Shishir AsthanaMoneycontrol Research
As if Dilip Shanghvi of Sun Pharmaceutical did not have his hands full with troubles in the flagship company, he seems to be going about acquiring companies completely unrelated to his line of business.
It has been reported that Dilip Shanghvi’s Sun Oil and Natural Gas has bought a 33.3 per cent stake in the Hazira oil and gas field from Canada’s Niko Resources Ltd and is in talks to buy the remaining portion from Gujarat State Petroleum Corp (GSPC). This is the second non-core investment by Shanghvi after he picked up wind energy major Suzlon.
Ironically the acquisition comes at a time when Sun Pharma, along with other Indian pharmaceutical companies, is facing unprecedented regulatory issues from the US Food and Drug Administration (US FDA). On top of it Taro Pharmaceutical, Sun Pharma’s Israeli acquisition, is facing a class action suit by investors over its pricing policy for skin infection treatment Clobestasol. In September, the company, along with some others, was issued a subpoena by the U.S. Department of Justice over price collusion involving 20 drugs.
Amidst these troubling times for the flagship, an acquisition of an oil and gas producing company is unlikely to go down well with investors. Though its size is not public, the fact remains that an unrelated acquisition was made.
Indian investors and analysts did not like the group picking up a stake in Suzlon. Brokers had highlighted then that the unrelated acquisition was an unnecessary distraction. While Indian investors were polite and did nothing but grumble slightly, those in the United States voiced their disapproval loudly. Taro Pharmaceutical, listed in NYSE, had also announced that it might invest in Suzlon’s wind farm project in the U.S. for reducing tax liabilities. However, within four days, on strong negative feedback from investing companies the decision was withdrawn.
What separates Sun Pharma from other pharmaceutical companies in India is Shanghvi’s focus on making it a niche company. While other players were fighting over market share in the generic market, Sun Pharma concentrated on building a portfolio on specialty and chronic segments of neurology, cardiac and diabetic therapeutic segments.
Shanghvi’s focus on acquisition of 20 companies in 16 years to fill in the product gaps helped the company become the largest in India. The jewel in the crown was the Taro Pharma acquisition which was completed after a three-year court room battle. However, the company fumbled in its largest acquisition to date, Ranbaxy. Legacy issues and US FDA-related problems at Ranbaxy’s manufacturing facility has impacted Sun Pharma’s performance.
While Sun Pharma was still struggling to integrate Ranbaxy, it decided to invest in Suzlon. Unfortunately for Sun Pharma the acquisition came at a wrong time, as its revenue growth which was at a 30% CAGR since FY01 to FY15 hit a wall with growth flattening to only 2% in FY16.
Though Dilip Shanghvi does not look after the day-to-day business of Sun Pharma, unrelated acquisitions raise questions on management focus, especially when the parent company is going through a rough patch. While Sun Pharma group claims to be only a financial investor in Suzlon, its acquisition from Niko Resources and later from GSPC will make it the sole promoter and put it the driver’s seat, thus asking for management attention.
For investors, the Sun Pharma stock has long stood for a focus on growth, both through organic and inorganic routes. Is this lack of focus through unrelated investments the reason for its underperformance?
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