Polycab India's stock sees 21% rout on allegations of tax evasion

Company refutes allegations; stock may underperform in near term

The stock of India’s largest cable and wireless maker, Polycab India, lost more than a fifth of its market capitalisation on Thursday.

The 21 per cent fall in the stock price took the cumulative fall over the last four trading sessions to 28 per cent.

It was the top traded stock on Thursday and about 19.5 million shares changed hands. It ended at Rs 3,877 apiece.

The sharp reaction was on account of unaccounted cash sales of Rs 1,000 crore detected by the income tax department, says a PTI report quoting the Central Board of Direct Taxes (CBDT) and official sources.

In addition to this unaccounted cash of more than Rs 4 crore was seized and more than 25 bank lockers were put on restraint after the searches were launched against the group on December 22 last year, the CBDT said in a statement. 

The department said that a total of 50 premises (including that of distributors) in Mumbai, Pune, Aurangabad, and Nashik in Maharashtra, Daman, Halol in Gujarat, and Delhi were covered.

A distributor of the company was also alleged to have made unaccounted cash payments exceeding Rs 400 crore for the procurement of raw materials.

There were also expenses related to sub-contracting, purchases and transport to the tune of Rs 100 crore which were ‘not genuine’.

These allegations, especially those related to the procurement of raw materials have raised corporate governance concerns which hit consumer sentiment especially institutional investors who hold 20.5 per cent stake in the company. 

The company has, however, refuted the tax evasion allegations and said that it asserts its commitment to compliance and transparency.

The Street is divided on what the investor response should be to the dip witnessed in the stock on Thursday. 

Market expert Ambareesh Baliga believes that the sharp fall is a knee-jerk reaction to the allegations of tax evasion.

People in the trade say this (cash transactions) is normal in the electrical goods industry. However, given the issues related to corporate governance and large institutional holding, the stock may go down to Rs 3,500 levels, he says.

While the stock may underperform in the near term, there could be a gain when the issue is resolved. If you are an investor, you could probably hold on while new investors could consider accumulating at lower levels, says Baliga.

Others, however, believe that it is better to sit on the sidelines till there is clarity on the issue.  G Chokkalingam, founder, Equinomics Research says that the allegations if true are serious and the figure involved amounts to 6-7 per cent of FY24 annualised sales.

Given the uncertainty and stretched valuations at 34 times FY24 earnings estimates. Given the large institutional holdings there could be a price to earnings or PE derating.

One can buy once the regulatory issues are cleared even if it means paying 5-10 per cent more than the current levels.  

Some analysts expect the stock to underperform given the Rs 1,000 crore tax evasion issue. Anil R, research analyst at Geojit Financial Services says that amid expectations of sustained volatility, there is an anticipation that the stock will underperform.

Looking ahead, despite a favourable demand environment, a moderated growth pace is foreseen due to factors such as higher interest rates, increased input costs, and intensified competitive pressures.

On account of valuation concerns, Geojit Financial Services had recommended a sell rating with a target price of Rs 4,473, which has been achieved. 

In addition to the IT raids, the street will keep an eye on the December quarter results and the impact the raids have on operations.

Analysts led by Renu Baid Pugalia of IIFL Research highlight that Polycab, which was leading on cable and wire sector volume growth has witnessed a moderation in export demand due to destocking the US and income tax raids across corporate offices, factories and its large distributors impairing offtake for three to four days towards end of December. 

The December quarter is a robust one for the sector and the offtake over the last few days of the quarter and year is especially strong. Thus, the raids on the distribution network would have impacted the sales of the company, believe analysts.

IIFL Research believes that the housing wires segment continues to face a challenge given the lag in demand for new launches. Further, NGT-driven restrictions on construction activities in NCR and elections in five states during the third quarter, moderated demand for business-to-business products including that for cables and wires.