Multibagger EKI Energy is too risky to own; alarming red flags you should notice!

The company's investor presentation attempts to clarify the difference between the auditor's and management's opinions on revenue recognition.

One fine morning, I went to the market to buy some clothes as I had to attend a family gathering on that particular evening. There were many shops but I visited only two of them, let’s say Shop A and Shop B and interestingly, both these shops had a similar range of clothes. However, what struck to me was the narrative of salesperson of Shop A’s and hence, I decided to buy it from Shop A.   

Coming back to the stock market, we have seen how, based on narratives, stocks command an exuberant valuation. Mind you this is not restricted to stocks only but many start-ups too base on narrative and future growth projection command a lofty valuation.   

These narratives, however, sometimes tend to make our judgement a bit cloudy or let’s make it simpler by saying, it shifts our focus from the actual reality and the narrative we hear it out, we tend to share and pass on from one person to another person. As a result, we see some stocks fire all guns blazing and, in some cases, the stocks turn out to be a multibagger in a short span of time.   

In this article, we will talk about one such company, which not long back used to be the darling of investors as the company was in a niche corner of the energy market.   

The stock we are talking about is EKI Energy Services. The stock has touched its lower circuit limit in the last two trading sessions, resulting in an erosion of nearly 40 per cent in its share value.  

Now, you must be eager to know, what’s the reason for this sharp drop in the stock price?   

EKI Energy, a leading energy company, has faced scrutiny following the release of its Q3 financial results. As per communication with Beat The Street, managed by Chartered Accountant with forensic accounting capabilities, they said “An auditor's report by Walker Chandiok of Grant Thornton revealed a significant discrepancy in the company's revenue recognition, leading to a qualified report. The report showed that the company's revenue had decreased by 14 per cent, while its profit before tax (PBT) and profit after tax (PAT) had fallen by 32 per cent and 32 per cent respectively, compared to the reported figures for a period of 9-months.”  

The news has raised questions about the validity of the company's previous auditors, D.N. Jhamb and Anmol Bohra & Co, both of whom resigned in the past three years citing pre-occupation as the reason. The low audit fees paid to these auditors, which increased by 260 per cent in FY23, has also raised suspicions.  

The company's investor presentation attempts to clarify the difference between the auditor's and management's opinions on revenue recognition. However, the lack of provision for bad debts and doubtful debts, despite a large number of debtors accounting for 25 per cent of the company's balance sheet, has raised further questions about the company's accounting practices. The low cash conversion ratio, with only 10 per cent of the company's net profit being realized in cash, has also raised concerns about the company's ability to manage its working capital.  

The audit committee, which includes two independent directors, has also come under scrutiny due to their lack of expertise in accounting and financial statements. They are qualified Company Secretary not Chartered Accountant.   

The unaudited status of EKI's subsidiary financials and the absence of an audit report from the financial statements has further compounded these concerns. Here are the details:   

Unaudited Subsidiaries - Amrut Natural Solutions Pvt Ltd & Enking International FZCO Subsidiary Financials audited by old auditor who resigned as EKI auditor in Nov-20 citing pre occupations - Glofix Advisory Services Pvt Ltd. Auditor have signed FS but no Audit Report available - GHG Reduction Technologies Pvt Ltd.   

In conclusion, the latest Q3 results of EKI Energy have raised serious questions about the company's accounting practices, financial reporting and working capital management. While nothing has been proven illegal, it is imperative for the company to address these concerns and provide clarity to its investors.  

Hence, a clarification from the management side would not only help to clarify these doubts but also would act as a confidence booster for investors. But, until then, it remains a mystery, which remains unsolved and as we know, markets hate uncertainty and hence, we are seeing this stock falling like a pack of cards.