Axis Capital has cut its share price target for Polycab India Ltd sharply to Rs 4300 from Rs 5,809 earlier, factoring in the uncertainties due to the IT raid. Geojit Financial Services expects to underperform and says its ‘Sell’ target on the stock has been achieved. The Polycab India stock plunged 21 per cent in the previous session after the Ministry of Finance, without naming the company, said IT department has credible evidence to believe it unearth unaccounted cash sales of Rs 1,000 crore in its raid at a leading cables and wires company in December.
Axis Capital does not have sufficient information to decide whether tax evasion occurred and the timeline for the final judgement if Polycab decides to contest the charges. Besides, it is unsure of the scale of impact if tax evasion is proven — it could be both GST and IT evasion, and a penalty.
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“But we believe a multiple derating is inevitable till the charges are proven otherwise. We cut our target price to Rs 4,300. We cut EPS estimates by 2-4 per cent to factor in disruptions due to IT raid in FY24E and lower cables and wires margins as capacity is added in the sector in FY25/26E,” it said.
Axis Capital said its discussion with the management suggests Polycab India has not received any official letter from the IT Department yet. The company denies any tax evasion and intends to appeal against the same if the charges are levelled. In this scenario, legal redressal and final judgment on that matter could take a long time, it said.
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“We do not have sufficient data at this point in time to estimate the likely balance sheet impact on Polycab in the event the tax evasion case is proven, given: (1) the potential charges levelled might be both GST evasion (18 per cent) and IT evasion, not just IT evasion; and (2) the penalty for the IT evasion could anywhere between 100 per cent and 200 per cent. It is pertinent to note that Polycab had net cash and investments totalling Rs15.3bn end Sep’23,” it said.
Anil R, Research analyst at Geojit Financial Services said the ongoing Rs 1,000 crore tax evasion case involving Polycab India awaits further clarity. Amid expectations of sustained volatility, there is an anticipation that the stock will underperform, he said.
“Regarding Polycab’s core operations, the robust performance in cable and wires was fuelled by strong volume growth, higher government spending, and a thriving real estate market. Looking ahead, despite a favourable demand environment, a moderated growth pace is foreseen due to factors such as higher interest rates, increased input costs, and intensified competitive pressures. On account of valuation concerns, we had recommended a sell rating with a target price of Rs 4,473, which has been achieved,” he said.
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