Polycab India's Shares Continue to Decline Despite Positive Year-On-Year Net Profit Growth

Polycab India's shares have been on a downward trajectory, extending losses even further on Friday.

This follows the release of the company's Q3 results which failed to meet analyst expectations. Furthermore, the ongoing uncertainty surrounding the income tax raid on the company's offices has only added to investors' concerns. Jefferies brokerage, while still maintaining a "buy" rating on the stock, made significant adjustments to its previous target price.

Reasons for the fall:

It was reduced from Rs 7,000 to Rs 5,870 due to Polycab's disappointing profit margins in the third quarter. The company's performance was impacted negatively by lower-than-anticipated exports and increased advertising expenses.

In addition to this, the shadow of the December income tax raid loomed large over the company, adding further pressure. According to the income tax department, the company allegedly has unaccounted cash sales of around Rs 1,000 crore.

What are the thoughts of investors?

Investors remain cautious until a final resolution is reached. However, Polycab India has stated that they haven't received any official communication regarding the search's outcome.

Despite the challenges, Polycab India reported a year-on-year increase in net profit of 15.3% to Rs 416.51 crore and a 16.8% rise in net sales to Rs 4,340.47 crore for the quarter that ended in December 2023.

However, this fell short of Jefferies' previous sales growth forecast of 15%. Wires and cables revenue rose by 18%, while the FMEG (fast-moving electrical goods) segment saw a concerning 15% decline attributed to weak consumer demand.

Worryingly, the company's EBITDA margin contracted 130 basis points quarter-on-quarter to 13.1%. In their analysis, Jefferies cited other companies from 2023 that experienced similar stock price dips after facing income tax department scrutiny. However, they expressed optimism in Polycab's long-term prospects, hence the 'buy' rating despite the revised target price.

Conclusion

Polycab India is going through a turbulent time, with both internal operational challenges and external uncertainties impacting its stock price. While Jefferies remains positive about the company's potential, investors must carefully consider the risks involved before making any investment decisions.