EKI Energy tumbles over 40% in three sessions after auditor raises concerns

Solar power plant (Representative image)

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In the wake of a negative auditor's report and a disappointing performance in the December 2022 quarter, EKI Energy Services Ltd's stock has plummeted by over 40 percent over the past three trading sessions. This steep decline has dealt a major blow to investors who were once bullish on the company's prospects.

EKI Energy is a renewable energy company that is engaged in the development and operation of solar power plants.

The auditor, Walker Chandiok & Co LLP, in its report stated that there were "material weaknesses" in the company's internal financial controls, and raised concerns about the accuracy and completeness of its financial statements.

According to the report, EKI Energy had incorrectly classified certain expenses as assets, which had the effect of overstating the company's profits. The auditor also expressed fears about the company's ability to continue as a going concern, noting that it had incurred losses in the past and had a negative net worth as of March 31, 2021.

Meanwhile, the company said it disagrees with the opinion of the statutory auditors regarding the recognition of revenue from the contracts entered into with customers for community-based projects and delivery of carbon credits. “The management of the company asserts that the revenue is recognized based on the principles of substance over form, transfer of an underlying asset, and satisfaction of performance obligation,” it said in a statement.

The company said it has recognised only the transaction price received for project deployment as its revenue in the current period. It clarified that future revenue for the issuance of verified carbon units (VCUs) will be accounted for in the future as per relevant accounting standards.

"Even if the company follows the auditors' opinion, it will only result in the deferment of revenue recognition and will not impact the overall revenue and profitability of the company in the long run. The company is working with senior advocates and professionals to amend the contractual clauses with the customers to ensure that the essence of the contract is properly reflected in the contract to the satisfaction of the statutory auditors. They plan to share relevant information and updates with stakeholders from time to time," the company said in its clarification.

In the December quarter, the company's net profit dropped by 76.3 percent to Rs 38.09 crore, while revenue decreased 40.9 percent to Rs 406.57 crore, according to the company's report.

For three consecutive sessions, the stock has been hitting the lower circuit and has suffered a loss of 42.4 percent during this period. On April 7, 2021, the SME IPO was listed on the exchanges and managed to raise around Rs 19 crore. Within just one year of being listed, the firm was able to secure a place on the main board of the SME platform on July 4, 2022.

The company's stock was once considered a multi-bagger in the stock market, with investors betting on the growth potential of the renewable energy sector in India. The stock reached a record high of Rs 3,114.07 on January 21, 2022, which was a substantial increase of over 12,000 percent from its share price of Rs 25.50 on the listing date, according to Bloomberg.

However, the recent concerns raised by the new auditor have raised doubts about the company's financial health and its ability to meet its growth targets, analysts said. As of now, the stock is down by nearly 80 percent from its record high, and it is expected to remain under pressure until EKI Energy addresses the concerns raised by its auditor in a satisfactory manner, analysts added.