Fundamental Analysis of Gensol Engineering: India is currently undergoing a massive energy revolution, actively taking measures to slow down its dependency on energy generated from non-renewables. At the same time, technological innovations are making electric vehicles a reality, giving rise to further demand for electricity. This becomes the perfect environment for the Company that we are going to talk about today.
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Fundamental Analysis Of Gensol Engineering
In this Fundamental Analysis of Gensol Engineering, we take a look at their operations, financials, debt situation, Future Plans & more…
This Company offers advisory services on matters of solar power generation, takes up contracts from other businesses to construct solar power plants, and does a whole list of things all revolving around harnessing this very renewable resource.
Today, we will learn about when the was the Company incorporated & what it currently does. We will learn more about its business segments and move on to fundamentally analyzing the Company and finally reaching a conclusion.
Company Overview
Gensol Engineering was Incorporated in 2012 and is part of the Gensol group of companies. It is a Gujarat-based entity, predominantly catering to the solar infrastructure as well as the manufacture of Electric Vehicles.
The Company’s business can be divided into three specific segments: Solar EPC, Gensol primarily takes up Engineering, Procurement, and Construction (EPC) Contracts to construct solar infrastructure at their premises. Gensol installs both ground-mounted as well as rooftop panels. It has so far installed a capacity of 590 MW.
Apart from the Solar business, Gensol is offering comprehensive leasing services to ride-hailing players, offering a buy-and-lease package on EV Cars. The Company offers a lease period of 4-5 Years and has so far leased over 3000 vehicles, including cargo vehicles used for delivery.
Gensol has also ventured into the manufacturing of Electric Vehicles by setting up a plant in Chakan, Pune. The facility currently houses over 150+ Engineers and designers, all focused on an ambition to build an EV in the price range of Rs. 5-6Lakh.
It is partnering up with a US-based EV maker for the technical expertise of manufacturing Electric Vehicles. The US-based firm’s name remains unrevealed. The Company is expected to start its production in FY24, with 12,000 cars being produced in its first year, and will thereby scale to 30,000.
Industry Overview
India’s electricity needs, according to the Central Electricity Authority (CEA), are expected to increase and reach 817 GW by 2030. By the same period, the government wants to install 500 GW of renewable energy capacity.
Its power demands are currently met by a 416 GW installed capacity, which is a diverse mix of Coal, Thermal, Hydro, Biomass, and other renewable sources. Out of the 416 GW, nearly 30% of India’s current capacity comprises of renewable energy (Including hydro).
Indian Government is pushing solar energy projects as investments, thereby promoting sustainability and aiding the switch to sustainable energy sources. Advantageous policy frameworks include Renewable Portfolio Standards (RPS), Feed-in Tariffs (FITs), and Power Purchase Agreements (PPAs).
The size of the global solar EPC market exceeded USD 215 billion in 2022, and it is anticipated to grow at a rate of 6.9%+ CAGR from 2023 to 2032, prompted by the increasingly stringent sustainable development goals across many major economies.
The government in its Union Budget 2022-23, announced the issuance of sovereign green bonds as well as infrastructure grants to energy storage technologies, including grid-scale battery systems. Additionally, the government provided Rs. 19,500 crore ($2.57 billion) for a PLI program to promote the production of high-efficiency solar modules.
These regulations offer grid access, long-term contracts, and price guarantees, which support the growth of the solar EPC (Engineering, Procurement, and Construction) business.
India’s total Installed solar capacity has increased from 6.76 GW in FY 2016 to 54.00 GW in FY 2022, growing at a CAGR of 41.39%.
Gensol Engineering – Financials
Revenue & Net Profit
Gensol Engineering reported a Revenue of Rs. 397 Cr in FY23, which increased by Rs. 162 Cr in FY22, growing by over 1.45x in a year. At the same time, its Net Profits increased by a similar 1.25x, growing from 11 Cr in FY22 to Rs. 25 Cr in FY23.
The Company was listed only in FY20, due to which the data for analysis will be for 4 Years instead of the usual 5. So now, looking at the Company’s financials we see that revenue took a 23% fall in FY21, but ever since then, Gensol has performed very aggressively in both revenue as well as profits.
| Fiscal Year | Net Sales | Net Profit |
|---|---|---|
| 2023 | ₹397.35 | ₹24.91 |
| 2022 | ₹162.40 | ₹11.09 |
| 2021 | ₹64.59 | ₹3.18 |
| 2020 | ₹83.48 | ₹2.20 |
| 3-Year CAGR | 68.21% | 124.55% |
Profit Margins
The reason behind the spectacular growth in Net Profits is the profit maximization that we can observe, with an expansion in Operating Margins from 5.04% in FY20 to 15.45% in FY23. The biggest jump was from 10.90% in FY22 to 15.45% in FY23, a 455 Bps growth in a single year.
The Company operates on a single-digit margin territory, earning an average of Rs. 5 for every Rs. 100 worth of business made, in the past 5 years. These Net Profit Margins were in a dire condition back in FY20 and have improved significantly coming around 6% in FY23.
| Fiscal Year | Operating Profit Margin (%) | Net Profit Margin (%) |
|---|---|---|
| 2023 | 15.45% | 6.00% |
| 2022 | 10.90% | 7.00% |
| 2021 | 9.96% | 4.99% |
| 2020 | 5.04% | 2.74% |
| 4 Year Average | 10.34% | 5.18% |
Return Ratios
Gensol’s Return on Equity saw a drop, from 24% in FY22 to 12% in FY23. The massive drop came as a result of a 4.54x growth in Reserves, from Rs. 35 Cr to Rs. 194 Cr. This led to an increase in shareholder’s equity. This may not be a bad sign on the Company’s financials however, Gensol must either reduce its reserves or increase profits in the future.
Return on Capital also saw a huge fall from 13% in FY22 to 7% in FY23. This happened as a result of the Company taking on more debt. Its long-term borrowings increased by nearly 11x from the previous year, significantly affecting its stakeholder’s returns.
| Fiscal Year | RoE | RoCE |
|---|---|---|
| 2023 | 12.00% | 7.00% |
| 2022 | 24.00% | 13.00% |
| 2021 | 9.20% | 12.19% |
| 2020 | 9.64% | 16.16% |
| 4 Year Average | 13.71% | 12.09% |
Debt Analysis
Speaking of increased borrowings, we see that the Company’s debt has reached risky levels. Debt to Equity ratio must always be under 2x, but we see that Gensol has crossed the threshold, to reach 2.5x in FY23. The Company seems to have been consistently adding more & more debt from FY20.
Although debt levels are significantly high, the Company’s interest obligations can easily be covered by over 3.05 times with its Operating Profits. Interest Coverage ratio (ICR) of 1.5x is always the minimum required ICR, and the Company easily fulfills the requirement.
| Fiscal Year | Debt / Equity | Interest Coverage |
|---|---|---|
| 2023 | 2.50 | 3.05 |
| 2022 | 1.77 | 3.61 |
| 2021 | 0.29 | 2.98 |
| 2020 | 0.39 | 2.70 |
| 4 Year Average | 1.24 | 3.09 |
Fundamental Analysis of Gensol Engineering
The Key Metrics of Gensol Engineering are given below.
| Particulars | Amount | Particulars | Amount |
|---|---|---|---|
| CMP | ₹800 | Market Cap (Cr.) | ₹3,073.2 |
| EPS | ₹3.89 | Stock P/E (TTM) | 121.17 |
| RoE | 19.38% | RoCE | 7.00% |
| Promoter Holding | 64.67% | FII Holding | 2.57% |
| Debt to Equity | 2.5 | Price to Book Value | 11.12 |
| Operating Profit Margin | 15.45% | Net Profit Margin | 6.00% |
Future Outlook
- The Company’s main focus will be on Commercial & Industrial (C&I) consumers, who are looking to optimize energy costs.
- Gensol is maintaining a closed-loop policy with its vendor relations thereby ensuring that raw material prices remain in control, in spite of the falling rupee
- The Electric Vehicle segment of the Company targets to lease 5000 EV cars and 1000 EV Cargo Vehicles in next 12 months
Conclusion
As we conclude our article on Fundamental Analysis of Gensol Engineering Ltd, It is a small cap focused on making the most out of India’s energy revolution. This revolution has given rise to a boatload of opportunities, and every Company wants to make the most out of it.
We can list Gensol also as one such company on this list. The Company has been consistently growing at a rapid pace and improving its margins as well. But what is not so good about the Company are its valuations.
You will find it currently trading at a sky-high PE of 136x. You might argue that it also grew its earnings by over 1.25x, but Gensol will have to maintain this rocketing growth to justify those valuations.
Apart from this, the Company’s rising debt is a concern and any investor has to be overly optimistic to invest at this time. Do you think this valuation of Gensol is justified? Do let us know in the comments below.
Written By Nasir Hussain
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