Dilip Shanghvi to alter certain business practices, large fund houses and brokerage firms remained unhappy with the prevailing
corporate governance culture at India’s biggest drugmaker.
The lack of disclosures around non-related party transactions to the tune of Rs 2,200 crore has become a sore spot for investors, who are questioning the nature — and beneficiaries — of these loans.
The uncertainty has seen the Sun Pharma stock skid 11% in just two trading days.
Some investors are also uncomfortable with the company’s lack of clarity on the possible regulatory action from the whistleblower complaint. The role of Aditya Medisales, a pharma distribution company owned by Shanghvi and a relative, is also under scrutiny.
“The management is unwilling to share information on the eventual beneficiary of the loan as they believe that this information is material and sensitive to the business, with the only clarification being that the loan is for pharma business,” wrote Chirag Talati and Kumar Gaurav of Kotak Securities.
“While it was open to altering the distribution structure to curb these transactions, it refrained from full disclosure on the loan it advanced in FY18,” said Piyush Nahar, an analyst with brokerage firm Jefferies.
Kotak outlined the various expenses the company has to incur in the coming quarters, including a $200 million settlement in the US and another $250 million specialty-product-related milestone in the first half of FY19.
Sun Pharma was forced to ask Taro, its US subsidiary, for a $500-million special dividend to strengthen its non-Taro balance sheet. “Does it indicate that Sun Pharma no longer has investment avenues to earn 15% IRR on pharma / specialty projects?” Kotak Securities asked in the note.
The Street believes that risks have increased for the company, leading most analysts to give a ‘sell’ call on the stock. “Few questions still remain unanswered, particularly regarding Aditya Medisales and the unsecured loan extended by Sun Pharma. Most other issues were dated, but enough to question the track record of India’s largest pharma company,” said Deepak Malik, a research analyst at Edelweiss Securities.
While reviewing its estimates, Kotak analysts said that they expect the risks to ‘other income’ that is currently 20% of FY19 profit before tax. These include a possible increase in tax rates, and potential legal uncertainties emerging out of these developments.
On Monday, Shanghvi, promoter and MD of Sun Pharma, said that the company is committed to the highest standards of corporate governance even as a Macquarie sales note had raised several red flags, including alleged transactions with banned stock market traders.
Shanghvi said that the company would work toward re-establishing credibility that would include the review and recall of some past decisions, such as the Rs 2,200-crore loan to employees, among others, and a possible buyout of Aditya Medisales that is classified as related party.
“If we get a sense that it is an important requirement for the shareholders, we will unwind the business,” Shanghvi had said in his call with investors.
Prabhudas Lilladher (PL), another brokerage firm, said that there are many grey areas of Sun’s past transactions that remain unanswered due to lack of clarity over the intentions of the promoter group to get involved in deals where the integrity of the counter party (ies) is questionable.
“We believe that the hangover of corporate governance issues remains in the short-to-medium term and impacts the valuation of the company,” said Surjit Pal, a pharma analyst with PL.