical areas (“GAs”) allotted to us for industrial, commercial, domestic and automobile customers, and have built our competency as a CGD company by development of our existing GAs since 2017. The company focus on meeting the energy needs of customers in our GAs through our pipelines and CNG station network at a competitive price, while maintaining high safety standards.

The company have positioned ourselves 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 distribute CNG for use in motor vehicles and PNG for use by domestic households as well as for commercial and industrial units. The company were recognized as the ‘City Gas Distribution - Growing Company of the Year 2020’ by Federation of Indian Petroleum Industries (“FIPI”). Due to their competitive gas price and optimized operational expenditure, can offer gas to their PNG industrial customers at a viable price in the market and enable the PNG industrial customers to switch from other alternate fuels (coal and furnace oils) to natural gas. Compared with competitive fuels, company provide a more reliable and environment-friendly alternative fuel to all their customer segments, and hence have been able to tap potential customer segments in the respective GAs. Further, company are committed to health and safety and have established safety management systems which ensures safe, reliable and uninterrupted distribution of natural gas to their customers, with a focus on systemic minimization of health and safety risks.

Network and Distribution

Company's supply network consisted of (i) 3,248 inch kms, including approximately 2,665 inch kms of pipelines of medium density polyethylene (“MDPE”) pipelines and 583 inch kms of steel pipelines for the six months ended September 30, 2022; (ii) 2712 inch kms, including approximately 2158 inch kms of MDPE pipelines and 554 inch kms of steel pipelines for the six months ended September 30, 2021; (iii) 2954 inch kms, including approximately 2380 inch kms of MDPE pipelines and 574 inch kms of steel pipelines for Fiscal 2022; (iv) 2343 inch kms, including approximately 1851 inch kms of MDPE pipelines and 492 inch kms of steel pipelines for Fiscal 2021; and (v) 1936 inch kms, including approximately 1499 inch kms of MDPE pipelines and 437 inch kms of steel pipelines for Fiscal 2020.

The company served 168 industrial customers, 88 industrial customers, 96 industrial customers, 59 industrial customers and 30 industrial customers as at September 30, 2022, September 30, 2021, March 31, 2022, March 31, 2021, and March 31, 2020, respectively. Further, the company served 202 commercial customers, 145 commercial customers, 179 commercial customers, 125 commercial customers and 90 commercial customers as at September 30, 2022, September 30, 2021, March 31, 2022, March 31, 2021 and March 31, 2020, respectively; and 43,183 domestic customers, 29,237 domestic customers, 35,725 domestic customers, 25,626 domestic customers and 18,382 domestic customers as at September 30, 2022, September 30, 2021, March 31, 2022, March 31, 2021 and March 31, 2020, respectively. 

The company have established a network of 56 CNG filling stations, comprising 2 stations owned and operated by the Company (“COCO Stations”), 30 CNG stations owned and operated by dealers (“DODO Stations”) and 24 CNG stations owned and operated by oil marketing companies (“OMC Stations”) as at September 30, 2022. Further, their network consisted of (i) 2 COCO Stations, 25 DODO Stations and 22 OMC Stations as at September 30, 2021; (ii) 2 COCO Stations, 27 DODO Stations and 23 OMC Stations as at March 31, 2022; (iii) 2 COCO Stations, 22 DODO Stations and 21 OMC Stations as at March 31, 2021; and (iv) 2 COCO Stations, 15 DODO Stations and 16 OMC Stations as at March 31, 2020. In aggregate, the company had (i) 216 CNG station dispensing points across all GAs as at September 30, 2022; (ii) 188 CNG station dispensing points across all GAs as at September 30, 2021; (iii) 205 CNG station dispensing points across all GAs as at March 31, 2022; (iv) 170 CNG station dispensing points across all GAs as at March 31, 2021; and (v) 139 CNG station dispensing points across all GAs as at March 31, 2020. The COCO Stations and DODO Stations include the ‘IRM Energy’ branding to position and strengthen our corporate identity.

The table below sets out the breakdown of net revenues (including compression income and excluding excise duty) generated from CNG and PNG (domestic, commercial and industrial) distribution and pursuant to NG trading for the six months ended September 30, 2022 and September 30, 2021, and for Fiscal 2022, Fiscal 2021 and Fiscal 2020, for each of our GAs:

The table below sets out the percentage of revenue contribution from CNG and PNG (domestic, commercial and industrial) distribution and pursuant to NG trading, for the six months ended September 30, 2022 and September 30, 2021, and for Fiscal 2022, Fiscal 2021 and Fiscal 2020, for each of our GAs:

Company's Competitive Strength

Exclusivity in CNG and PNG supply in the awarded GAs
The company is the sole distributor of CNG and PNG in the GAs awarded to us, for the period of exclusivity granted pursuant to the PNGRB authorizations. The company have marketing exclusivity until June 2023 for the Banaskantha GA, until September 2023 for the Fatehgarh Sahib GA, until September 2028 for the Diu & Gir Somnath GA, and until March 2030 for Namakkal & Tiruchirappalli GA, recently acquired in the eleventh round of bidding. The company have also been granted network exclusivity rights of 25 years for infrastructure creation for all our GAs, including laying down of pipelines and CNG distribution network within their GAs pursuant to the authorization received. Please see below the details in relation to authorization to lay, build, operate and expand their CGD network for our GAs, as granted by the PGNRB:

Successful development and operation of CGD business

We have successfully built and operated our CNG and PNG distribution system in the GAs awarded to us, and also set up our supplementary network of pipelines and CNG stations. The image below represents the details in relation to the minimum work permit (“MWP”) commitments fulfilled by the Company as at September 30, 2022.

Please see below MWP achievements contract year basis for our Banaskantha GA

Please see below MWP achievements contract year basis for our Fatehgarh Sahib GA

Please see below MWP achievements contract year basis for our Diu & Gir Somnath GA

Diverse customer portfolio and distribution network of CNG and PNG

The company believe that company have established strong relationships through collaborative efforts to a diverse customer base including industrial, commercial and domestic customers. The company is provide competitive offerings while maintaining a customer-centric approach and making continuous efforts to upgrade their services, by leveraging technology across all their customer operations. The company have successfully established a distribution network of CNG and PNG to customers. The company served 168 industrial customers, 88 industrial customers, 96 industrial customers, 59 industrial customers and 30 industrial customers as at September 30, 2022, September 30, 2021, March 31, 2022, March 31, 2021, and March 31, 2020, respectively. Further, the company served 202 commercial customers, 145 commercial customers, 179 commercial customers, 125 commercial customers and 90 commercial customers as at September 30, 2022, September 30, 2021, March 31, 2022, March 31, 2021 and March 31, 2020, respectively; and 43,183 domestic customers, 29,237 domestic customers, 35,725 domestic customers, 25,626 domestic customers and 18,382 domestic customers as at September 30, 2022, September 30, 2021, March 31, 2022, March 31, 2021 and March 31, 2020, respectively.

Strong parentage, experienced board and management team and strong execution team
The company are 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 our Equity Shares as at the date of this Draft Red Herring Prospectus. 

Company's Strategy

Expand our 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 & Tiruchirappalli, Tamil Nadu

Technology adoption to increase operational efficiency and enhance customer value

Business integration for transition into a complete energy solution provider

Continue to focus on sourcing reliable and cost-effective gas from leading Gas Suppliers

Business Operations

The company supply network consisted of (i) 3,248 inch kms, including approximately 2,665 inch kms of pipelines of medium density polyethylene (“MDPE”) pipelines and 583 inch kms of steel pipelines for the six months ended September 30, 2022; (ii) 2712 inch kms, including approximately 2158 inch kms of MDPE pipelines and 554 inch kms of steel pipelines for the six months ended September 30, 2021; (iii) 2954 inch kms, including approximately 2380 inch kms of MDPE pipelines and 574 inch kms of steel pipelines for Fiscal 2022; (iv) 2343 inch kms, including approximately 1851 inch kms of MDPE pipelines and 492 inch kms of steel pipelines for Fiscal 2021; and (v) 1936 inch kms, including approximately 1499 inch kms of MDPE pipelines and 437 inch kms of steel pipelines for Fiscal 2020.

Geographical Locations & Distribution Network

Geographical Location

Distribution Network

Industry Analysis

OVERVIEW OF AND OUTLOOK ON NATURAL GAS MARKET IN INDIA

Natural gas consumption in India clocked a compound annual growth rate (CAGR) of 3.8% between fiscals 2016 and 2020, rising to ~176 MMSCMD in fiscal 2020. However, it dipped 5% in fiscal 2021 due to Covid-19 related challenges such as constrained transportation and industrial activities.

Demand rose again ~4.8% in fiscal 2022. Growth was driven by higher offtake from end-use industries as economic and industrial activity and personal mobility gained traction. Segments such as CGD saw healthy growth. However, demand from the power segment declined as higher LNG prices affected the load factor (PLF) of gas-based power plants. Natural gas demand is estimated to increase in fiscal 2023, driven by strong growth in the CGD and fertiliser sectors.

Review of natural gas consumption in India (MMSCMD, FY16-FY22)

Demand by end-user industries

The fertiliser, CGD and power sectors accounted for ~63% of the total gas consumption of ~175 MMSCMD in fiscal 2022. Fertilisers had the maximum share of 28%. CRISIL MI&A Consulting expects demand for natural gas to increase at 7-8% CAGR to 309-320 MMSCMD between fiscals 2022 and 2030. We expect the CGD network and fertiliser units to fuel demand because of improved domestic gas supply and governmental policy/financial support.

Sector-wise natural gas demand outlook, FY22-30 (MMSCMD):

Power

Demand from power sector is highly price sensitive. This has become more pronounced with declining domestic gas production, coupled with lack of priority for the sector in domestic gas allocation. The sector’s dependency on imported gas (re-gasified LNG, or RLNG) is also on the rise. The share of RLNG in power sector increased from 5% in fiscal 2016 to 26% in fiscal 2022.

 Power - natural gas demand outlook, FY22-30 (MMSCMD):

Fertilisers

This sector is the largest and most sustainable driver of natural gas demand in India. Currently, there are 32 units producing agriculture grade urea, with a capacity of 25.5 million tonne (MT). Raw materials required for urea manufacturing are carbon dioxide and ammonia. Ammonia is produced from natural gas or LNG. Natural gas forms ~70-80% of the cost for urea production.

Fertilisers - natural gas demand outlook, FY22-30 (MMSCMD)

CGD

Demand from the CGD segment was the major driver for growth in gas demand in fiscal 2022. The segment reported ~32% year-on-year growth, over the low base of fiscal 2021 when the demand was impacted by pandemic. CRISIL MI&A Consulting expects natural gas demand from the CGD sector to log 15-16% CAGR between fiscals 2022 and 2030, growing to 103-107 MMSCMD. Demand from each sub-segment, including CNG and PNG (domestic and industrial), is likely to grow at a healthy pace over the forecast period, with an 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 pace of development of the CGD network would be another key determinant of growth, going forward.

natural gas demand outlook, FY22-30 (MMSCMD)

CGD demand outlook by segments

Availability of gas through new LNG terminals for priority sectors

Pipeline connectivity to LNG terminals provide CGD entities an opportunity to source LNG for providing natural gas to areas where laying infrastructure is a challenge. Further, CGD entities have revamped the gas distribution model to reach consumers faster by transporting and storing LNG in hubs and further distributing it onwards in the defined geographical area.

Refineries

Refineries: Natural gas demand outlook for FY22-30 (MMSCMD)

Gas supply and infrastructure

Domestic natural gas reserves

India’s total proven reserves of natural gas were estimated at 1,373 billion cubic meters (bcm) as of fiscal 2021, with 64% located in offshore gas fields. Moreover, natural gas discoveries have been made by Reliance Industries Ltd. (RIL), ONGC and Gujarat State Petroleum Corporation Ltd (GSPC) in the offshore Krishna-Godavari (KG) basin area of Andhra Pradesh. Onshore reserves are primarily located in Rajasthan and the north-eastern states of Assam, Nagaland, Arunachal Pradesh, and Tripura.

Natural gas – domestic reserves (bcm)

Management Of The Company

Maheswar Sahu
Maheswar Sahu is a Non-Executive Director of our Company and the Chairman of the Board of Directors of our Company. He holds a Bachelor of Science degree in electrical engineering from Regional Engineering College, Rourkela. He also holds a Master of Social Science degree from the University of Birmingham. He joined Indian Administrative Service (IAS) in 1980. He has served the Government of India and Government of Gujarat in various capacities for more than three decades before retiring as Additional Chief Secretary to Government of India, Industries and Mines Department (Industries & Mines), Sachivalaya, Gandhinagar, Gujarat. He has 33 years of active involvement in government departments handling various profiles and PSU management. At present he is on the board of directors of listed companies as an Independent Director. 

Dr. Rajiv Indravadan Modi
Dr. Rajiv Indravadan Modi is the Promoter and Non- Executive Director of our Company. He holds a Bachelor of Technology in chemical engineering from Indian Institute of Technology, Bombay. He also holds a diploma in Biochemical Engineering form University College London and a degree of a Doctor of Philosophy (Biological Sciences) from University of Michigan. He is a fellow member at Indian National Academy of Engineering. He also serves as the Chairman of Board of Governors of IIT Guwahati and Chairperson of the Board of Governors of IIT Gandhinagar, Gujarat. He is also a member of the Board of Governors of the Academy of Scientific and Innovative Research. He has more than thirty years of experience as an industrialist in the pharmaceuticals industry and at present he is the chairman and managing director of Cadila Pharmaceuticals Limited.

Amitabha Banerjee
Amitabha Banerjee is a Non- Executive Director of our Company. He holds a Bachelor of Commerce Honours and Master of Commerce degrees from the University of Calcutta. He is an associate member of the Institute of Cost Accountants of India and an associate member of the International Institute of Management Sciences. He is currently associated with Cadila Pharmaceuticals Limited and was previously associated with Tyre Corporation of India Limited as a Manager (Finance and MIS) and Rajinder Steels Limited as General Manager (Finance and Accounts). He has 42 years of experience in finance and accounts.

Financial Performance Of The Company

Balance Sheet

Profit and Loss

Cash Flow

Risk Factors

• The company is dependent on third parties for sourcing and transportation of natural gas. Any disruption in the receipt of such natural gas from these third parties, or delay or default in timely transportation of the natural gas could lead to a disruption or failure in the supply of natural gas by them, which could adversely affect their business, reputation, results of operations and cash flows.
• The company dependent on Government policies for allocation of natural gas and cost of gas supplied for our 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 their business, reputation, operations and cash flows.
• Any breakdown in the network infrastructure through which we source and supply natural gas could adversely affect our business, reputation, results of operations and cash flows.
• Company's operations are restricted to defined geographical boundaries and the natural gas requirements in these regions may be affected by various factors outside their control, which may adversely affect our business operations,profitability and cash flows.

Object of the issue

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 and Fiscal 2026;
2. Prepayment or repayment of all or a portion of certain outstanding borrowings availed by the Company; and
3. General corporate purposes.