This Stock is Up Over 5,000% in 2021! Are You Kidding Me?

Crazy, isn’t it?

If you’re wondering whether this is a penny stock, you couldn’t be more wrong!

What makes this rally even more unbelievable is that the gains are not over the entire period of 2021. They are only from April 2021 until now!

So, which stock am I talking about and why has it seen a meteoric rise in the last couple of months?

Founded in 2011, EKI Energy is one of the leading companies in the carbon credit industry in India.

The company listed on the bourses at ₹147 a share in April 2021 with the intention to raise a little over ₹180 m through an initial public offering (IPO).

Since then, the stock has zoomed over 5,000% hitting an upper circuit of 5% almost every day.

The positive sentiment driving this share is the growth of net-zero commitments being made as the world focuses on lowering the carbon footprint.

The stock currently trades at ₹7,779.

EKI Energy Services Share Price Since April 2021

Data Source: BSE

What does EKI Energy Services do?

EKI Energy Services offers services in climate change advisory, carbon credits trading, business excellence advisory, and electrical safety audits.

However, its main business is to facilitate the trading of carbon credits.

What is a carbon credit?

A carbon credit is a certificate that signifies that one tonne of carbon dioxide emission has been reduced from the atmosphere.

This is often obtained by carrying out activities such as planting trees, or through industrial applications such as using carbon-reducing agents at emission points.

The carbon credits can then be traded in the carbon market.

Companies or industries for whom saving a tonne of carbon emission is expensive, buy these carbon credits from companies for whom saving a tonne of carbon is much cheaper.

This helps mitigate environmental crises, reduce greenhouse gas emissions and also creates new market opportunities.

EKI Energy has been in this business for over 12 years, operating under the brand ‘Enking International’.

It has over 2,000 clients which include the likes of NTPC, NHPC, Indian Oil Corporation, Indian Railways, SB Energy, The World Bank, and Fortum.

The company has said that it facilitates the trading of a million carbon offsets (tradeable carbon credits) every month.

Financial Snapshot

EKI Energy Services’ ever-increasing share price has been supported by the company’s robust financials.

In the last three years, the company’s revenues have seen a growth of almost 200% every year. Its net profit growth has also sustained at over 100%.

In the financial year 2021, the company’s revenue grew 189% year on year (YoY) to ₹1.9 bn while net profit grew 316% YoY to ₹187 m.

                           EKI Energy Financials (2018 – 2021)

Data Source: Ace Equity

This momentum has been carried forward in the current fiscal year as well.

For the first half of the financial year 2022, EKI Energy’s revenue has already seen a sharp increase at ₹6.4 bn, compared to the full-year turnover of ₹1.9 bn in 2021.

Similarly, its net profit has zoomed to ₹1.2 bn, against a net profit of ₹187 m reported in 2021.

The strong numbers were driven by increasing market awareness for net-zero emissions, increased demand from major markets especially America and Europe, and improved pricing of carbon credits.

EKI Energy Financials (June 2021- Sep-2021)

Data Source: Ace Equity

The company is debt-free as of March 2021. Moreover, its return ratios are strong with Return on Equity (RoE) at 75.1 and Return on Capital Employed (RoCE) at 98.2.

Promoters own 73.5% of the company and have not pledged any shares. 

The Path Ahead for EKI Energy Services 

EKI Energy Services is eyeing a turnover of ₹15 bn in the current fiscal and expects sales to grow by 50% in 2022-23.

Manish Dabkara, Chairman and Managing Director & CEO of EKI has said that he expects to facilitate the trading of 150 m carbon credits this year, against 55 m last year.

To increase its revenue, the company has acquired a 51% stake in SustainPlus Rise, a multi-disciplinary advisory and consultancy firm that specializes in climate resilience services.

It has also incorporated an offshore wholly-owned subsidiary called Enking International FZCO in Dubai free zone (IFAZA) to expand its presence in the global carbon market.

Moreover, it has recently announced a joint venture with Shell Overseas Investments, a unit of Royal Dutch Shell to focus on developing nature-based solutions (NBS) for carbon capture in India.

The JV will work on conserving, enhancing, and restoring natural ecosystems such as forests, agriculture, grasslands, wetlands, and blue carbon.

This will prevent emissions or lower concentrations of greenhouse gases in the atmosphere.

Currently, there is no highly viable commercial technology available in the carbon removal space. So nature-based solutions are the best solutions to remove carbon dioxide from the atmosphere.

The carbon credits that will be generated from these NBS projects will be shared in proportion to the investment Shell or EKI makes.

If Shell invests 80% of the capital in a project, it will get 80% of the carbon credits generated from it.

Both companies have also signed an exclusivity clause in the contract.

Why the stock could rally some more?

Earlier companies used to receive ‘certified emission reductions’, or CERs, for their projects. Those were issued under a framework that the climate negotiators called ‘Kyoto Protocol’. 

However, this was later replaced by the Paris Agreement. 

In December 2015, 196 countries signed an international treaty in Paris called the Paris Agreement to reduce carbon emissions.

While all rules for the treaty were operationalised, the unfinished agenda was making rules for carbon markets (Article 6).

Then in November 2021, at the UNFCCC’s Twenty-Sixth Conference of the Parties (COP 26) in Glasgow a breakthrough was made in finalising the rules and open up the carbon markets.

With the rules now in place, governments of mostly developed countries are expected to start buying credits. In the Paris Agreement it’s called ‘internationally traded mitigation outcomes’ (ITMO).

The prices of carbon credits (or offsets) are already going through the roof. Today, certain types of carbon credits sell for as much as 60 euros.

To conclude…

India’s carbon market is one of the fastest growing markets in the world and has already generated millions of carbon credits.

Carbon is also now being traded on the MCX (Multi Commodity Exchange). The platform is the first exchange in Asia to trade carbon credits.

As India goes on a seismic shift where traditional energy sources get replaced by green energy like solar, wind, and green hydrogen, there’s massive scope.

Billionaires such as Ambani and Adani have already announced plans for investments in renewable energy to ensure India moves closer towards its net-zero target.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. 

This article is syndicated from Equitymaster.com