12 Jan Polycab Saga: All You need to Know?

 “Polycab’s IT Raid: Rumors, Denials, and the Investor Dilemma – What Happened?”

In a recent development, Polycab faced an IT raid on December 22nd, leading to a series of events that impacted the company’s stock price and raised concerns about corporate governance. Here’s a breakdown of the situation:

December 22nd – IT Raid

Polycab underwent an IT raid on December 22nd, triggering speculations and uncertainties in the market.

The Ministry of Finance reported that the IT Department initiated search and seizure operations at Polycab and its distributors on December 22, 2023. This extensive operation spanned over 50 locations in Mumbai, Pune, Aurangabad, Nasik, Daman, Halol, and Delhi.

During the search, incriminating evidence pointing to a tax evasion modus operandi was discovered and seized by the authorities.

January 9th – Rumors Surface

A preliminary analysis conducted by Axis Capital, a domestic brokerage firm, highlighted various alleged irregularities.

Allegations and Findings:

• Unaccounted Cash Sales: ₹10 billion, not recorded in the company’s books.
• Unaccounted Cash Payments: Exceeding ₹4 billion, made by a distributor on behalf of Polycab.
• Non-Genuine Expenses: Amounting to ₹1 billion, suggesting sub-contracting and transport irregularities.

 
Rumors started circulating on January 9th, suggesting significant irregularities, including 1800 Cr of sales booked in personal records and 200 Cr of tax evasion. This news resulted in a 9% drop in the stock price.

January 10th -Government’s Involvement

On January 10th, around 8 PM, a press release from the Press Information Bureau (PIB), a government media agency, added another layer to the situation, raising questions about corporate governance.

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Company’s Response: 11th Jan

Post-market hours, Polycab released a press release denying the claims, emphasizing that no written communication had been received from the IT Department regarding the outcome of the search. The company stated that there was no material adverse impact on its financial position.

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Polycab’s Press Release Raises Three Puzzling Questions

Why the Unnamed Announcement on the Finance Ministry Website?

The announcement regarding Polycab’s situation surfaced on the Finance Ministry website without directly naming the company. The question remains: Why the veiled disclosure? What prompted this unusual approach?

Standard Procedure or Unique Circumstance: Why the Anonymity?

Delving deeper, investors wonder whether such indirect announcements are a common practice or if Polycab’s case is an exception. If it’s a unique circumstance, what factors led to this distinctive handling by the authorities?

Communication Gap: Why No Word to Polycab, and Why the Exchange Silence?

A critical query arises regarding the communication flow. If the government has information impacting Polycab, why hasn’t the company received it directly? Moreover, in the absence of such official communication, why hasn’t Polycab promptly informed the stock exchange about the developments?

Investors Dilemma

IT raids are not uncommon in the business world, and the focus should be on the findings and outcomes rather than the raid.

In the age of social media, distinguishing between rumors and authentic news becomes challenging. The investor waited for a day to assess the situation and monitor the price action.

Price action provided an early indication of the event’s magnitude. Despite the initial drop, the stock stabilized, prompting a wait-and-watch approach.

 Analysts’ Views:
 
Anil R, a research analyst at Geojit Financial Services, weighs in on Polycab’s situation.

 
Capital Mind’s Perspective:

 
Looking ahead, Polycab’s stock may recover in three months, returning to previous highs. This is part of our established process.

For instance, when faced with a similar IT raid issue, we exited Manappuram last year at 110/- levels, and the stock now stands at 170/- levels. The unpredictability of these situations is why we follow a systematic approach. While four out of five such exits may rebound, our structured process serves as a safeguard against the fifth one.

This isn’t the first challenge, and it certainly won’t be the last. Each experience becomes a learning opportunity, informing our investment thesis and refining our approach. We embrace the dynamic nature of the market, continually adapting and growing from our experiences.

 
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Fundamentals:

• Market Cap ₹ 60,093 Cr.
• Current Price ₹ 4,002
• High / Low ₹ 5,733 / 2,651
• Return over 1year 44.9 %
• Book Value₹ 480
• Face Value₹ 10.0
• PEG Ratio 1.34
• Stock P/E 37.4
• Industry PE 40.5
• Dividend Yield 0.49 %

Financials

• OPM 14.0 %
• ROCE 27.0 %
• ROE 20.0 %

• Sales growth 20.4 %
• Profit growth52.1 %
• Profit Var 3Yrs 17.6 %
• Sales growth 3Years 16.9 %

Debt Profile

• Debt ₹ 213 Cr.
• Debt to equity 0.03
• Free Cash Flow ₹ 969 Cr.
• Int Coverage 25.0
• Cash Equivalents ₹ 409 Cr.

 
Future Outlook and Lessons Learned

The investor should acknowledge the possibility of similar events in the future, emphasizing the reliance on available information, trust in the company, and adherence to risk management practices. The situation with Polycab serves as a learning experience, and the investor remains open to adjustments in their investment thesis.
 
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