Multibagger electrical goods stock crashes on alleged tax evasion shock

• Income Tax officials found unaccounted cash sales to the tune of ₹1,000 crore at Polycab’s premises, say news reports.
• Polycab has denied tax evasion and said it hasn't received any communication from the IT department regarding the search outcome.
• Last year, the multibagger stock was added to the MSCI Index.

The stock of Polycab India fell sharply by 15% on Thursday morning trade, after news of tax evasion to the tune of ₹200 crore hit the markets. As per news reports, Income Tax officials found unaccounted cash sales to the tune of ₹1,000 crore during the raids conducted at 50 of the company locations.

The wire and cable manufacturer has been under the taxman radar since 2022. The department had seized unaccounted cash and put 25 of its bank lockers under restraint last year.

The company, on its part, has denied any wrongdoing in a statement to the exchanges. “The company asserts its commitment to compliance and transparency, having fully cooperated with the Income Tax Department officials during the search proceedings in Dec 2023,” the statement reads.

It has denied the rumours on tax evasion as well. “The company has not received any communication from the Income-tax department regarding the outcome of the search,” it added.

MSCI Index effect plus capex push

The midcap stock has been providing its investors with stellar returns and had turned a multibagger last year. The stock was also added to the MSCI index last year, putting it in the radar of international funding which saw fresh buying.

The stock, which was seen as a proxy for the government’s capex push as well as housing construction activity, had been seeing buying even before the index addition. The company too has been chasing growth with a large capex push to the tune of ₹1,200 crore in FY24-25.

“Polycab has been investing in capex over the past 2-3 years, and now operates at est 65-70% avg capacity utilization. Our channel checks suggest healthy demand in cables and wires, and Polycab looks well-poised to benefit, with capacities largely in place,” said a report by Jefferies on January 3.

The company has also recently rebranded itself, and is also chasing business-to-consumer business. It manufactures and sells fast moving electrical goods (FMEG) like switches, switchgears, fans and lighting. “Polycab chooses business categories that possess high market size potential, generate strong margins and better return on investment (RoI),” said a report by ICICI Securities in December 2023.

It had also set overall targets to grow at compounded annual growth rate (CAGR) of 18% as of FY26. It has also created various moats to generate revenue growth.

“Polycab has various certifications which make exports easier. It is also planning warehouses in other geographies which will reduce delivery times and shorten the working capital cycle,” said a Bobcaps report in December 2023.

This is the reason valuations also become so important. Polycab is considered a gold standard - a picture-perfect company until now. Revenue, profit, share price, everything has been very smooth and constantly rising. It was priced at perfection, trading at a P/E of 50 where there is no scope left for a margin of error. Now a de-rating of the multiple is definitely on the cards. This is also the reason valuations must be given heed and the counter must be avoided when there is very little margin of safety. If you buy a stock trading at absurd valuations, P/E 50+, such bad news will result in a more significant fall as compared to a stock with a 15-20 P/E. The fall will be there in both the cases, but the intensity will be less in the latter. In my dreams, I never could have imagined this would happen to Polycab. Average Valuations have gone above P/E 50 Polycab, Kei, RR Kabel We have seen sector re rating and now we will see de rating $POLYCAB.NSE $RRKABEL.NSE $KEI.NSE

— (@EquityInsights) January 10, 2024