Gensol Engineering And The Curious Case Of Missing Cash

It is turning out to be a case of falsified and misleading disclosures in the case of Gensol Engineering Ltd. The EPC contractor imploded within three weeks of announcing its third quarter earnings that raised the first red flag for investors.

To begin with, Gensol had set a target of Rs 2,000 crore in revenue for the fiscal ending March 2025, but managed just Rs 1,056 crore for the nine months ending December 2024. This means the company's on the way to miss its revenue guidance for the second consecutive fiscal.

The EPC contractor disclosed in the last earnings call that it had an order book of Rs 7,000 crore, with Rs 3,000 crore received in the last one quarter alone. Execution was held up though, as land was not transferred by the developer. The company claimed that these orders need to be executed in the next 18–24 months.

On March 4, credit rating agencies ICRA and Care Ratings downgraded Rs 2,050 crore of Gensol's debt — over Rs 1,640 crore in long term and over Rs 400 crore in short term debt facilities — to default status after the company failed to service the debt.

ICRA cited communications from the Gensol's lenders that there has been an ongoing delay in the debt service. This is even though the company in its recent analyst call and communication to the rating agency assured it had sufficient liquidity to support operations.

ICRA said in its March 4 report that Gensol had been sharing no-default statements with ICRA at the beginning of every month suggesting timely debt servicing. However, the rating agency now says that it has learnt that certain documents shared by the company, on its debt servicing track record, were ‘apparently falsified’, which raises concerns about its corporate governance practices, including its liquidity position.

This raises disclosure issues with respect to company's filings with stock exchanges at the end of September 2024 when it disclosed the limited review balance-sheet.

Perhaps Gensol Engineering's auditors Suresh Surana & Associates LLP can come up with an explanation since they audited the company's financial performance of the company during six months from April to September last year. Meanwhile, the CFO Ankit Jain has resigned after the credit default. The exit was "due to personal reasons and to explore other professional opportunities," according to an exchange filing.

As per the consolidated profit and loss accounts, the company had a finance cost of Rs 181.12 crore for the nine months ending December 2024, compared to Rs 108.15 crore in the year-ago period. The finance cost indicates significantly higher debt than it has indicated during the Q3 investor call.

Jain, the erstwhile CFO, had stated during the call that total gross debt is Rs 1,150 crore. He added, "if you back out the Refex deal debt, which is about Rs 320 crore, that's going to transfer to Refex, so you get to about Rs 850 crore. So, Rs 850 crore against the equity of Rs 600 crore is the gross debt, which is about 1.5x. And if you were to think of it in terms of net debt, then that number is Rs 600 crore, which is 1:1 ratio to equity".

The company undertook a share warrant issue in the six months to September 2024, and received Rs 15.92 crore from equity proceeds and Rs 131.83 crore from proceeds of share warrants in the first half of the year. While the company received only 25% of the warrant issue, it is unclear why any investor will pay the remaining amount given the stock has fallen by over 72% from its 52-week high of Rs 1,124.90 apiece in early June 2024.

In June last year, the company issued 61.83 lakh warrants to promoters and other non-promoter investors at Rs 871 apiece amounting to Rs 538.60 crore. More than half of it was towards working capital, about 25% of it towards EV manufacturing, and remaining was kept for inorganic acquisition.

The company, in its third quarter investor call, claimed that it received Rs 140 crore and the remaining Rs 400 crore were to come by December 2025, that is 18 months from the date of warrant issue. It is uncertain whether the remaining amount will be honoured or get devolved as the current price is significantly lower than the conversion price.

The company claims that it has sold 2,997 electric four-wheeler vehicles to Refex for Rs 315 crore and the same will release the pledge to the same extent. But the deal will take another quarter to be closed. The company further claims that it will receive another Rs 350 crore from sale of its step-down US subsidiary Scorpius Trackers, but this transaction will be completed by March 2026.

It is interesting to note that the promoter Anmol Singh Jaggi brought 12,000 and 26,500 shares of Gensol Engineering from open market in September and October 2024, when they could have easily converted the existing warrants. The company issued 1.29 lakh shares against share warrants to shareholders in the second quarter ending September 2024, the company disclosed in its notes to account for the period's financial results.

The promoters recently sold 11.5 lakh shares in the open market to raise some liquidity. This they claim will be used to convert warrants and raise cash for the company. The stake sale is insufficient amount to convert the warrants, and the promoter will have to raise private credit to fully convert the warrants into the shares.

At this point it seems a difficult raise given 81.7% of the promoter shares as on December 2024 are already pledged to power sector financiers, including Power Finance Corp. and Indian Renewable Energy Development Agency Ltd., against debt for EV leasing. Gensol's share price has been on a downward trend as well. This means promoters will have to provide additional security against the loans. In the meantime, data on the BSE suggest` shares have been invoked by lenders.

Gensol Engineering began as a solar plant advisory and EPC company and diversified into the electric vehicle leasing business. These two businesses are the main revenue segment for the company. Of the Rs 1,000 crore-odd revenue for the nine months to December 2024, the EV leasing business accounts for the little over Rs 300 crore.

The story of Gensol Engineering began in 2022 and came to the market's attention after a JPMorgan August 2022 visit note titled ‘Another challenger in India’s EV market?’

At that time, the company had a market cap of $180 million (around Rs 1,500 crore). At that time, the note stated that the promoter group of Gensol had invested in the Gurugram based electric transport start-up BluSmart Mobility. In July 2022, Gensol announced plans to acquire a majority stake in a US-based electric vehicle manufacturing start-up and will start manufacturing three-wheeled two-seater EVs for use in personal mobility, ride hailing and last mile mobility, the note said. Today the company claims that it has build a capacity of 30,000 units for its EV but will undertake a slow ramp up as it is a first time OEM.

Post credit default, the board of the company will meet on March 13 to discuss further fund raising. In the meantime, Gensol announced the re-appointment of Jabirmahendi Aga to succeed Jain as its new Chief Financial Officer, effective immediately.

It is time that the regulator steps in with forensic audit of the company and its financials.

Queries sent to the management remain unanswered.