IRM Energy
Outlook remains robust
Our BUY recommendation on IRM Energy (IRM) with a target price of INR 665/sh is premised on (1) a ~40% CAGR volume growth over FY24-26E and (2) robust margins. In Q3FY24, EBITDA stood at INR 422mn (+15% YoY, +1% QoQ), broadly in line, while consolidated PAT totalled INR 238mn (+20% YoY, -9% QoQ), below our estimates due to higher-than-expected depreciation and interest costs, partially offset by higher other income. Volume at 0.55mmscmd (-1% YoY, +7% QoQ) surpassed our estimate.
▪ Volume: IRM’s volume at 0.55mmscmd (-1% YoY, +7% QoQ) came in above our estimate. CNG volume stood at 0.29mmscmd (+31% YoY +9% QoQ), domestic PNG segment volume was at 0.02mmscmd, (+50% YoY, +39% QoQ), and industrial and commercial segment volume was at 0.2mmscmd (-37% YoY, -6% QoQ). Trading volume came in at 0.04mmscmd (+9x YoY, +77% QoQ). We expect IRM to maintain its CGD network expansion, which should support our projected ~40% CAGR volume growth from FY24-26E owing to (i) an anticipated rise in the number of CNG vehicles due to favourable economics and rapid expansion of the CNG retail network and (ii) expectation of an increased demand from industrial consumers in Mandi Gobindgarh in Fatehgarh Sahib and Namakkal and Tiruchirappalli (N&T) in Tamil Nadu. Our volume estimates for FY24/25/26E stand at 0.53/0.80/1.03msmcmd.
▪ Resilient margins despite APM shortfall: The gross spread, at INR 12.4/scm, improved by INR 3/scm YoY; however, it declined INR 0.85/scm QoQ owing to INR 1.7/scm QoQ decline in realisation to INR 45/scm compared to only INR 0.9/scm QoQ decline in gas cost at INR 32.5/scm. We also note that despite a decline in the allocation of Administered Pricing Mechanism gas to CNG and DPNG segments in November and December 2023, IRM’s gas cost decreased QoQ due to its favourable gas sourcing mix. EBITDA/scm came in at INR 8.4/scm (+15% YoY, -6% QoQ), below our estimate; however, it was supported by lower opex of INR 4.1/scm (-1% YoY, -8% QoQ). Given higher pricing power and a favourable gas sourcing mix, we factor EBITDA margins of INR 8.8/9.2/9 per scm for FY24/25/26E.
▪ Key highlights: (1) IRM prepaid borrowings of INR 1.35bn, so outstanding borrowings declined to INR 1.8bn from INR 3.3bn at the end of Q2FY24 (-45% QoQ). (2) It achieved the highest-ever quarterly average CNG volume of 0.29mmscmd in Q3. (3) In 9MFY24, the company added 12,305 domestic household connections, 52 commercial customers, six industrial customers and 12 CNG stations (of which seven stations were added in N&T GA).
▪ Change in estimates: We cut our FY24/25/26 EPS estimates by 9.7/4.3/6.1% to INR 25.7/43.4/55.1, factoring in lower volume and EBITDA margin (considering the 9M performance). While we reduce our medium-term volume growth, we marginally increase our long-term per unit EBITDA margin estimate and increase terminal growth to 2% (from 1% earlier), delivering a revised target price of INR 665/sh.
▪ DCF-based valuation: Our target price of INR 665/sh is based on Mar-25E free cash flow (WACC 13.3%, terminal growth rate 2%). The stock is currently trading at 13.4x Mar-25E EPS.
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