| EKI Energy Services Limited | ||||
| Rating downgraded to 'CRISIL BBB-'; Placed on 'Watch Negative' | ||||
| Rating Action | ||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||
| 1 crore = 10 million | ||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has downgraded the rating on the bank loan facilities of EKI Energy Services Limited (EKI, part of EKI group) to 'CRISIL BBB-' from 'CRISIL BBB/Stable' and placed its rating on 'Rating Watch with Negative Implications'.
The rating action follows the announcement of recent disclosure by EKI regarding the delay in filing of Q4 and full year financials and removal of statutory auditors. The board of directors on July 13, 2023, has approved to remove Walker Chandiok & Co LLP as the statutory auditors of the company and the decision is subject to approval from the Central Government and the shareholders of the company. The Rating Watch will get resolved once CRISIL Ratings gets adequate clarity on Q4 and full year audited financials and its impact on the overall credit risk profile.
The rating action also incorporates the increasing competition in trading of carbon credits amid slowdown in export markets and volatility in global pricing leading to sustained moderation in operating margins over the medium term.
The ratings reflects EKI 's established market presence supported by extensive experience of the management with established network of projects, geographically diversified operations, and strong financial risk profile. These strengths are partially offset by its Susceptibility to intense competition and high inventory levels, exposure to adverse changes in government regulations and vulnerability of operating margin to carbon credit prices and fluctuations in forex rates. |
Analytical Approach For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of EKI and all its subsidiary companies which are strategically important to and have a significant degree of operational integration with EKI. These subsidiaries are Glofix Advisory Services Private Limited (GASPL), GHG Reduction Technologies Private Limited (GRTPL), Amrut Nature Solutions Private Limited (ANSPL), and Enking International FZCO (EIF). CRISIL Ratings considers these entities, together referred to as EKI group, have common promoters and strong operational and financial linkages.
Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths: Established market position supported by extensive experience of the management The group has a strong market presence in the carbon credit trading and carbon advisory services, with an experience more than 10 years in the industry. The group has established 1000+ project network in its portfolio as of March 2022 and is focusing on further expanding its supplier base for carbon credits through exploring new projects such as nature based, community based and green hydrogen projects. The deep understanding of market dynamics and eligibility requirements, the group is also expanding into backward integration through setting up community and nature based projects which will provide stable availability of carbon credits.
Diversified operations with large customer base EKI has established relationships with a wide number of clients, which are well diversified across geographies. EKI group derives generates majority of its revenues (more than 95% of its revenue) from export markets including UK, Europe, US, Australia, etc. Diversity in geographic reach and clientele should continue to support the business risk profile.
Strong financial risk profile EKI had a strong networth of Rs 406 crores as on March 31, 2022 and is expected to further improve to Rs 600 Crores as on March 31, 2023 with steady accretion to reserves. EKI’s capital structure is comfortable due to lower reliance on external funds yielding gearing and total outside liabilities to adj tangible networth (TOL/ANW) of below 1 times for year ending on 31st March 2022. EKI debt protection measures are also robust with interest coverage and net cash accrual to total debt (NCATD) ratio of above 100 times for fiscal 2022. The interest coverage is estimated at above 30 times and NCATD above 1.5 times for the fiscal 2023 due to increase in working capital requirements.
Weakness: Susceptibility to intense competition and high inventory levels EKI’s operations are susceptible to the intense competition in global markets with majority of its revenues being generated through exports. Subdued demand from international markets or slowdown in orders could limit the growth trajectory of EKI. In addition, amid slowdown in demand, inventory levels are expected to remain high at 90-100 days over the medium term. As a result, working capital requirements is expected to remain moderate over the medium term.
Exposure to adverse changes in government regulations The carbon credit trading business is susceptible to government regulations in domestic as well as international markets (including the recent developments around Energy Conservation Act, 2022 passed in Indian parliament), and any unfavorable change in policy may impact EKI’s operational performance and profitability.
Vulnerability of operating margin to carbon credit prices and fluctuations in forex rates Operating margins have remained volatile in the range of 5% to 28% over the past four years ending fiscal 2022. The prices for carbon credits are market driven and tied to the global supply demand dynamics. Price realizations for EKI have increased more than 400% in fiscal 2022 as compared to fiscal 2021 which supported the profitability. However, operating margins have moderated in Q3 FY2023 to about 13%, though is expected to improve back with benefits from economies of scale. In addition, with 99% of revenues exposed to export revenues the margins are further susceptible to fluctuations in forex rates. |
Liquidity: Adequate Cash accruals are expected to be over Rs 180 crore which are sufficient against negligible term debt obligation as the company repaid its term loan obligations. Bank limit utilization is low at 26.7 percent for the past twelve months ended February 2023. Cash and cash equivalents was about Rs 13 crores with additional Rs 22 crores in mutual funds as of March 2022. Current ratio is healthy at 3.5 times on March 31, 2022 and estimated at 2.9 to 3.0 times on March 31, 2023. Low gearing and moderate net worth support its financial flexibility and provides the financial cushion available in case of any adverse conditions or downturn in the business. |
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About the Company EKI, incorporated in March 2011, is promoted by Mr. Manish Kumar Dabkara. It is engaged in providing of carbon credit trading, carbon advisory services, climate change and sustainability solutions mainly buying of carbon credits from domestic market and selling into international market. The group is based in Indore and have established global footprint in 40+ countries including 2500 plus clients. |
Key Financial Indicators
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Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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Annexure - List of Entities Consolidated
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| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||
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Criteria Details
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