Corporate Governance Issues in Sun Pharma explained by Stocksbaazigar
In past, IT & Pharma stocks always acted as ‘Defensive sectors’ in falling Market. But in the last few years, we saw that IT sector stocks showed good synergy about rising and falling patterns but Pharma sector stocks had no specific direction, all credit to USFDA. Investors had to be very stock-specific and approach individual stocks differently in this basket.
In 2015 when Founder and MD of Sun Pharmaceutical Industries Ltd. Mr. Dilip Sanghvi became the richest person of India for a very short time, the stock of Sun Pharma traded above Rs 1000 per share price for a while. But then the ‘Halol’ night-mare started haunting the investors.
Halol plant of Sun Pharma contributed 8-10% of the total revenue to the company. The delay in the resolution of regulatory issues raised by USFDA at Halol plant affected the approval of new drugs coming from the facility, which delayed its pick-up in US markets.
Dilip Sanghvi is known as a visionary leader who successfully acquired sick companies and converted them into profitable ones. Sun Pharma acquired companies Caraco, Taro, Ranbaxy, Dusa, Insite Vision and URL etc aggressively. These all acquisitions had strategic reasons and made Sun Pharma 5th largest company of the world in Speciality business. But Ranbaxy deal came with Insider Trading allegations and Taro deal came with price erosion in their product portfolio.
Promoter’s interest in investing in unrelated businesses like Oil & Gas, Solar, Wind energy etc. unrelated businesses also affected Investor’s confidence in Sun Pharma stock post-2015. In the month of June, when Gujarat facility received its first approval in Cancer drug after the gap of 4 years, Sun Pharma share rallied to give it’s 52 Week high of 678.80. After 2 months, Sun Pharma again came under the scanner of US Food and Drugs Administration (USFDA) which issued 6 observations related to deficient procedures at Sun Pharma’s manufacturing facility of Halol.
Sun Pharma shares corrected from the top and tried to take some support at 600 price level. Unfortunately, bad quarterly results pushed Sun Pharma further down to the price level of 485. On 29th November 2019 SEBI decided to re-open the Insider trading case against Sun Pharma after a 150 pages letter from a Whistleblower (perhaps an ex-employee). From 495 to 402 stock fell by almost 23% in just one week. After some clarification by
Mr Dilip Sanghvi himself and an Investor’s conference call share of Sun Pharma rose up to 425 levels but only to hold 400 level support intact. The overhang of Corporate Governance Issue will keep this stock volatile for some more time. Institutional Investors have already exited the stock, that’s why company reduced to 1/5th of it’s Market cap after Macquire’s report of 29th November on ‘Corporate Governance Issues’ in Sun Pharma Industries Ltd. It means only retail investors are stuck in this company and stock will move up again only after Management of Sun Pharma answers all the un-answered/avoided questions by Big Investors.
Clarifications on the allegations:
Let’s discuss the important questions raised by Australian brokerage firm Macquarie on Sun Pharma in its note and what Mr Dilip Sanghvi clarified about it in his conference call
1) Inadequate disclosures related to promoter’s brother-in-law Sudhir Valia in the company
Clarification: Sanghvi said Sudhir Valia doesn’t have anything to do with Operations of Sun Pharma. He only gave financial and strategic advice.
2) About Re-opening of ‘insider trading case’ by SEBI
Clarification: Shanghavi said that company is not aware of that as SEBI didn’t inform them anything about a complaint of Whistleblower and re-opening of Insider Trading Case.
3) About guarantees which were given to real estate firm Surakhsha reality whose founding member is Sudhir Valia
Clarification: Management said it didn’t give any loan or bank loan guarantee to Suraksha realty
4) Questionable selection of London-based firm Jermyn Capital for managing $ 275 million FCCBS issued during 2004-2007. A note says Indian arm of Jermyn Capital has links with Ketan Parekh and Dharmesh Doshi, banned traders who rigged stocks prices and caused Share Market Crash of 2002
Mr Shanghvi said J P Morgan was lead Manager and Jermyn Capital only co-managed it
5) About Insider Trading in Sun Pharma during Ranbaxy acquisition
Clarification: No Insider traded in Sun Pharma before Ranbaxy Acquisition. The decision of acquisition of Ranbaxy was taken in a meeting conducted on Sunday. Being trading Holiday decision was not shared with SEBI on the same day.
6) Macquarie notes that some of Dilip Sanghvi’s stocks investments in a personal capacity as Natco Pharma also had bulk deals done by Orange Mauritius. Orange is FII sub-account of First International Group which has links with Dharmesh Doshi and Jermyn Capital
Clarification: Minority stake in Natco Pharma by Dilip Sanghvi was already disclosed by him
7) Some of Sun Pharma’s subsidiaries are audited by Valia and Timbadia, whose one of partners was allegedly involved in a Stock rigging scam leading to freezing of his accounts.
Clarification: This matter is 20 years old. The Subsidiaries in question are non-material for the company and account only for 0.6% of the consolidated revenue of the company. None of the partners of this audit firm or the firm itself was a party to this investigation.
8) About forceful acquisitions
Clarification: Management clarified that Sun Pharma never arm-twisted any entity for its acquisition. Taro Pharma’s acquisition was done after a favourable court ruling.
9) Sun Pharma’s domestic formulations business being routed through a related party, Aditya Medisales Ltd (AML)
Clarification: Domestic formulation business transactions with AML exists from past many years. It became a related party in FY18. This arrangement was done for tax-purpose and can be re-looked if Investors demand.
10) Why did Sun Pharma lend to four Individuals without Security?
Clarification: This too is a 20+-year-old event which involved money of few lakh rupees only and the loans are fully recovered. The loans were given as per business policies and guidance of applicable laws of the company.
11) What about Non-related party transactions which included loans to employees worth Rs. 2,200 Cr?
Clarification: The company said this was a structured transaction, related to the pharmaceutical business. The company said this was a structured transaction, related to the pharmaceutical business. It will take 2 to 2.5 years to come back with interest rate ranging from 0 to 15 %, depending on certain outcomes.
12) Why Lakshadeep Investment and Finance is not considered a ‘promoter entity when its ownership lies with Sudhir Valia?
Clarification: Lakshadeep Investment Finance is classified as an N0n-Promoter entity and disclosures are made accordingly. The company said in its statement that most of the pieces of information given in note are available on the public domain and are too old to retrospect.
What to do in Sun Pharma shares now?
As per my opinion, even after the correction present P/E of stock is too high. There is a scope of more downside in the company as Analysts are not satisfied with the answers given on AML and Third Party Loans worth Rs 2200 Cr. Chart Structure shows weakness and 400 will act as an immediate crucial psychological support for the stock.
If SEBI re-opens the Insider Trading Case as they have said, the stock will fall further to 380 level where it can get good support. Trend reversal in stock will happen only when we see some delivery based bulk buying by Institutional investors. New One year target for Sun Pharma is now about 560. If you have this stock in your Portfolio, don’t average now. It’s a Falling Knife, don’t catch it. Let it create proper bottom first.
Positional Traders can trade in Sun Pharma with SL 401 or Target 425 where it faces some resistance. If stock manages to give short-covering rally above 425, it can reach up to 455 level too. But the main trend of stock is now downwards and it’s always better to respect the trend. Retail Investors should stay away from companies like Sun Pharma which has so many Corporate Governance Issues. Lupin, Dr Reddy’s etc are always better options in this sector.
(Disclaimer: Please note, this post is for educational purpose only. Stocksbaazigar Mr. Deepak Doddmani is not a SEBI registered Advisor. He is NSE’s Certified Investment Analysis Professional and NSE’s Marketing professional level -4. Stocksbaazigar does not take any responsibility of your gains/losses. Please consult your Financial Advisor before taking any investment related decision. Thank You)