IRM Energy
- IRM Energy is coming out with a 100% book building; initial public offering (IPO) of 1,08,00,000 shares of Rs 10 each in a price band Rs 480-505 per equity share.
- Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
- The issue will open for subscription on October 18, 2023 and will close on October 20, 2023.
- The shares will be listed on BSE as well as NSE.
- The face value of the share is Rs 10 and is priced 48.00 times of its face value on the lower side and 50.5 times on the higher side.
- Book running lead managers to the issue are HDFC Bank and BOB Capital Markets.
- Compliance Officer for the issue is Shikha Jain.
Profile of the company
The company is a 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. It develops natural gas distribution projects in the geographical areas (GAs) allotted to it for industrial, commercial, domestic and automobile customers. Its 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. Its PNG 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).
The company has 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. It was recognized as the ‘City Gas Distribution - Growing Company of the Year 2020’ by Federation of Indian Petroleum Industries (FIPI). It distributes CNG for use in motor vehicles and PNG for use by domestic households as well as for commercial and industrial units. Due to its competitive gas price and optimized operational expenditure, it is in a position to offer gas to its industrial PNG customers at a viable price in the market and enable the industrial PNG customers to switch from other alternate fuels (coal and furnace oils) to natural gas. Compared with competitive fuels, it provides a more reliable and environment-friendly alternative fuel to all its customer segments, and hence has been able to tap potential customer segments in the respective GAs. Further, it is committed to health and safety and have established safety management systems which ensures safe, reliable and uninterrupted distribution of natural gas to its customers, with a focus on systemic minimization of health and safety risks.
The company has established credibility in terms of efficient operational management, stakeholder’s management and supply chain risk management in its existing GAs, as there are significant entry barriers such as marketing and infrastructure exclusivity granted pursuant to the PNGRB authorizations for the respective GAs and requirement of large investments to establish a natural gas distribution network for competitors to enter into its area of operations post the expiry of marketing and infrastructure exclusivity. The company sees growth potential in and around the GAs it operates in, due to the (i) expected growth in the number of CNG equipped vehicles due to the cost effectiveness of CNG as a fuel over other fuels; (ii) potential growth in the number of households in its areas of operation; and (iii) presence of industrial clusters in Mandi Gobindgarh (Fatehgarh Sahib) and in Namakkal & Tiruchirappalli (Tamil Nadu).
Proceed is being used for:
- Funding capital expenditure requirements for development of the City Gas Distribution network in the Geographical Areas 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).
- Prepayment or repayment of all or a portion of certain outstanding borrowings availed by the company.
- General corporate purposes.
Industry Overview
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 city gas distribution (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. In fiscal 2023, demand from natural gas declined by 6%. The decline in demand was attributable owing to steep rise in prices and constrained supplies under long term LNG contracts. The demand remained subdued from power, refinery and petrochemicals sector as these sectors are dependent on imported gas pushed the demand downwards. The gas demand in fiscal 2024 is expected to rebound by 12-13% due to a mix of factors such as a favourable government policy for the CGD sector, a moderation in the natural gas price, and an expected increase in the production of domestic natural gas.
India’s total proven reserves of natural gas were estimated at 1,139 billion cubic meters (bcm) as of fiscal 2022, with 53% located in offshore gas fields. Moreover, natural gas discoveries have been made by Reliance Industries (RIL), ONGC and Gujarat State Petroleum Corporation (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. Domestic natural gas production is expected to rise 5-7% to 94-119 mmscmd during the forecast period of fiscals 2023 to 2027 driven by new production from the Daman and KG fields of ONGC and deep-water fields of ONGC and RIL on the eastern offshore. This will include production from the KG basin from Vashistha, KG-D5, R-cluster and satellite fields (a part of KG D6 field). The government's steps to attract investments and improve production through the new gas-pricing mechanism are expected to expedite the development of new fields. The mechanism provides pricing freedom for gas produced from HPHT deep-water and ultra-deep-water areas. New discoveries are expected in KG basin post fiscal 2027 from RIL (UDW1 block under exploration), as well as ONGC (Clusters 1 & 3 of 98 DWN/2 block). Despite new discoveries, production will stagnate post fiscal 2027 as existing fields peak and start declining in terms of output.
Pros and strengths
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 it, for the period of exclusivity granted pursuant to the PNGRB authorizations. It has marketing exclusivity until September 2028 for the Diu & Gir Somnath GA, and until March 2030 for Namakkal & Tiruchirappalli GA, acquired in the eleventh round of bidding. Marketing exclusivity for the Banaskantha GA and Fatehgarh Sahib GA expired in June 2023 and September 2023 respectively. The company has also been granted network exclusivity rights of 25 years for infrastructure creation for all its GAs, including laying down of pipelines and CNG distribution network within its GAs pursuant to the authorization received.
Successful development and operation of CGD business: The company has successfully built and operated its CNG and PNG distribution system in the GAs awarded to it, and also set up its supplementary network of pipelines and CNG stations. It has developed strong in-house project management capabilities, complemented by robust operation and maintenance processes. Its relationship with vendors, suppliers and contractors has enabled it to expand its network in a timely and cost-efficient manner. Further, it is also committed to health and safety and have implemented safety management systems to ensure the safe, reliable and uninterrupted distribution of natural gas. Governance monitoring through internal processes and systems, coupled with its management team helps it achieve operational efficiencies. It has also established a well-rounded project management infrastructure for seamless and cost-efficient distribution of natural gas in all its 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. It provides competitive offerings while maintaining a customer-centric approach and making continuous efforts to upgrade its services, by leveraging technology across all its customer operations. It has successfully established a distribution network of CNG and PNG to customers. Its dynamic business model ensures that it is abreast of the changing needs of its customers, with a focus on innovation and technology adaptation. 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. Further, the strong emphasis of the government on the expansion of the CGD network across the country will result in a favourable demand outlook among its customers.
Technology adoption and digital initiatives for efficient and optimal operations: The company has laid an optimal capacity steel pipeline network from the cross-country pipeline available in all its GAs, to cater to both CNG and PNG demands in the respective GAs. It is focused on implementing the latest engineering practices in its business. For instance, it has implemented supervisory control and data acquisition (SCADA) at all operational CNG stations, to establish automation at the CNG stations. It has implemented Radio Frequency Identification (RFID) Writing, Detection and Annunciation System, which aids in digitally identifying the hydrotesting due date of CNG cylinders installed on-board vehicles and helps in reducing the probability of fatal incidents at CNG stations. It has developed a web-based application for capturing geo-tagged points and gas assets and their attributes in real time including an incident report module. For the fast adoption of PNG in steel re-rolling mills in Mandi Gobindgarh, Fatehgarh Sahib, it awarded the technology study assignment to Punjab State Council for Science and Technology, for setting up three model steel re-rolling plants of small, medium and large sizes running on PNG for identification of optimal burners, recuperators and automation to increase the fuel efficiency and reduce per ton fuel cost. Automatic Meter Reading (AMR) and EVC cum Data Loggers have been implemented for all industrial customers and District Regulating System (DRS) helping in the monitoring of the consumption logs, hourly flow and other critical parameters through a GSM network to the Master Control Room.
Risks and concerns
Depends on third parties for sourcing and transportation of natural gas: The company has entered into certain natural gas sale and purchase agreements (GSPAs) with third-party gas suppliers such as GAIL (India) and Reliance Industries (RIL) for supply of natural gas in the geographical areas (GAs) allotted to it. As of June 30, 2023, it procured natural gas from seven suppliers, of which the top seven suppliers contributed to 100% of its total quantity purchased. Upon procuring the natural gas from the suppliers, it thereafter distributes piped natural gas (PNG) through its own network of pipelines and compressed natural gas (CNG) through CNG filling retail outlets to its customers. While it is entitled to liquidated damages in the event its suppliers fail to provide it with the adequate quantity of natural gas as prescribed under the GSPAs, it cannot assure that it will be able to supply CNG and PNG to customers in the event of non-receipt of natural gas from its suppliers and that such liquidated damages will be sufficient to cover the losses. It issues purchase orders to third party agencies for the maintenance of its Mother Stations and city gate stations. In the event such maintenance is underway, it may be unable to receive the supply of natural gas from its suppliers, which may result in a loss in its revenue.
Transporting natural gas is hazardous and could result in accident: Natural gas is highly combustible. The company’s operations are subject to the risks and hazards inherent in the business of natural gas transportation and distribution such as: accidents, fires and explosions; leaks or other losses of natural gas or other hydrocarbons as a result of the malfunction of equipment; damage from third parties, including from construction and utilities equipment and from other surface users; blowouts (uncontrolled escapes of natural gas from pipelines); difficulties maintaining and extending its widespread network infrastructure; and natural disasters such as earthquakes, floods, storms, landslides and other adverse weather conditions and hazards. These risks could result in serious injury and death to employees and others, significant damage to property, environmental pollution, legal proceedings, impairment of its business and operations and curtailment or suspension of its supply of natural gas, which in turn could lead to substantial loss to it. It could also receive adverse publicity and experience diversion of management attention and resources in defending such claims. Further, the location of its laid down network infrastructure and storage facilities in or near heavily populated areas, including residential areas, commercial business centres and industrial sites, may increase the chance of sustaining injuries, causing deaths or resulting in damages resulting from any such related incidents.
Risks associated with delays in construction and commissioning of existing and new gas distribution pipelines: The time and costs involved to complete the laying of pipelines and creating suitable pipeline infrastructure may be subject to several factors, including receipt of requisite approvals and permits from the relevant authorities, unavailability of land, shortages of, or price increases with respect to, construction materials (which may prove defective), equipment, technical skills and labour, unanticipated cost increases, changes in the regulatory environment, adverse weather conditions, third party performance, environmental issues, changes in market conditions and other unforeseeable issues and circumstances. Any of these factors may lead to delays in, or prevent the completion of, the expansion of its pipeline network and result in a substantial increase in costs incurred by it. The cost overruns may not be adequately compensated by contractual indemnities, which may affect its business, financial condition, and results of operations. In addition, any delays in implementing its expansion plans as scheduled or directed by the PNGRB could result in the imposition of a penalty by PNGRB. In the event there are any delays in the implementation and completion of the expansion plans its business, financial condition and results of operations could be adversely affected.
Depends on government policies for allocation of natural gas: For the company’s domestic PNG customers and CNG customers, it is allocated natural gas by the Ministry of Petroleum and Natural Gas (MoPNG), the price of which is determined in accordance with the New Gas Pricing Guidelines, 2014 (the ‘Pricing Guidelines’) and as per the circulars dated May 6, 2022 and August 10, 2022 issued by the MoPNG. Under the existing Pricing Guidelines and subsequent circulars, the price of natural gas is revised on a half yearly basis, i.e., in April and in October every year. The MoPNG has issued a notification dated April 7, 2023 revising the Pricing Guidelines (the ‘Revised Pricing Guidelines’). As per the notification, Domestic Natural Gas Price (APM Price) shall be 10% of the Indian Crude Basket Price as defined by Petroleum Planning and Analysis Cell (PPAC) from time to time. The APM Prices will be declared on a monthly basis by the PPAC, on the last day of the current month. For determining the APM Price for the relevant month, average of the daily prices data of India Crude Basket Price shall be taken from the 26th day of the previous month to the 25th day of the current month. For the gas produced by ONGC & OIL from their nomination fields, the APM Price shall be subject to a floor and a ceiling. The initial floor and ceiling prices shall be $4/MMBTU and $6.5/MMBTU respectively. The ceiling would be maintained for the next two years (FY 2023-24 and 2024-25) and then increased by $0.25/MMBTU each year.
Outlook
Incorporated in 2015, IRM Energy is a gas distribution company. The company is involved in developing, operating, and expanding of local natural gas distribution network. It 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. On the concern side, the company requires numerous approvals, licenses, registrations and permissions to operate its business, including Right of Uses (RoUs) and Right of Ways (RoWs) for the land traversed by its pipelines. It is in the process of filing an application for obtaining a license or approval for RoUs and RoWs to construct its pipelines traversing through land owned by third parties.
The issue has been offered in a price band of Rs 480-505 per equity share. The aggregate size of the offer is around Rs 518.40 crore to Rs 545.40 crore based on lower and upper price band respectively. On the performance front, total revenue increased by 90.30% from Rs 5,491.93 million in Fiscal 2022 to Rs 10,451.00 million in Fiscal 2023 primarily due to increase in income from sale of natural gas from by 90.58% from Rs 5,432.07 million in Fiscal 2022 to Rs 10,352.48 million in Fiscal 2023. Profit for the year decreased by 50.68% from Rs 1,280.28 million in Fiscal 2022 to Rs 631.46 million in Fiscal 2023 due to significant increase in input gas cost as well as due to lower profits earned by joint control entities. Meanwhile, as a part its strategy, the company work towards distribution and sale of CNG through its Dealer owned and dealer operated stations (DODO) Stations and Company owned and Company operated stations (COCO) Stations, since it is cost saving when compared to the OMC Stations. For the PNG domestic segment, it intends to install pre-paid meters so that the customers pay for their consumptions, in advance, without any monthly fixed charges in case of no consumption for any particular billing period. This will help it save in terms of marketing cost of billing and collection, and negate any risk of default by customers, thereby improving cash flow.
