Brokerages Say Three Concerns Remain On Sun Pharma Despite Shanghvi’s Clarification

Sun Pharmaceuticals Ltd.’s promoter Dilip Shanghvi denied allegations of insider trading and poor corporate governance after a report that the market regulator may reopen its probe against India’s largest drugmaker and some of its promoters for various lapses.

While the consensus sell-side analysts' opinion remains that majority of the queries have been answered by Shanghvi in an conference call, they believe that there could be some overhang relating to a few details that were not disclosed or need corrective measures.

Concern #1: There was no clarity given on the Rs 2,200 crore loans and advance given by the drugmaker to unrelated parties.

Shanghvi said the loan was given to a pharma company but refused to disclose the details due to it being a structured product and confidentiality norms. He mentioned that the loan was for a duration of two to two-and-a-half-years and has the potential to be reversed.

Concern #2: The other overhang, brokerages said, will be the lack of information on the whistleblower case, alleging irregularities at the company. Sun Pharma said it has not received any query or communication from SEBI and is not aware of any such complaint.

Concern #3: There was an issue raised on Sun Pharma’s domestic formulations business being routed through a related party -- Aditya Medisales Ltd.

A Macquarie sales note highlighted concerns relating to the way the business deal between Sun Pharma and Aditya Medisales was structured. Sun disclosed financials of Aditya Medisales for FY18 and said that the current structure was implemented as it resulted in tax saving before GST implementation. Shanghvi clarified that he is open to restructuring the deal if investor concerns remain.

Here are what brokerages have stated post the conference call:

Credit Suisse

• Maintains ‘Outperform’; target Rs 630.
• Positive: The drugmaker showed the willingness to change some of the structures of Aditya Medisales and smaller auditors.
• Insufficient disclosure on loan of $305 million but highlighted potentially reversing.
• Whistle-blower document overhang as details of 150-page document is not available.

Edelweiss

• Maintains ‘Reduce’, target cut to Rs 430 from Rs 500.
• Queries regarding Aditya Medisales and unsecured loan remain unanswered.
• Sun Pharma needs to re-evaluate some of its structures and transactions.
• Reduce target multiple to 20 times from earlier 23 times.

JPMorgan

• Maintains ‘Neutral’, target at Rs 525.
• SEBI news does create some uncertainty on the stock price.
• The stock is close to its recent lows and expectations have been reset post the recent earnings.
• Medium-term earnings trajectory will be crucial for a sustained stock recovery.
• Sun Pharma does have the financial flexibility to continue long-term investments for specialty business.

Macquarie

• Maintains ‘Neutral’, target Rs 585.
• Management partially addressed investor concerns on corporate governance.
• Aditya Medisales, loans and whistle-blower case need more explaining/corrective measures.
• Insider trading case, Lakshdeep, and other issues were largely addressed.

Prabhudas Lilladher

• Maintains ‘Reduce', target Rs 447.
• There are many grey areas of its past transaction which remain unanswered.
• There are some deals where the integrity of the counterparties are questionable.
• The hangover of corporate governance issues remain in the short-medium term.

Jefferies

• Maintains ‘Hold’, target Rs 535.
• The overhang may remain as valuations aren't inexpensive at 20 times FY20 PE.
• Management responses may leave the markets with mixed feelings.
• Management refrained from full disclosure on a chunky Rs 2,200-crore loan advanced in FY18.
• Many of the allegations appear to be related to old events and are widely known.