Polycab India witnessed a significant setback as its shares tumbled by 22% during morning trade on January 11. This downturn followed an income tax department search on the company’s premises the previous day, revealing “unaccounted cash sales” totaling around Rs 1,000 crore.
The income tax officials conducted raids on 50 locations, including Mumbai, Pune, Aurangabad, Nashik in Maharashtra, Daman, Halol in Gujarat, and Delhi. Block deals worth Rs 1,293 crore occurred on the exchanges, with 33 lakh shares (representing a 2.2% stake) changing hands.
By 10:12 am, Polycab’s shares were trading at Rs 3,825 on the NSE, reflecting a substantial decrease in market capitalization by Rs 23,091 crore over the past nine sessions, bringing it down to Rs 59,270.70 crore.
The Central Board of Direct Taxes (CBDT) revealed that credible evidence pointed to unaccounted cash sales of Rs 1,000 crore, not recorded in the company’s books. The search operation covered not only Polycab’s premises but also authorized distributors associated with the group.
The investigation disclosed instances of “non-genuine” expenses amounting to approximately Rs 100 crore, including sub-contracting expenses, purchases, and transport expenses. The search operation further unveiled “unexplained” transactions by the distributor, involving the issuance of bills without actual goods supply, leading to artificial inflation of purchase accounts.
Nuvama Institutional Equities anticipates a medium-term impact on Polycab’s stock, expecting a de-rating on valuations, which had expanded to 37x throughout 2023. The upcoming Q3 results are seen as critical, with any revenue growth below 14-15 percent likely to trigger further negativity.
Additionally, Nuvama suggests that the development could jeopardize valuations in the entire cables and wires sector, as market assumptions may extend to other players engaging in similar practices. Stocks with significantly expanded valuations, like KEI Industries at 42x, are deemed at risk of de-rating in the immediate term.
Conclusively, the news has sent shockwaves through the market, impacting not only Polycab but potentially influencing the valuation landscape for the broader industry in the short term. Investors are advised to seek guidance from certified experts before making any investment decisions.