IndiaBulls bullish on carbon credits market

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IndiaBulls bullish on carbon credits market

Sabyasachi Ganguly of Indiabulls Securities appears bullish in this space. He is of the firm opinion that these companies will continue to generate huge cash flows. “Gujarat Fluorochemicals, SRF and Navin Fluorine are huge beneficiaries of the carbon credit trade mechanism,” he said.

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Excerpts from Markets Midday on CNBC-TV18 Watch the full show » RELATED NEWS SRF reports Rs 618.98 crore turnover for quarter ended Jun 2010 Gujarat Fluorochemicals reports Rs 205.60 crore turnover for quarter ended Jun 2010 ALSO READ See what other experts are saying about markets See what FIIs are saying about the markets See what Udayan Mukherjee is saying about the markets

In the past year, some aspersions have been cast on carbon credit companies with skepticism spreading across the world that the Kyoto Protocol will not be extended beyond 2012 and that these companies are probably exaggerating the problem and therefore gaining more carbon credits than they would be otherwise entitled to, an allegation which is gaining momentum across several developing countries. This has created a bit of a market fear that maybe the prices of carbon credits may fall and therefore these stocks are not worth what they are being paid for.

Sabyasachi Ganguly of Indiabulls Securities appears bullish in this space. He is of the firm opinion that these companies will continue to generate huge cash flows. " Gujarat Fluorochemicals , SRF and Navin Fluorine are huge beneficiaries of the carbon credit trade mechanism," he said.

Below is a verbatim transcript of his interview with CNBC-TV18's Latha Venkatesh and Anuj Singhal. Also watch the accompanying video.

Q: What is your own sense that you are going to see the prices of carbon credit fall, after this acquisition did you see a fall in carbon credit prices?

A: In fact today's reports in the press indicate that there has been a 17% rise in the price of carbon credits, not in the price of the shares of companies benefiting from carbon credits. That is in keeping with what we have said in our analysis in our study.

Q: But would there be a fear that going forward you could see if these allegations get proved or get noisier and if the Kyoto Protocol is not extended, will there be a process of carbon credit prices falling because after all the Protocol has fallen?

A: There are two aspects to it, one is whether the protocol will fall or not fall. The issue number two is what happens to the carbon credits issued to companies that destroy hydrofluorocarbon-23 (HFC) which is a byproduct of HCFC-22 which is a refrigerant gas.

Let us first look at the first issue, will the Kyoto Protocol fall? The Kyoto Protocol is supposed to conclude by the end of December 2012. If we don't have a Kyoto Protocol post 2012, it is no surprise. The issue is not with the Kyoto Protocol, you call it by any name. The issue is will there be a market for carbon credits.

The possibility now is looking at what is happening, the world has seen two major conferences on this, one was in last December in Copenhagen and one was this August in Bonn and there have been no positive declarations coming from there. They have just paid lip service to the need to clean the environment. Our study convinces us that there has to be a carbon combat regime.

Public opinion in the developed countries has reached a point from which their government cannot retrace its steps. Environment is one of the two major issues in confronting the developed countries.

Q: So your assumption would be that carbon credit markets would continue?

A: Yes, it has to continue but it could be in a different form. It could be on a different algorithm, the calculus might be different, but it has to be a market.

Q: We had that phase earlier about three-four years when we had stocks like SRF or Gujarat Fluoro hitting the life highs and carbon credit prices also peaked at that time. After that we saw significant erosion in the prices and even though we have seen some rally, they are still nowhere near those peak prices. Going by this history and anecdotal evidence, how do you play these three-four listed stocks?

A: We don't have a formal coverage of these companies. What we have done is we have viewed the carbon credit aspect and we found these three companies, Gujarat Fluorochemicals, SRF and Navin Fluorine are huge beneficiaries of the carbon credit trade mechanism. From that point of view, if you take the base price as 12 euros per CER which is an ultra conservative price, the price is now hovering around 15-16 euros per CER. We have taken at 12 euros per CER for the entire period, for the entire lifecycle of their CDM project.

We see that on this conservative basis, Gujarat Fluorochemicals stands to earn Rs 35.3 billion between now and February 2016, SRF stands to earn Rs 11.5 billion between now and June 2014 and Navin Fluorine stands to earn Rs 6.5 billion up to April 2017. These are very huge figures and they are windfalls. The kind of value that these huge windfalls will see, this is not a one time windfall but for successive years. How they will affect the value of the company that is anybody's guess.