EKI Energy slumps after Q3 PAT drops 76% YoY; auditor raises red flags

EKI Energy Services hit a lower circuit of 20% at Rs 877.75 after the company's net profit fell 76.3% to Rs 38.09 crore on 40.9% decrease in revenue from operations to Rs 406.57 crore in Q3 December 2022 over Q3 December 2021.

Profit before tax (PBT) tumbled 75.7% YoY to Rs 51.83 crore in Q3 FY23. EBITDA fell 78.03% to Rs 46.9 crore in Q3 FY23. EBITDA margin stood at 11.5% in Q3 FY23, steeply lower than 31% in Q3 FY23.

Total expenditure fell 24.2% YoY to Rs 359.67 crore in Q3 FY23. Employee expenses rose 41.2% to Rs 12.20 crore.

Manish Dabkara, Chairman & MD - EKI Energy Services Ltd. (EKI), said, "The quarter began on a positive note for us as we received much awaited clarity from Minister of Power and New & Renewable Energy, Government of India, that the surplus compliance carbon credits from the country will continue to be exported worldwide. Further, Budget 2023 gave a fresh thrust to India's transition to clean energy.

We are constantly monitoring the macro-economic environment and are proactive in assessing new opportunities as we continue to retain our market leadership. We are very much confident that carbon market will grow gradually and EKI will have major share in the market with the help of our investors, stakeholders, employees and clients."

Meanwhile, the company's auditor Walker Chandiok & Co highlighted red flags with reference to non-compliance with IndAS 115 and revenue recognition.

The auditor stated: "During the quarters ended 31 December 2022 and 30 September 2022, and nine-month period ended 31 December 2022, the company has recognized revenue from contracts with certain customers. However, in our view, recognition of aforesaid revenues and the corresponding cost to fulfil the underlying performance obligations is not consistent with accounting principles as stated in Ind-AS 115, revenue from contracts with customers, as the performance obligation of delivering the verified carbon units under the aforesaid arrangements, is not yet satisfied by the company. Had the company applied the principles of revenue recognition as per Ind AS 115, revenue would have been lower by Rs 1,818 lakh, Rs 10,162 lakh and Rs 19,011 lakh, cost would have been lower by Rs 1,140 lakh, Rs 3,950 lakh and Rs 7,971 lakh and the profit before tax for the periods stated above would have been lower by Rs 679 lakh, Rs 6,212 lakh, and Rs 11,040 lakh respectively, together with corresponding impact on the earnings per share for the aforesaid periods."

However, in the opinion of EKI's management, the agreement between company and the customer is development of carbon credit eligible projects whereas, the form of the agreements between the company and the customers is delivery of Verified Carbon Units (VCUs) from project implementation. The projects have been implemented and some are also duly registered with the respective registry bodies in the name of the project proponent (i.e., customer). Since the projects are duly implemented in the name of the customer, the revenue is ought to be recognized considering substance of the transactions over mere form.

The projects deployed by the company has been registered with the registry bodies in the name of the project proponent (customer), which implies that the underlying asset generating VCUs are transferred by the company. Accordingly, there will be no sale transaction at the time of generation of VCUs and thus revenue must be recognized upon project development by the company.

The company has duly deployed the project and accordingly has satisfied its performance obligation in substance. In the routine course of business of the company, the issuance of VCUs from a project is only an administrative activity in nature and therefore does not qualify to be called as a performance obligation.

EKI has recognized only the transaction price relating to project deployment as its revenue in the results of current period. The future revenue for issuance of VCUs will be earned by the company in addition to the revenue already recognized and the same will be accounted for by the company as revenue in the future as per the relevant and applicable accounting standards. company has realized contractual amount during the year.

EKI Energy Services is a leading carbon credit developer & supplier across the globe. EKI offers strategic solutions to businesses and organizations globally to achieve their climate ambition. EKI offerings span across carbon credit/asset management, carbon credit generation, carbon credit supply, carbon credit offsetting, carbon footprint management, sustainability audits, as well as carbon neutrality and climate positive initiatives. EKI is having around 15% global market share in carbon industry.

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