Recently, Polycab India, a big company that makes wires and cables, made headlines because the tax people searched about 50 places connected to the company all over the country.
After these searches, the company’s shares dropped by 3% to Rs.5450 on the stock market called BSE. But, Polycab says they didn’t do any tax evasion, and if they’re accused, they plan to appeal.
What’s the deal with this?
Let’s uncover the story behind Polycab’s tax problems.
(A) Synopsis: What’s wrong with Polycab?
Polycab India, a prominent manufacturer of wires and cables, recently found itself entangled with the tax department, triggering a noteworthy plunge in its stock value. The tax department’s investigation unearthed unrecorded sales totaling a hefty $120 million, causing a substantial 23% drop in the company’s stock, hitting a six-month low.
Despite Polycab asserting no formal communication from the IT department and no expected negative impact on its finances, the incident seemingly played a role in the significant stock downturn.
These unfolding events have captured the attention of market watchers, prompting discussions on the need for diversification in Indian investments, using Polycab’s notable stock descent as a cautionary example.
| Events in Polycab | Details |
| Company | Polycab India Ltd. |
| Industry | Wires & Cables |
| Recent Incident | The Income Tax Department conducted raids on nearly 50 locations linked to the company across the country. |
| Share Price | Shares of Polycab India slipped 3% to Rs. 5450 on BSE after the raids |
| Financials | The cables and wire maker reported a 59% rise in September quarter profit at Rs. 426 crore. Revenue grew 26.5% to Rs. 4218 crore in Q2 against Rs. 3332 crore in the September 2022 quarter. |
Highlighting the impact of recent Income Tax Department raids, the company witnessed a noticeable dip in its share price.
Despite this setback, there’s a silver lining – the company has just reported a substantial surge in both profits and revenue during the September quarter. Firmly denying any allegations of tax evasion, the company plans to contest any charges that might be brought against it.
With the situation still unfolding, it remains premature to definitively conclude whether the company is facing failure or navigating through a challenging phase.
(B) Root Cause: Why is Polycab failing?
In a surprising twist of events, the Ministry of Finance, on January 10, unveiled compelling revelations unearthed by the income tax department. Deliberately avoiding specific company names, the statement exposed substantial irregularities in unaccounted cash sales within the “cables and wires” sector, tallying an alarming Rs.1,000 crore.
This disclosure set the stage for a sequence of impactful developments, casting a significant shadow on Polycab India Ltd, a pivotal player in this industry.
Let’s decode this whole incident in detail-
(B.1) Ministry of Finance’s Revelation: Illuminating Unrecorded Cash Sales
In the January 10 statement, the Ministry of Finance illuminated the income tax department’s credible evidence pointing towards a company in the “cables and wires” domain engaged in unaccounted cash sales, totaling approximately Rs.1,000 crore.
(B.2) NSE’s Immediate Response: Market Turbulence Unleashed
The National Stock Exchange (NSE) witnessed an immediate and substantial reaction to the Ministry’s revelations. Polycab India’s shares experienced a sharp decline of 20.50%, settling at Rs.3,904.70. The market sentiment was palpable, with investors responding to the gravity of the disclosed irregularities.
(B.3) Market Speculation: Polycab India in the Spotlight
Market speculation intensified as observers connected the dots between the Ministry’s statement and Polycab India Ltd. Given its prominent position in the “cables and wires” market and a history of income tax searches in December, there was a strong belief that Polycab India was the company alluded to in the Ministry’s disclosure.
(B.4) Amplifying the Impact: Significance of Ministry’s Disclosure
The perceived connection between Polycab India and the Ministry’s statement added a layer of significance to the disclosure. The belief that a major industry player was under scrutiny heightened concerns and created a ripple effect, impacting not only Polycab India’s stock but also the broader market sentiment.
This unfolding narrative leaves investors and market observers on the edge, eagerly awaiting further developments and the potential repercussions on Polycab India’s standing in the cables and wires market.
(C) Polycab’s unaccounted cash sales confirmed
On December 22, 2023, the Income Tax Department orchestrated an extensive search on over 50 locations associated with Polycab India, unearthing a series of concerning revelations. The investigation exposed hidden sales amounting to Rs.1,000 crore, conspicuously absent from the company’s official accounts.
Notably, the authorised distributors linked to the group were also subjected to scrutiny during this operation.
(C.1) Geographical Sweep of Search
The search action spanned across diverse locations, encompassing Mumbai, Pune, Aurangabad, Nasik, Daman, Halol, and Delhi. This widespread sweep underlines the gravity of the investigation, implicating various facets of the company’s operations.
(C.2) Unveiling the Hidden Sales and Cash Payments
Within the search operations, it was discovered that Polycab India had indeed conducted sales amounting to Rs.1,000 crore, deliberately omitted from their financial records. Shockingly, evidence emerged of a substantial cash payment of Rs.400 crore to a distributor, a revelation that added complexity to the unfolding scenario.
(C.3) Incriminating Evidences and Modus Operandi
As the search progressed, a trove of incriminating evidence, comprising both physical documents and digital data, was uncovered and seized. These findings shed light on the modus operandi employed by the group in collaboration with certain authorised distributors, exposing a systematic approach to tax evasion.
(C.4) Chronology According to the Ministry of Finance
The Ministry of Finance disclosed that the IT Department initiated search and seizure operations at Polycab and its distributors on December 12, 2023, across more than 50 locations in Mumbai, Pune, Aurangabad, Nasik, Daman, Halol, and Delhi. This marked the beginning of a comprehensive investigation that would soon reveal the intricate web of financial irregularities.
(C.5) Unpacking Tax Evasion Techniques
During the search, the authorities seized evidence pointing to a sophisticated tax evasion strategy. Preliminary analysis suggests a range of illicit activities, including unaccounted cash sales, unauthorized cash payments linked to undisclosed purchases, sham transportation transactions, and the masking of income through dubious subcontracting expenses.
(C.6) Allegations and Brokerage Firm’s Insights
As the dust settled, domestic brokerage firm Axis Capital weighed in on the allegations. They pointed to unrecorded cash sales of ₹10 billion, clandestine cash payments exceeding ₹4 billion facilitated by a distributor on Polycab’s behalf, and ₹1 billion in non-genuine expenses. These revelations underscore the multifaceted nature of the accusations against the company, raising serious concerns within the financial community.
(D) Tragic Aftermath of Tax Evasion by Polycab
The following events describe the consequences of the tax evasion case of Polycab-
(D.1) Axis Capital’s Response: Adjusting Targets Amid Allegations
In response to the tax evasion allegations, Axis Capital took decisive action, reducing its target price for Polycab India to ₹4,300 per share. This revision, down from the earlier target of ₹5,809, aimed to account for uncertainties arising from the IT raid. Axis Capital adjusted the target Price/Earnings (P/E) ratio to 30x for December 25 estimates, down from 38x in September, reflecting the potential impact of the ongoing investigations.
(D.2) Insight from Axis Capital: Unravelling Financial Implications
Axis Capital, acknowledging the lack of official communication from the IT Department, expressed the challenge in estimating the balance sheet impact on Polycab in the event of a proven tax evasion case. The potential charges might involve both Goods and Services Tax (GST) evasion (18%) and IT evasion, with the penalty for the latter ranging between 100% and 200%. It’s noteworthy that Polycab had net cash and investments totaling ₹15.3 billion at the end of September 2023.
(D.3) Capital Group’s Move: Offloading Shares Amidst Turbulence
On the same day, US-based Capital Group, through its affiliate SmallCap World Fund Inc., executed a significant move by offloading 8,51,003 shares of Polycab India for ₹337 crore through an open market transaction. This move was marked by a calculated average price of ₹3,955.87 per share, indicating a strategic decision amidst the ongoing uncertainties.
(E) Assessing Future Prospects: Navigating Turbulence with Analysts’ Perspective
Anil R, a research analyst at Geojit Financial Services, weighed in on the situation. He highlighted that the unresolved ₹1,000 crore tax evasion case involving Polycab was awaiting further clarity.
Amid expectations of sustained volatility, there was an anticipation that the stock might underperform. Despite robust performance in cable and wires attributed to strong volume growth, higher government spending, and a thriving real estate market, the outlook foresaw a moderated growth pace.
Factors contributing to this forecast included higher interest rates, increased input costs, and intensified competitive pressures.
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(F) Wrapping Up Polycab’s Saga
In the Polycab story, the IT raid has brought confusion and uncertainty. Without clear messages from authorities, there are changes in predicted prices and a big sale of shares. The unfolding events, including accusations of tax issues and financial complexities, make it hard to understand Polycab’s situation.
With the buzz growing, the future for the company is unclear. Investors want clear information to understand and solve the mysteries around Polycab’s current troubles. Looks like the Ministry of Finance holds a great power to shake up a company to its core.
Let’s see how the mysteries of Polycab unfold in the coming days!
