Wires crossed: Polycab navigates uncertainty amid income tax raids

Two weeks into 2024 and Ltd’s shares are down 27%. Reports of tax evasion by the company have created an environment of uncertainty. A press release from the finance ministry has stated that the income tax department had initiated search and seizure operations of a group engaged in the manufacturing of wires and cables on 22 December.

The government’s release does not specify the company’s name. A filing made by Polycab in response to the clarification sought by the exchanges says that the income tax department had initiated search proceedings across some of its plants from 22 December to 30 December. This duration is in line with the details released by the government.

The search has revealed that there was 1,000 crore unaccounted cash sales, over 400 crore unaccounted cash payments made by a distributor on behalf of the company and 100 crore non genuine expenses, according to the government. Also, unaccounted cash exceeding 4 crore and more than 25 lockers have been put on restraint.

Polycab has said it has not received any written communication from the income tax department regarding the outcome of the search. But since the search proceedings went on for nine days, it is likely that Polycab’s business would have been hampered. In view of this, Polycab’s year on year revenue growth is expected to be soft at 12% in December quarter (Q3FY24), said Praveen Sahay, an analyst at Prabhudas Lilladher.

For perspective, in Q1 and Q2, Polycab’s revenue grew by about 42% and 27%, respectively. “The second half of December generally sees strong sales but the raid across multiple locations has played spoilsport," he said. Apart from earnings impact, there are other repercussions. “Mutual fund and foreign institutional investors take such corporate governance matters seriously and hence are likely to remain cautious on Polycab.

This might lead to a cut in valuation multiples," said Harshit Kapdia, an analyst at Elara Securities (India). In this backdrop, the Polycab stock is likely to see weakness unless clarity emerges on the income tax matter. Polycab will announce December quarter results on Thursday. Investors will do well to watch out for management comments on this issue and potential impact on financials.

All said, the cables & wires sector is on a strong footing buoyed by healthy demand in the business to business sector and solid infrastructure spends. This is good for Polycab but one must see if this quarter has any disruptions. After the sharp drop, the stock now trades at 30 times its FY25 estimated earnings, showed Bloomberg data..