Synopsis:
IRM Energy surged 20 percent to hit its upper circuit after HDFC Securities retained its “Buy” rating with a revised target of Rs. 440, implying 33 percent upside. Strong CNG growth prospects offset PNG weakness, supporting future profitability.
A city gas distribution stock hit its 20 percent upper circuit on Wednesday after HDFC Securities revised its target price, highlighting a potential upside of 33 percent. The strong upside projection triggered investor optimism, even as PNG volumes remain under pressure, with the higher-margin CNG segment expected to support profitability in FY26.
IRM Energy Ltd, with a market capitalization of Rs. 1,354 crore, opened at Rs. 284.85 against its previous close of Rs. 274.90 and surged to an intraday high of Rs. 329.85, locking in a 20 percent upper circuit.
HDFC Securities retained its “Buy” rating on the stock but trimmed its target price from Rs. 515 to Rs. 440. This revised target still indicates a potential upside of nearly 33 percent from the day’s high.
Future Outlook
According to HDFC Securities, IRM expects the strong growth in CNG volumes seen in Q1FY26, which rose 21 percent year-on-year, to continue through FY26. The company has partnered with Red Taxi, which operates about 700 cabs in the Tiruchirappalli GA, to encourage drivers to shift to CNG by offering pre-filled fuel cards redeemable at IRM CNG stations.
While PNG volumes are expected to remain under pressure as some industries revert to cheaper fuels like coal, the higher-margin CNG business is set to increase its share in the overall mix.
Currently, around 43 percent of IRM’s gas requirement is sourced through APM and HPHT gas, both linked to crude oil prices. With crude prices expected to stay steady, the company has guided for FY26 EBITDA per unit to expand to Rs. 5.25–5.50 per scm from Rs. 4.7 per scm reported in Q1FY26. Management is confident of adding 50 new CNG stations in FY26, which will further boost medium- to long-term CNG growth.
CNG Vehicle Registrations Accelerate
According to the report, Vahan data showed that CNG vehicle registrations across IRM’s operating geographies rose 13 percent year-on-year in Q1FY26 to 2,610 units, compared to 2,306 in the same period last year. Growth was led by Banaskantha GA with an 18 percent rise, followed by Tiruchirappalli GA at 31 percent and Namakkal GA at 44 percent.
Impact of Pipeline Tariff Changes
As per PNGRB’s recent notification, natural gas pipeline tariff zones have been cut from three to two. This will benefit IRM, as 70 percent of volumes in Fatehgarh Sahib GA will now fall under the cheaper zone two tariff instead of zone three. These cost savings are expected to be passed on to customers, given the competitive pricing of alternate fuels in the region.
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Royalty Payments
According to the report, Investors had raised concerns over royalty payments made to the IRM Trust for the use of the brand name, given that branding is seen to play little role in the CGD business. However, management clarified that these payments would continue as per the License Agreement Addendum signed on 12 September 2023.
Q1FY26 Financial Performance
During the quarter, IRM raised industrial and commercial gas prices by about Rs. 2 per scm in the Fatehgarh Sahib GA. This lifted blended realizations to Rs. 47.9 per scm, higher by Rs. 1 per scm sequentially.
Raw material costs fell by Rs. 1.43 per scm to Rs. 35.6 per scm due to softer crude prices, which improved gross profit per unit by Rs. 2.4 per scm quarter-on-quarter to Rs. 12.3 per scm.
Operating costs rose to Rs. 7.6 per scm, up by Rs. 0.74 per scm, following an impairment loss of Rs. 37.52 million linked to subsidiary Ni Hon Cylinders Pvt Ltd. EBITDA per unit still expanded sequentially by Rs. 1.7 per scm to Rs. 4.7 per scm.
Q1FY26 Operational Performance
IRM reported total sales volume of 54.8 mmscm, up 14 percent year-on-year but down 4 percent sequentially. CNG volumes rose 21 percent year-on-year and 12.2 percent quarter-on-quarter to 32.4 mmscm, while PNG volumes increased 5.2 percent year-on-year but fell 20.6 percent sequentially to 22.5 mmscm.
The CNG segment, being more profitable, accounted for 59 percent of total volumes compared to 51 percent in the previous quarter. This growth was driven by network expansion and rising CNG vehicle adoption.
Meanwhile, PNG volumes declined sequentially as the National Green Tribunal rolled back its earlier order mandating industrial users in Fatehgarh Sahib GA to adopt natural gas, prompting some to switch back to alternate fuels.
Q1FY26 Snapshot
On a quarter-on-quarter basis, the company’s sales declined from Rs. 268 crore to Rs. 262 crore, down 2.24 percent, while operating profit rose from Rs. 17 crore to Rs. 26 crore, up 52.94 percent. PBT increased from Rs. 11 crore to Rs. 20 crore, a rise of 81.82 percent, and net profit jumped from Rs. 4 crore to Rs. 14 crore, a substantial increase of 250 percent.
On a year-on-year basis, sales grew from Rs. 225 crore to Rs. 262 crore, an increase of 16.44 percent. However, operating profit fell from Rs. 30 crore to Rs. 26 crore, down 13.33 percent, PBT declined from Rs. 26 crore to Rs. 20 crore, a drop of 23.08 percent, and net profit decreased from Rs. 19 crore to Rs. 14 crore, down 26.32 percent.
Valuation
HDFC Securities cut its FY26E and FY27E volume estimates by 13 percent and 16 percent respectively, factoring in muted growth across all segments. EBITDA assumptions were lowered from Rs. 8.0 and Rs. 8.2 per scm to Rs. 5.1 and Rs. 5.5, given the continued royalty payouts, competitive alternate fuel pricing, lower gas allocation, and rollback of the NGT order.
At current levels, the stock factors in an average EBITDA per unit of Rs. 4.6 per scm over FY26–34E, broadly in line with Q1FY26. Despite these adjustments.
-Manan Gangwar
