Polycab India Slides 20% on Rs 1,000 Cr 'Unaccounted Sales' Found by I-T Dept

Polycab India shares dropped 22% during morning trade on 11 January 2024. The income tax department revealed that it uncovered "unaccounted cash sales" amounting to about ₹1,000 crore during a search conducted at the company's offices on 10 January 2024.

Central Board of Direct Taxes (CBDT) disclosed that credible evidence found during the search established unaccounted cash sales of approximately ₹1,000 crore by Polycab India. These sales were not recorded in the company's books of accounts. The search covered 50 premises in Mumbai, Pune, Aurangabad, Nashik in Maharashtra, Daman, Halol in Gujarat, and Delhi. Authorized distributors of the group were also included in the investigation.

The CBDT accused a distributor, acting on behalf of Polycab, of making unaccounted cash payments exceeding ₹400 crore for raw material procurement. The investigation also revealed "non-genuine" expenses totaling around ₹100 crore. This included sub-contracting expenses, purchases, and transport expenses, based on seized evidence from Polycab's premises.

Block Deals and Market Response

Simultaneously, multiple block deals worth ₹1,293 crore took place on the exchanges, involving approximately 2.2% stake in Polycab. The identity of the buyers and sellers in these transactions remains undisclosed. Consequently, Polycab's shares were trading at ₹3,825 on the NSE, with volumes higher than the one-month daily average.

Analyst anticipates a medium-term impact on Polycab's stock, expecting a de-rating on valuations that expanded to 37x throughout 2023. The upcoming Q3 results are deemed critical, and any revenue growth below 14-15% may trigger further negativity.

The development puts the valuations of the entire cables and wires sector at risk, as market concerns may extend to other players engaging in similar practices. Stocks with expanded valuations, like KEI Industries, are particularly vulnerable to immediate de-rating.

Despite the recent setback, Polycab has been a ten-bagger stock since its listing in April 2019, with a remarkable IPO performance. The company's shares delivered positive annual returns each year, including over 100% returns in 2023 and 2021. Promoters have gradually reduced their shareholding, while foreign investors increased their stake.

Final Words

Polycab India's shares are currently locked in a 20% lower circuit at ₹3,929.5, marking the largest single-day drop since March 2020. The stock is down 25% in 2024, reflecting the gravity of the situation. Investors await the Q3 results and closely monitor the unfolding developments to assess the long-term impact on Polycab's financial health and market standing.