Why Transfer Of Distribution Business Will Hit Sun Pharma’s Q4 Earnings

The business will be transferred in a phased manner on receiving regulatory approvals, the company said in an exchange filing. The company’s arm will commence distribution from this month on the same terms as Aditya Medisales Ltd., owned by the Dilip Shanghvi family.

In December, a whistleblower letter and a brokerage sales note cast doubts about disclosures and corporate governance standards at Sun Pharma. Among those was the link between Shanghvi and Aditya Medisales. A BloombergQuint investigation showed this relationship went back several years.

Impact On Earnings

The transfer of the distribution will have a one-time impact on the revenue and profit for the year ended March 2019, the company said in the filing. What that means is that it will be captured in the fourth-quarter earnings when the actual transfer is happening in the first quarter of the following financial year.

Sun Pharma used to sell its drugs to Aditya Medisales, which distributed them in the domestic market. While the sales are recognised in the books of Sun Pharma, Aditya Medisales held the unsold drugs as inventory.

As part of the transition, Sun Pharma’s wholly owned subsidiary will have to take back the inventory. This will have an impact on the revenue, according to Amey Chalke, research analyst at HDFC Securities. The subsidiary taking over the distribution business will have to take back the inventory pending with Aditya Medisales at the end of March and that would lead to a negative revenue recognition, he said.

Sun Pharma, the producer of drugs sold to Aditya Medisales, will have to recognise the inventory at production cost. That will be lower than the price Sun Pharma sold the drugs to Aditya Medisales.

Aditya Medisales had Rs 1,135.7-crore inventory as of March 2018, according to its filings with the Registrar of Companies. The of inventory as of March this year isn’t known.

“We don’t have anything further to add at this point of time,” said Sun Pharma in an emailed statement to BloombergQuint. “Should we have further information/insights, we will disclose during our Q4 FY19 results announcement.”