Last Updated : Dec 04, 2018 11:53 AM IST | Source:

Corporate governance issue hits Sun Pharma; should you sell or buy on dips?

Most brokerages maintained their reduce or hold ratings on Sun Pharma, while some of them slashed their target price

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Sun Pharma shares witnessed a double-digit fall on December 3 after a report of a regulatory probe against the country’s biggest drug manufacturer by market value. Analysts tracking Sun Pharma turned cautious on the stock, with some even slashing their target price.

PTI reported, quoting sources, that SEBI plans to reopen the investigation into the insider trading case against the company and its promoters, which was settled through the consent mechanism last year.

Following the news, most brokerages maintained their 'reduce' or 'hold' ratings on Sun Pharma (SUNP). However, some of them slashed their target price as the ongoing issues could lead to de-rating of the stock.

“There seems to be no end to Sun Pharma’s woes – the latest one being a whistle-blower filing with SEBI. Previously reported business challenges coupled with recently highlighted issues have led to its sharp de-rating. We appreciate the management for arranging an investor call,” Edelweiss Securities said in a note.

The brokerage slashed Sun Pharma’s target multiple to the sector average of 20 times (from 23 times). It maintained its 'reduce' rating with a revised target price of Rs 430, down from Rs 500 earlier.

Edelweiss highlighted that although the management provided some clarifications, a few questions still remain unanswered, particularly those regarding Aditya Medisales (AML) and the $350 million unsecured loan extended by SUNP.

Sun Pharma Managing Director Dilip Shanghvi told investors in a conference call that his company was committed to the highest level of corporate governance. He also said he had not received any query from SEBI about the whistleblower's complaint.

The whistleblower alleged that the Sun Pharma promoter has made around Rs 8,000 crore through insider trading. Shanghvi rejected the allegations and said the company hasn’t been involved in any insider trading norm violation pertaining to the Ranbaxy deal.

JP Morgan maintained its 'neutral' rating on Sun Pharma with a target price of Rs 525. “Sun Pharma did not receive any query from SEBI, but the news does create some uncertainty,” it said in a report.

The international brokerage added that the company's medium-term earnings trajectory will be crucial for a sustained stock recovery. It expects a ramp-up of the specialty chemicals business to improve margins over time.

Another global brokerage, Jefferies, maintained its 'hold' rating on Sun Pharma with a target of Rs 535. The overhang could continue despite the conference call, it said in a report.

The valuation now appears inexpensive at 20 times its estimated earnings for FY20, but the management's responses may leave market participants with mixed feelings.

Sun Pharma 4 December

Edelweiss' version of highlights from investor call:

  • Audit firm Valia and Timbadia, which was involved in the stock market rigging case, is the auditor of many Sun Pharma subsidiaries.
    A: The matter being referred to is about 20 years old, and none of the members of the firm was party to this investigation.
    B: This audit firm audits some of SUNP’s non-material subsidiaries (0.6 percent of consolidated revenue for FY18).

  • Lakshadweep, an investment company of Mr Valia, is not classified as a promoter as per legal advice. The company plans to consider seeking a revised legal opinion.

  • Jermyn Capital, a small London-based entity found to have links with two of the biggest market manipulators, co-managed Sun Pharma’s FCCB issue.
    A: JP Morgan Chase was the lead book-runner.
    B: This issue dates back to 2004.

  • Orbit Investment Services and Investment Trust of India
    Sun Pharma is not privy to information on these entities.

  • Sun Pharma lent some money to four individuals without security
    A: The amount was small and was fully recovered.
    B: Happened in 1996 – the company adhered to the rules prevailing at that time.
    C: The individuals were investigated by SEBI and, in 2002, a ruling was made passed in their favour of them.

  • Insider trading case settled with SEBI
    A: A minor technical issue as the trading window closure was not announced as the meeting was done on Sunday.
    B: The matter is now settled with SEBI now.

  • Shares of Natco Pharma were purchased by Dilip Shanghvi in a personal capacity through Orange Mauritius.
    A: The transaction was disclosed by Dilip Shanghavi to the stock exchanges.

  • Aditya Medisales
    A: Became a related party due to the consolidation of shareholding among fewer entities than in the past. The company took shareholder approval to consolidate these shareholdings.
    B: The structure was created to achieve a more tax-efficient structure.
    C: SUNP is open to unwinding this arrangement and looking for other options such as direct sales taken by SUNP or by the acquisition of Aditya Medisales at cost.

  • The company denied giving any bank guarantees or loans to Suraksha Realty at any point of in time.

  • Tax rate
    A: Effective tax rate now is in the mid-teens.
    B: As previously guided, this will gradually inch up in the coming years, as manufacturing facilities in tax-exempt regions will start getting taxed.

  • Whistle-blower
     As of now, Sun Pharma has not received any query from SEBI.
    B: Sun Pharma not aware of any whistle-blower complaint, except for from the ones from news articles.

  • Re-opening of insider trading case
    No notice for the same from SEBI.

  • Loans and advances increased significantly from around Rs 70 crore in FY17 to Rs 2,240 crore
     The company expects to reverse this in 2.5 years and has an option to roll back.
    B: The company is open to reversing this transaction but refused to divulge the name of the borrowing entities.

Disclaimer: The above report is compiled from information available on public platforms. advises users to check with certified experts before taking any investment decisions.
First Published on Dec 4, 2018 11:53 am
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