In today’s Finshots we tell you what’s spooking investors and credit rating agencies about Gensol Engineering.

The Story

If you look at Gensol Engineering Limited’s (GEL) stock price graph over the past week, you’ll see a staircase that’s spiralling downwards. We’re talking about a whopping 40% price drop in just five days.

But anyone who knows Gensol, knows that it went public in 2019 through an SME IPO. And working in renewable energy and EV mobility, two fast-growing sectors, meant that there was a lot of excitement around it. The IPO saw good demand, the stock price soared, profits grew and by 2023, it had moved to the NSE and BSE main platforms. Add to it the fact that the company had a solid order book, rising revenues and big expansion plans, and Gensol looked like a great investment.

So then why are investors getting nervous about its stock now?

Well, turns out, something wasn’t quite adding up beneath the surface. And it all started bubbling up when two ratings agencies, ICRA and Care Ratings, recently downgraded its credit ratings.

You see, credit rating agencies act as watchdogs, checking how healthy a company is and warn investors and lenders about risks. They assign grades from AAA (top-tier) to D (default risk)—just like school report cards. A AAA rating means the company is thriving and can borrow money easily, while a D rating’s a financial flatline, signaling imminent default. And Gensol? It just got downgraded from BBB- to D for its bank loans, meaning it’s struggling to pay its dues. And the reasons behind this are quite something to know about.

First up is the fact that Gensol has huge debts to pay – about ₹1,146 crores. Compare this to its reserves and equity of ₹589 crores and you get a debt-to-equity ratio of about 2x (a sign of financial stress). The bigger problem? It’s struggling to pay back its loans (which means troubles in cash flows). Even murkier? GEL has been telling rating agencies that all debts are being paid on time. So think about it – if a company starts doctoring its paperwork to appear financially stable, it raises big questions about what else could be hidden. It throws the governance and credibility in question. And when lenders and banks lose trust, funding dries up quickly.

Does Gensol need funding though? Yup, a lot. Because it boasts a ₹7,000 crore order book, which, on paper, should mean stable revenues for the next few years. But securing orders and executing them are two very different things. And with its debt servicing ability in question, it’s a long shot to think that it will get fresh funding or smoothly complete its big projects.

This is already becoming clear. Because Gensol planned to raise ₹244 crores through warrants by March 2024, but so far, it has only managed to secure ₹140 crores. The rest? Pushed to December 2025. That means it’s running on less cash than it expected, which is a big issue for a company in an industry that needs huge and constant money flow.

But cash flow isn’t the only problem, and a major issue lies with Gensol’s promoters.

Right now, about 82% of promoter shares are pledged as collateral for loans, up from 80% in September 2024. That’s a lot. What does this mean, you ask?

You see, when a company’s owners need money, they often use their shares as security to borrow cash. And that’s sometimes fine when the stock price is stable or rising, or the company if funding growth with that collateral. But when the stock price crashes, lenders panic. They might ask for more shares as security or start selling the pledged shares—which can drive the stock price down even further. Normally, you wouldn’t expect a promoter to pledge shares of a company as profitable as GEL. But a pledge that went as high as 85% and swinged wildly in a matter of months sure rings alarm bells.

Then to make things worse comes Gensol’s subsidiary – Blusmart Mobility. The problem? Blusmart is struggling too, with no profits and it recently defaulted on its non-convertible debentures (NCDs). This makes Gensol’s financial position even weaker and makes it even harder to find new investors.

Now, could we be wrong about all this? Maybe. After all, we’re looking at what the credit rating agencies flagged. And within a day of the downgrade, Gensol’s management rushed in with clarifications.

Their defense? They say that a mismatch in cash flow from big projects put pressure on their working capital, but insist that there was no financial misreporting and an independent committee is put up to verify this. They also point to their ₹7,000 crore order book as a sign of revenue stability. And they also shared some strong numbers: revenues up 42%, operating profit up 89%, and net profit up 34% in FY25. To calm fears, they announced plans to sell assets and cut debt by ₹665 crores and noted that they had already repaid ₹230 crores this year.

So basically, Gensol insists that things aren’t as bad as they seem.

The only problem is that investors don’t seem to be convinced as the stock keeps falling.

And it makes sense because at this point, Gensol’s response feels like pouring buckets of water on a fire that has already gutted the house. The stock has taken a beating, and there were no warning signs or preventive steps taken early on.

And this brings up a few questions…

Why did ratings agencies take so long to flag these issues? Were there red flags earlier that the market simply ignored?

Next up, how can retail investors spot these troubles before it’s too late? This is especially crucial for SME-listed companies transitioning to the main market. Many of them lack long-established track records, making them riskier bets. And in Gensol’s case, the debt buildup, promoter pledging, and struggling subsidiaries should have been ringing alarm bells. And instead of hoping for a turnaround, it would have been wiser to look elsewhere.

And lastly, apart from the clarifications, what’s the company doing to make good for shareholder losses for the financial mismanagement which was on their part because of excessive borrowing and share pledging? Are the promoters going to put in their personal funds and buy some shares from the open market to give a vote of confidence and bring some relief in the stock’s downfall?

Some also see this stock crash as a buying opportunity, betting on the management’s word that ratings could improve in the next three months—giving Gensol room to borrow again. But isn’t three months a long time when a stock’s already stuck in a lower circuit? The company already has ₹20 crores in monthly debt obligations (₹60 crores over three months), and shareholders can’t even exit as of now. If things go further south (and they often do in situations like this) how much more damage will it cause?

Sure, these are many but valid questions to look at.

So if you’re invested, or thinking about it, ask yourself—where does Gensol go from here?

Well, it needs to prove it can consistently repay debt—not just talk about liquidity. It must show real profitability growth, not just wave around an order book that may or may not materialise into revenue. And its promoters need to step up, reduce their pledged shares or buy more stock to show they have skin in the game.

So yeah, only time could tell if Gensol can turn things around. And if there’s one thing market participants can take away from this, it’s that when numbers and narratives don’t align, caution is key.

Until next time…

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