This is the commentary from Abacus who sold full stake in Polycab today!!
For starters, Polycab (which was part of our Focused portfolio with an allocation of 5.5%) is currently in the spotlight for the wrong reasons. Just jotting down our thoughts on the current fiasco.
What actually happened?
Polycab had an IT raid on December 22nd. On January 9th, rumors circulated that there were around 1800 Cr of sales booked in personal records and another 200 Cr of tax evasion. The price started to react to this (down 9%) on that day. Post-markets, the company released a press release denying the claims.
Two days later, on the evening of January 10th around 8 PM, there was a press release from PIB (a media agency of the Government under the Ministry of Information & Broadcasting) indicating that the claims were true.
Why didn’t we exit on December 22nd on the news of the IT raids?
IT raids are rare but not uncommon. They keep happening regularly for companies (Manappuram, Astral, Shree Cement, etc, to name a few in the recent past). A raid alone shouldn’t be an issue. The findings & outcome of the raid are what matter. This press release at 8 PM yesterday has kind of clarified it, confirming the lapse in corporate governance.
Why didn’t we exit on January 9th when the rumors started to pour in?
In the current state of social media, it is difficult to distinguish between a rumor and news, and more importantly, the authenticity of it. Polycab was one of our core holdings, which we have held for the past three years (entered in February 2021). Technically, it is not feasible to react to every rumor and move the position in & out of our portfolio. So, we waited for a day to see how things unfold. Our eyes were on the price action. In these kinds of uncertain news, price action gives an early indication of the magnitude of the event. The stock was down 9%, and the next day, it kind of stabilized. So, yes, we waited for some clarity to emerge before making any decision. After yesterday’s press release, the news has become official.
Will there be another Polycab kind of event in our portfolio?
Honestly, I would be lying if I said that there will not be any more such events going forward. Because, fortunately, or unfortunately, we as outsiders have only a certain amount of information to deal with. And for the remaining unknowns, we have to rely on the company’s history, management background, publicly available numbers, and, more importantly, a certain level of trust (both in our process & the management). We have to live with it, and that’s where our risk management & position sizing comes into the picture. We usually don’t allow any single position to go beyond 10% of the portfolio, no matter how confident we are about the company. Even in the case of Polycab, we trimmed our position from 9% to 6% in September 2023, not because we anticipated this fraud, but because we were not comfortable holding large positions in a single stock.
Also, given the state of our bureaucracy and the system our promoters deal with for their day-to-day business operations, we have to accept it. Unfortunate to say this, but that is what it is. Everything is shades of grey, and it all depends on how you would like to react to it, and that’s how businesses grow. To an extent, the market has also accepted it. In fact, there was an instance (almost a decade back, and I heard from a senior investor) where a consumer appliance company, the promoter, went too clean and was not ready to pay a bribe to commence his new factory operations. This delayed the production and impacted its sales. The market didn’t like it.
Coming back to Polycab, it was a false communication from the company and a corporate governance failure. Having said that, three months from now, the stock can bounce back to its previous highs and move on. But that’s ok. That is the process we follow. For example, we exited Manappuram last year due to a similar kind of IT raid issue. We exited at 110/- levels, and the stock is now at 170/- levels. The same thing can happen with Polycab also, I don’t know. In fact, 4 out of 5 of our such exits may bounce back, but our process will save us from that fifth one.
Closing thoughts: This is not the first, and it will not be the last. We learn from our mistakes, implement them in our investment thesis & take it from there.
This is the commentary from Abacus who sold full stake in Polycab today!!
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