Navigating Through Polycab's Recent Turbulence

Hey Long-term Squad,

I hope you're all doing well! Let's dive into this week's edition of Finance Findings, where we're taking a closer look at Polycab and the recent tax dispute that has sparked the fire.

About Polycab

Polycab is India’s leading manufacturer of cables and wires and allied products such as uPVC conduits lugs and glands. They have a range of cables and wires for practically every application. More recently Polycab has also launched a wide range of consumer electrical products like Fans, Switches, Switchgear, LED lights and Luminaries, Solar Inverters, and Pumps.

The Spark:

On December 22nd, the I-T department suspected "unaccounted cash sales" of roughly 1,000 crore by Polycab. Officials alleged that preliminary analysis suggests the company engaged in unaccounted cash sales, cash payments for unaccounted purchases, non-genuine transport, and sub-contracting expenses to suppress taxable income.

Polycab's Response:

Fast forward to January 11, and Polycab India comes out saying, "We haven't received any official word from the Income Tax Department yet." Confusion ensues, and the stock takes a nosedive, losing Rs 20,000 crore from its market cap.

Is It a Scam?

My thought is this might be tax irregularities, not a full-blown scam. In the past, similar kind of events happened with Hero Motocorp and Divis Labs. Check these stories for more details: Hero Motocorp, Divis Labs.

Analyzing the Numbers:

• Promoters hold 65% with zero pledging.

• Revenues and profits are on the rise, with a 16% and 28% CAGR in the last 5 years.

• Debt to Equity is a mere 0.03 - negligible, right?

• The CFO to PAT ratio stands strong at 1.06.

Breaking down the numbers and conducting a forensic analysis, it appears challenging to uncover any irregularities or distrust by the management—especially for layman investors like us.

What's an investor to do?

Extending the benefit of the doubt to Polycab, in the worst-case scenario where the allegations prove true, the potential tax liability would hover around ₹35 to ₹40 crores which is not a huge amount for the company considering the company’s reserves of ₹7000 crores. This estimate is based on an unaccounted cash revenue of ₹1000 crores and historical PAT margins of 10%.

Although it might take time to settle things down. The stock price could dip further, and I am not catching a falling knife instead keeping an eagle eye for when the stock forms a base. If the growth story continues and if I see a solid foundation, I might just dive in.
Remember, it's all about the long game!

Disclaimer: This is for informational purposes only and not financial advice. Do your own research before making any investment decisions.

Till next time, happy investing!

Cheers,

Finance Findings Team