Polycab India Share Drops 20%: IT Dept Finds Unreported Cash

Polycab India Share News

Shares of Polycab, a leading cables and wires manufacturing company, experienced a sharp decline of 20% on Thursday, extending the negative trend seen since the beginning of 2024. The Income Tax Department's recent search operations at the company's premises have stirred concerns in the market. Despite these challenges, Polycab has been a standout performer since its IPO in April 2019, delivering substantial returns to investors.

The Recent Developments

The decline in Polycab's shares began on Tuesday when reports of the Income Tax Department's search operations surfaced, leading to a 9% drop. The company swiftly responded, denying any involvement in alleged tax evasion. However, the negative momentum continued, with a 20% drop on Thursday, marking the most significant single-day decrease since March 2020.

Market Sentiment

Despite the recent setbacks, a majority of analysts, approximately 60% of the 31 tracking the company, maintain a bullish outlook, with a "buy" recommendation. The consensus price targets suggest a potential upside of 14.5% from Wednesday's closing levels. Notably, Jefferies stands out with the highest price target of ₹7,000, implying a substantial 42% potential upside.

Polycab's Remarkable Performance

Polycab has been a stellar performer since its listing in April 2019. With an IPO price of ₹538, the stock has been a ten-bagger, reaching a record high of ₹5,733 in December 2023. The company delivered positive annual returns every year since listing, even achieving over 100% returns in 2023 and 2021.

Shareholding Dynamics

Promoters of Polycab have gradually reduced their shareholding, standing at 65.91% as of September 30, 2023, down from 67.97% the previous year. Domestic mutual funds, on the other hand, witnessed a decline in their stake, reaching a three-year low in September. In contrast, foreign investors increased their stake from 9% in June to over 12% in September.

Income Tax Department's Findings

The recent Income Tax Department's search revealed "unaccounted cash sales" of approximately ₹1,000 crore. The CBDT, the administrative body for the Income Tax department, claimed to have found evidence of tax evasion, including unrecorded cash sales, cash payments for unaccounted purchases, and non-genuine expenses amounting to about ₹100 crore.

Impact on Stock and Market Reaction

Following the revelation, Polycab's shares were locked in a 20% lower circuit at ₹3,929.5, resulting in a 25% decline in 2024. The market witnessed multiple block deals worth ₹1,293 crore, with a significant increase in trading volumes. Analysts anticipate a medium-term impact on the stock and potential de-rating of valuations, urging caution for investors.

Outlook and Concerns

Nuvama Institutional Equities anticipates a medium-term impact on Polycab's stock, leading to a potential de-rating of valuations. The upcoming Q3 results are deemed crucial, with revenue growth below 14-15% likely to trigger further negativity. The development has also raised concerns about the entire cables and wires sector, with potential repercussions on other players in the near term.

Conclusion

While Polycab faces challenges following the Income Tax Department's findings, its historical performance and analyst optimism suggest a potential for recovery. Investors, however, are advised to tread cautiously, considering the uncertainties and the potential impact on the broader sector. The situation emphasises the importance of closely monitoring corporate governance and financial transparency in the current market landscape.

This blog is for informational purposes only and not financial advice. Investors should conduct their research and consult financial professionals before making decisions.