Dilip Shanghvi, managing director of Sun Pharma, in an interview in Mumbai. (Photographer: Kuni Takahashi/Bloomberg)

What Sun Pharma’s Troubles Mean For The Stock

Shares of Sun Pharmaceuticals Industries Ltd. tumbled as much as 13.21 percent, the most in nearly 20 months, as anxious institutional investors sold the scrip after a report revealed excerpts about a whistleblower’s complaint against controlling shareholder Dilip Shanghvi.

India’s largest drugmaker’s corporate governance concerns were back in the spotlight with Moneylife publishing part of the complaint alleging irregularities by the company, Shanghvi and his brother-in-law Sudhir Valia. The stock closed 8.39 percent lower, when Japan’s Daiichi Sankyo sold its stake in Sun Pharma.

A fund manager told BloombergQuint that his asset management company offloaded part of its holding in Sun Pharma in the last two days as it felt uncomfortable about Aditya Medisales Ltd., Sun Pharma’s key distributor owned by the Shanghvi family, playing the role of an investment firm by lending money itself.

Other concerns were the role of Valia on the company’s board and that lack of disclosures about the distributor may be questioned at the company law board, the fund manager said requesting anonymity as he isn't authorised to speak publicly about investments.

A BloombergQuint investigation found that Shanghvi family’s ties with Aditya Medisales went back several years and ought to have been disclosed much earlier than it has been. Shares of Sun Pharma have plunged more than 25 percent since November when a sales note by Macquarie trader Andrew Peretti highlighted corporate governance issues at the firm. While Shanghvi in a conference tried to allay investor nerves, he didn’t reveal who was the beneficiary of related-party loans.

 What Sun Pharma’s Troubles Mean For The Stock

A senior executive at a large institutional investment firm not holding the stock, said he thought that the overhang on the stock might stay. Despite the valuations having come off, he wouldn't want to buy at the current levels, he said. He didn’t want to be identified since he’s now allowed to disclose investment calls.

 What Sun Pharma’s Troubles Mean For The Stock

BloombergQuint found the Shanghvi family indirectly owned Aditya Medisales since at least the year ended March 2007 but disclosed it to the exchanges only in 2017-18. Sun Pharma, in response to a query, had said the relationship was on an arm’s-length basis.

Moneylife has now published the second document filed by the whistleblower highlighting that some Aditya Medisales offices had the same addresses as Sun Pharma; and also had links to Valia-owned property developer Suraksha Realty Ltd. The magazine invited investors to view whistleblower’s documents.

Another fund manager whose firm owns Sun Pharma shares was optimistic that the allegations will not hurt the core business of the company. He will be concerned only if there is evidence of the promoters taking money out of the listed entity and using it for personal use, he said on the condition of anonymity. As of now, the evidence is only on transactions between promoter entities which will not affect the company, adding that any potential action by the market regulator will be against the promoters, not the drugmaker.

Analysts were cautious.

The noise around corporate governance issues will weigh on the stock in the near term, Prashant Nair, analyst at Citi, said in a note. But any move by Sun Pharma to address concerns, like more disclosure on loans to third parties and simplifying the distribution structure for India, could also act as positive catalysts, he said.

About 53 percent analysts tracked by Bloomberg recommend ‘Buy’ on Sun Pharma, 22 suggest ‘Hold’ and a little less than 25 percent advise ‘Sell’.

Piyush Nahar of Jefferies agreed that the issue will remain an overhang till clarity on investigations emerges.

Investor concerns on governance are unlikely to dissipate until Sun Pharma takes concrete corrective steps and clarity emerges on SEBI’s investigation, Macquarie’s Alankar Garude wrote in a note. Sun failed to completely allay key investor concerns pertaining to a few historical issues as well as recent ones like third-party loans of $300 million and the nature of its relationship with Aditya Medisales, especially in the context of the sharp reduction in domestic inventory in the quarter ended September, the brokerage said.

Corrects an earlier version which understated the decline in Sun Pharma shares.