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India's largest wire and cable maker announced its quarterly results yesterday, in which it reported double-digit growth in revenue and profit. The analysts and stakeholders were looking forward to the earnings call today, seeking answers on the tax evasion concerns that put Polycab India’s shares under pressure.
Inder Jaisinghani, chairman and managing director of Polycab, addressed the issue in his opening remarks saying, “Last month, the Income Tax Department conducted searches at our plants and offices. We have fully cooperated in their investigation. To date, the company has not received any written communication from the income-tax department regarding the outcome of the search. And our operations are running smoothly.”
The management, based on available records, believes there is no material adverse impact on the company's financial position. No material adjustments are deemed necessary for the quarter and nine months ended December 31, 2023, in this regard, the company said.
Some analysts raised questions about its corporate governance practices, to which the company responded saying they’ve been quite vigilant about them for many years.
Referring to the allegations made by the IT department against the company around sub-contracting expenses, purchases and transport expenses, and some authorised distributors of the group covered in the search, an analyst asked that Polycab’s internal processes keep these things under check, especially pointing towards distributors and channel financing.
“We are the pioneers as far as channel financing is concerned. We do almost 50 to 80 percent of our business through dealers and distributors, and out of that, more than 90 percent of the business is done through channel financing. We are continuing with the same on ethics and governance. We have been extremely cautious and fully compliant,” Gandharv Tongia, executive director and CFO, Polycab India, said in response.
Polycab has been under scrutiny after the finance ministry on January 10 posted a release on the Press Information Bureau stating that the IT department had initiated search and seizure operations “in the case of a group engaged in the manufacturing of wires and cables and other electrical items on 22.12.2023. Some of the authorised distributors of the group were also covered in the search. The search action was conducted at more than 50 premises located in Mumbai, Pune, Aurangabad, Nasik, Daman, Halol, and Delhi.”
Without naming the company, it further added that the company has made unaccounted cash sales of around Rs 1,000 crore, which are not recorded in the books of accounts. Evidence of unaccounted cash payments of more than Rs 400 crore made by a distributor on behalf of the flagship company towards purchases of raw materials had also been seized.
The very next day, the Polycab stock fell 21 percent, wiping out over Rs 15,000 crore from its market valuation amid tax evasion concerns. However, the stock recovered by 16 percent after many brokerages maintained a positive stance, increasing the target price.
On January 18, Polycab India reported a 15.3 percent increase in profit for the December quarter to Rs 416 crore compared to Rs 361 crore a year ago. Their revenue from operations grew by 17 percent to Rs 4,340.4 crore in Q3 FY24, up from Rs 4,217.7 crore in the year-ago period. The bottomline fell 3 percent, while the topline rose a moderate 3 percent.
Wire and cable revenue jumped to Rs 3,900 crore, up 17 percent YoY, while FMEG revenue declined 13 percent from a year ago to Rs 296 crore. Other revenue jumped 97 percent to Rs 248 crore.
While volume growth has been robust in the wires and cables division, incremental industry capacity could put some pricing pressure on the company in the medium term, explains Natasha Jain, lead research analyst, consumer durables and electricals sector at Nirmal Bang, a stockbroking firm. “We remain positive on W&C volume growth in the medium term, mainly on the back of strong infrastructure-led spending both by the government as well as private players. Additionally, capex planning ahead of the curve will support this volume growth. FMEG may continue to struggle in the near term, mainly due to subdued consumer sentiment.”
The shares of Polycab fell over four percent to the day's low of Rs 4,250, seeing their second consecutive drop following its quarterly earnings announcement.