EKI Energy Services Limited; An Opportunity to participate in the carbon credits market

EKI Energy is a company that offers end-to-end carbon sustainability advisory services to its clients. Currently, EKI has a global presence across 4 continents and 15 countries.

In providing end-to-end carbon sustainability services, EKI Energy also makes arrangements to offer carbon credits for its clients.

What are Carbon Credits?

A Carbon Credit is a tradable certificate which permits its holder a right to emit carbon dioxide or other greenhouse gases. One carbon credit is equal to one ton of carbon dioxide.

Thus, EKI Energy Services Limited offers advisory services and methodologies for reducing the emission of greenhouse gasses and arranges for voluntary carbon credits, which are mandatory for Green House Gases emitting companies resulting in sustainable climatic conditions.

The Turning Point:

As per the table below, the company's revenues increased substantially because of the increased demand for carbon credits As per the table below, the company's revenues increased substantially because of the increased demand for carbon credits after the amendments to Article 6 in Paris Agreement.

The voluntary carbon markets

In a voluntary carbon market, an entity (company, individual, or other "emitter") chooses to take accountability for its carbon footprint by purchasing carbon credits that reduce the amount of carbon in the atmosphere. It is driven by a company's desire to demonstrate climate leadership or 'do the right thing' and has been around in different forms for many years.

Over a decade of experience in the business, EKI has accumulated an inventory of carbon credits, mediating the sellers and buyers of carbon credits globally. When there was a sudden demand after article 6 in the Paris agreement, EKI Energy's profit margins skyrocketed along with the revenues through the accumulated inventory and trading of the carbon credits.

Is this growth sustainable?

The business of EKI, like any other company, has vast opportunities and threats related to its business. Any change in the carbon markets regulation can significantly impact the business of EKI Energy Services Limited. While the prospects of growth for the company include raising awareness of global climatic effects due to greenhouse gasses and the participation of about 140 countries actively trying to offset their carbon emissions.

Thus, the company's performance is closely linked to the carbon markets in the global economy.

Financial Analysis:

1. Revenues & Profit margins of the company have increased substantially due to the demand for carbon credits.

2. Working capital management of the company is good, with a cash conversion cycle of 55 days along with the rising scale of the business.

3. EKI has successfully reduced its debt levels to zero.

4. EKI is maintaining a healthy current and quick ratio to manage its working capital requirements.

Recommendation:

As the company's future is purely dependent on global climatic regulations, any changes related to easing the carbon regulations can impact the business. So, we recommend a cautious buy on the stock with monitoring the carbon regulations by the global environmental organizations. Investment in the stock can be super beneficial if the carbon regulations are tightened further.

The stock's current price-to-sales ratio is 3.32, increased from 2.77 last year. Thus, we recommend the best buy levels in the present scenario at an attractive valuation could be Rs.1,882.00 with a watch on business and the carbon markets every quarter.