Polycab faces investor scepticism after income-tax findings; analysts unconvinced

Income-tax findings on an “unnamed” company perceived to be Polycab Industries and the company’s clarification failed to convince analysts. The Polycab stock corrected 21 per cent to ₹3,905 on Thursday because of a Ministry of Finance release suggesting tax evasion by the group.

While retaining the “Add” rating on the stock, Axis Capital cut the target price to ₹4,300 from its previous target of ₹5,809.

“We do not have sufficient information to decide: if tax evasion occurred?; time for final judgement if Polycab decides to contest the charges; scale of impact if tax evasion is proven (could be GST and IT evasion, and a penalty). But we believe a multiple derating is inevitable till the charges are proven otherwise,” said Axis Capital.

According to Anil R, Research analyst, Geojit Financial Services, the ongoing ₹1,000 crore tax evasion case involving Polycab awaits further clarity.

Amidst expectations of sustained volatility, there is an anticipation that the stock will underperform, he said, adding that regarding Polycab’s core operations, the robust performance in cable and wires was fuelled by strong volume growth, higher government spending, and a thriving real estate market.

“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, we had recommended a sell rating with a target price of ₹4,473, which has been achieved.”

Meanwhile, SmallCap Fund Inc sold a 0.57 per cent stake or 8.51 lakh shares of the company through a block deal window at an average price of ₹3,599.87.

Axis Capital cut its target price to factor in the uncertainties due to the IT raid by cutting the target P/E to 30x Dec’25E (from 38x Sep’25E).

“We cut EPS estimates by 2-4% to factor in disruptions due to IT raid in FY24E and lower cables and wires margins as capacity is added in the sector in FY25/26E.”

In a late night “X” post, the income-tax department said it started search and seizure operations in Polycab and some of its distributors on 12 Dec’23 at more than 50 locations across Mumbai, Pune, Aurangabad, Nasik, Daman, Halol, and Delhi.

During the search, incriminating evidence was found and seized, revealing a modus operandi of tax evasion. Preliminary analysis suggests unaccounted cash sales, cash payments for unaccounted purchases, non-genuine transport, and subcontracting expenses to suppress taxable income.

Unaccounted cash sales of ₹1,000 crore (not recorded in the books), unaccounted cash payments of more than ₹400 crore made by a distributor on behalf of Polycab, and ₹100 crore of non-genuine expenses are some of the allegations. Cash exceeding ₹4 crore and more than 25 bank lockers have been put on restraint.”

In its response, Polycab said it’s yet to receive any communication from the income-tax department and denied any tax evasion and intends to appeal against the same if the charges are levelled.

Legal redressal and final judgment could take a long time in this scenario, cautioned Axis Capital.

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