Gensol Engineering: Why Big Losers Happen and How to Cope

Let me make a confession upfront.

I know of no techniques of avoiding a big loser in a portfolio. Despite my best intentions as well as intense research, there will always be the odd Gensol Engineering that will creep into one's stock portfolio.

I wish the best to those who claim they will never let a stock like Gensol Engineering enter their portfolio.

Either they are lying or are in possession of a mystical crystal ball that tells them the future exactly the way it unfolds.

For us lesser mortals though, we will have to settle for a much lower goal.

The logical question to ask therefore is not 'How to avoid the next Gensol?' but 'How to minimise the damage to Your portfolio from a stock like Gensol?'

Let me repeat that. No matter how hard you try, there will always be those stocks in your portfolio that go down 50%, 60% or even 70% from your purchase price, never to recover again.

This is especially true if you like investing in smallcaps or microcaps. Just as you enjoy multibagger gains from these stocks, you will also have to be prepared for the next Gensol. You can't have one without the other.

You can however, do two things. Reduce the possibility of Gensol like explosions in your portfolio and if a few still occur, minimise the wealth destruction from them.

These goals are more practical in my view. You can certainly minimise Gensol like accidents if not completely eliminate them. And if these accidents occur, you can ensure they don't wipe out a large percentage of your capital.

You see, the analysis of a stock can be divided into 2 parts: Quantitative and Qualitative.

What is the difference?

Quantitative data is mostly verifiable whereas qualitative inputs are hard to verify and rely upon.

If a man says that he weighs 70 kg, we can quickly make him stand on the weighing scale and boom, we have our answer.

His statement that his weight is 70 kg was instantly verifiable.

Likewise, if a girl says that her height is 5 foot 4, that again is a quantitative input and verifiable. We can quickly come to know whether she is lying or telling the truth.

But what about an artwork like a painting?

Is it possible to reach a consensus on whether a painting is pleasant or unpleasant or whether a Bollywood song is melodious or non-melodious?

I believe the opinions will be divided and it will be hard to reach a consensus here.

Well, something similar happens in stock analysis. There are things that are quantitative in nature and there are things that are qualitative.

The company's profitability, its sales growth, its margins, and its balance sheet strength all fall under the quantitative category. It is easy to reach a consensus here and the data is easy to verify.

However, the quality of the company's management, its future plans, its shareholder friendliness, and growth prospects are more of the qualitative type where verification is difficult and reaching a consensus is hard.

The big mistake that most investors make is that they overestimate the qualitative and underestimate the quantitative. Put differently, they will give a lot more importance to the qualitative aspects like management's vision, its grand plans for the future, and its robust expansion plans.

Simultaneously, they will attach a lot less importance to its quantitative parameters like its financial track record, its balance sheet strength, and its cash flow generation ability.

Even a cursory look at these parameters for Gensol Engineering would have pointed to a lot of big red flags.

Take a look at the company's overall debt position between March 2021 and March 2023.

The company's borrowings have gone up more than 50 times from Rs 11 crores to close to Rs 600 crores!

While the topline grew more than 6x, the bottomline 7x, the total debt went up by a whopping 50x.

To be honest, this is where I will stop looking further. I won't touch a stock even with a 10-foot pole if its debt is going up by so much in just a matter of 2 years and also pushing the debt-to-equity ratio well beyond dangerous levels.

To put things in perspective, its debt-to-equity ratio went up from a pretty respectable 0.3 in FY21 to a dangerous 3 in FY23, a ten-fold increase.

This alone would have made me stay away from any stock, let alone Gensol Engineering.

The next big red flag are the valuations. You see, a lot of investors had bought the stock close to its all-time high price of close to Rs 1,100.

At that time, it was trading at a PE multiple of close to 100 times its trailing twelve-month earnings.

Well, any experienced value investor would tell you that if you want to make good returns from a stock, you need to enter it at an attractive PE multiple. In fact, you shouldn't pay even the best companies, a PE multiple of more than 35-40 times.

And guess what? Gensol Engineering wasn't certainly one of the best companies around and was still commanding a PE multiple which was more than twice what you give to the best companies.

If a high debt to equity ratio wouldn't have deterred me from investing in Gensol, the high PE ratio of close to 100 would have certainly done that.

A company with deteriorating balance sheet plus a very high valuation is a toxic combination and should be totally stayed away from.

You see, investing isn't very difficult. It is, in fact, quite simple. I just demonstrated how using basic quantitative information, can help you stay away from big wealth destroyers like Gensol.

Unfortunately, most investors don't want to go down the simple route. They want to make it more complicated by relying more on qualitative data than quantitative.

I am not saying qualitative data has no value. However, relying totally on the qualitative without paying heed to the quantitative, is a recipe for disaster in my view.

Therefore, the next time you are investing in a smallcap or a microcap, ensure that both the qualitative as well as quantitative complement each other.

If the management is making grand announcements but if the fundamentals are weak and the valuations are sky high, then it's better to stay away from such stocks.

In fact, I am a big stickler for valuations.

So, even if fundamentals are decent and qualitatively also, the company ticks most of the boxes, I will still demand a reasonable margin of safety in valuations. A maximum PE of 25-30 is what I would be willing to pay, even for the best quality microcaps or smallcaps.

Lastly, make it a point to categorise every investment you make into whether it is an investment or a speculation.

A stock which has good quantitative track record and is also decent qualitatively, can be considered an investment, provided the valuations are also attractive with a sufficient margin of safety.

However, if it fails either qualitatively or quantitatively or is available at exorbitant valuations, classify it as speculation.

If it is an investment, do not make it more than 4-5% of your portfolio and if it is a speculation, it should not be part of your portfolio at all or at best, should not occupy more than 1% of portfolio.

Follow these simple rules and you would have taken a big step towards minimising Gensol Engineering type accidents in your portfolio.

Even if some accidents happen, your portfolio may not fall so much as to make recovery very difficult.

Happy Investing.

Warm regards,


Rahul Shah
Editor and Research Analyst, Profit Hunter
Equitymaster Research Private Limited (formerly Equitymaster Agora Research Private Limited) (Research Analyst)