EKI - A NICHE PLAY ON ENVIRONMENT PROTECTION

 

EKI Energy Services - EnKing International - ( EKI ) is a company listed in BSE ( Scrip Code-543284)  just three days back. I am aware about the fact that  there is many additional risks in buying a stock just after IPO and listing . So please take this note only as an introduction to a company that is operating in a niche sector which I feel there is very big opportunity existing in the years to come . Enking claiming that they are  the  ‘ World largest Carbon Credit Developer and Supplier’ . I have no statistics with me to verify and ascertain this claim but it is a fact that company generating more than 90% of its income from overseas markets.

 The Sector and Scope  

Global warming is a threat in these days and all countries around the globe realized the seriousness of the same and necessity to fight against it. It is widely accepted that Green House Gases ( GHG)  is the major reason for global warming . Kyoto Protocol was a landmark development in the history of world for the fight against global warming. The Kyoto Protocol is an international treaty which extends the 1992 United Nations Framework Convention on Climate Change (UNFCCC) that commits state parties to reduce greenhouse gas emissions, based on the scientific consensus that global warming is occurring and human-made CO₂ emissions are driving it. The Kyoto Protocol implemented the objective of the UNFCCC to reduce the onset of global warming by reducing greenhouse gas concentrations in the atmosphere to 'a level that would prevent dangerous anthropogenic interference with the climate system'. The Protocol's first commitment period started in 2008 and ended in 2012. All 36 countries that fully participated in the first commitment period complied with the Protocol. However, nine countries had to resort to the flexibility mechanisms by funding emission reductions in other countries because their national emissions were greater than their targets. A second commitment period was agreed in 2012, known as the Doha Amendment to the Kyoto Protocol, in which 37 countries have binding targets. Negotiations were held in the framework of the yearly UNFCCC Climate Change Conferences on measures to be taken after the second commitment period ends in 2020. The Protocol defines three "flexibility mechanisms" that can be used by Parties in meeting their emission limitation commitments. The flexibility mechanisms are International Emissions Trading (IET), the Clean Development Mechanism (CDM), and Joint Implementation (JI). IET allows Parties to "trade" their emissions that held in digital form (Assigned Amount Units, AAUs, or "allowances").

                                                             

 Next to Kyoto Protocol, another important event  in the same direction was ‘The Paris Agreement’ which is an agreement within the  UNFCCC on climate change mitigation, adaptation, and finance, signed in 2016. As of March 2021, 191 members of the UNFCCC are parties to the agreement. The Paris Agreement's long-term temperature goal is to keep the rise in global average temperature to well below 2 °C (3.6 °F) above pre-industrial levels; and to pursue efforts to limit the increase to 1.5 °C (2.7 °F), recognizing that this would substantially reduce the risks and impacts of climate change. This should be done by reducing emissions as soon as possible, in order to 'achieve a balance between anthropogenic emissions by sources and removals by sinks of greenhouse gases' in the second half of the 21st century.

 The concept of carbon credit and its trading.

A carbon credit is a generic term for any tradable certificate or permit representing the right to emit one tonne of carbon dioxide or the equivalent amount of a different greenhouse gas. ( Courtesy : Wikipedia)

Let me explain the concept in layman’s language ,  as per the agreements approved by the participant countries in UNFCCC a fixed level of GHC emission is permitted for each countries, that in turn divided among the industries/companies operating in that country.  Suppose you own a polluting industry that generates 100 units  of greenhouse gases beyond the level permitted to you . On the other side , suppose one of your friend own a large area of plantation or a large solar farm  that generating pollutants 100 units less than the permitted level to him. If you have no option left to reduce pollution( gas emission)  below the permitted level or it is uneconomical for you, you can buy your friend’s 100 units available with him to offset your excess generation and comply with the rule . Ultimately this resulted in transfer of some money from your pockets ( assume the seller is someone you don’t know and sitting somewhere in the world ) to the seller . Such an earning will help and encourage the seller to plant more trees or establish another power plant using non fossil fuel unit  . This is the basic concept of carbon credit trading .The tradable carbon credits are held in digital form.

There are two types of Carbon credit market , one is mandatory by law of each countries and the other is voluntary . The voluntary market is driven by companies and individuals that take responsibility for offsetting their own emissions, and entities that purchase offsets before emissions reductions are required by regulation. Buyers are driven by corporate social responsibility, ethics, a desire to enhance their reputation and so on.

As per reports by 'Reuters' , based on 2020 statistics ,The turnover in global emissions trading hit a record high last year of $214 billion as prices rose on current or expected stricter regulation. The turnover was up 34% from previous year and marked a third consecutive year of growth. It is a fact that ,not even 25% of countries in the world  started carbon credit trading and we can imagine the potential opportunity size from this statistics.

  

Role of Company

 EKI - acting as an advisor, facilitator  and solution provider in environment protection initiatives of corporates ,NGO.s ,individuals..etc. . They are providing  end to end solution to achieve carbon neutrality. Their business activities can be broadly classified into :

* Carbon Credits management.

*  Climate Change Advisory Services.

* Business Excellence Advisory & Training Services.

* Electrical Safety Audits.

They are assisting in completing all formalities for earning carbon credits that involved various inspections, certification ..etc.  and helping the buyers and sellers of the same to find their genuine counter parties and smooth completion of transaction. Though they are operating in these four verticals, more than 90% of income coming from carbon credit trading and that itself from overseas customers. Company’s client list includes various firms from countries like  Australia, USA, Germany, Europe ..etc. and its Indian client list includes Airport Authority of India, World Bank, Azure Power, National Thermal Power Corporation (NTPC), GAIL, GMR Energy Limited, NHPC, Indian Railways, etc.

Financial Performance.

Company reported a topline of Rs. 66.02 cr and a bottom line of Rs. 4.47 cr in FY 2019-20. For the first half of  FY2020 -21 ended in September 30. 2020, it reported a turnover of Rs. 59.96 Cr. and a net profit of Rs. 5.39 cr. Post IPO company’s equity will be Rs. 6.87 Cr ( FV.10) and promoter holding will be close to 73%

Particulars	For the year/period ended (₹ in lakh)
	30-Sep-20 (Six Months)	31-Mar-20	31-Mar-19	31-Mar-18
Total Assets	2,186.19	1,609.68	412.31	276.60
Total Revenue	5,996.34	6,601.90	1,988.13	701.01
Profit After Tax	538.58	447.45	68.04	26.91

Conclusion

Having said, at present company generating more than 90% of income  from overseas  .It is not a surprise ,considering the fact that still the rules prevailing in India is not strict in case of environment protection and Greenhouse Gas ( GHG)  emissions. . If we consider only the local opportunities at present, this company may termed as one  'came ahead of its time ' as it started in 2011 but at present they concentrating in developed countries where rules are stricter. Nowadays we are in an effort to make our country a manufacturing hub . When the percentage of agriculture reduces and that of  Industry increases, we have no other choice but implementing stricter rules to stay within global standards .We can’t unilaterally move without adhering global treaties and other norms in future and this situation will open up exciting opportunities for companies like EKI .Even in the present situation, many Indian firms who are eligible to get carbon credit not utilizing the opportunity due to their ignorance about it. Company is planning to utilize majority of the IPO proceeds for working capital requirements including strengthening the sales force both in India and abroad. I believe this will surely bring better business going forward provided the promoters are capable to execute. Company expecting market for carbon offsets is set to boom, especially once a solution arrived in the issue of rulemaking for the operation of international carbon markets sorted out among the countries that have signed the Paris Agreement. This is expected to happen at the upcoming conference of Parties scheduled to occur in November 2021. The meeting should have happened in November 2020, but postponed by a year due to pandemic. If there is no consensus in this meeting mainly about the trading of carbon credits earned during Kyoto Protocol regime ,that may affect the entire reliability of this mechanism. The question to be answered is whether the carbon credits earned between Kyoto Protocol and Paris agreement is valid or not for trading. Whether it is valid or not, an early ultimate decision on it will end the uncertainty on this subject that is expected to bring new direction for carbon credit trading worldwide. 

                                                       It is a niche company in this sector and a pioneer in the industry that started operations more than ten years back. The only (somewhat) similar pure play company I could find in India is Emergent Ventures India that is an unlisted firm . If my understanding is correct this is the first listed company from carbon trading space not only in India but  in the entire world. Current price Rs.162

 Company Website link HERE

Points to Note :

Company is a newly listed one and came to my attention only recently , so I have no clear idea about its promoter’s credentials  and their attitude towards minority share holders. In few IPO’s ,companies' shown sharply  improved financial performance in just previous year of IPO through window dressing to attract potential IPO investors , only time will tell what the case here in these above points. Since it is listed in BSE SME with a market lot of 1200 shares , liquidity may be less compared with main board listed stocks. Prepared this short notes on EKI purely to introduce a niche company listed in a futuristic space , no need to take it as a recommendation to BUY or SELL the stock.

 

      The above note prepared based on the information taken from publicly available documents like Wikipedia, Company IPO prospectus and other sources, few sentences  reproduced without editing.

 You can refer the below links for more info :

https://carbon-pulse.com/90631/

https://www.indiancarbon.org/the-carbon-credit-market/

https://www.thehindubusinessline.com/news/in-a-world-first-indian-carbon-trader-to-come-out-with-ipo/article33109195.ece

Discl: Holding tracking qty shares