Brokerages on Tuesday said that despite Sun Pharmaceutical’s denial on Monday of allegations of insider trading and other corporate governance lapses, some questions remained unanswered. They added that until the market leader reevaluated structures and transactions that weakened investor confidence, these would continue to overshadow the firm’s performance.
The company’s stock on the BSE shed 2.75 per cent on Tuesday, ending the day at Rs 442.8 per share. On Monday, it had fallen 7.5 per cent, following reports over the weekend that the Securities and Exchange Board of India (Sebi) planned to reopen an insider trading case against Sun Pharma. The case had been settled in 2017.
In a response to an email enquiring about its future course of action, Sun Pharma on Tuesday said: “As mentioned in the call yesterday, we are evaluating what will be the best course of action.”
Edelweiss maintained a “reduce” rating on the stock, with a revised target price of Rs 430, down from Rs 500.
A Jefferies India analyst said, “Many of the allegations appear to be related to old events that, we believe, are widely known but these could still remain an overhang, especially as the full details on the allegations are still unavailable. Markets are likely to fret about any related-party transactions, especially with the management’s somewhat equivocal responses. While it was open to altering the distribution structure to curb these transactions, for example, it refrained from full disclosure on the over $300-million loan it advanced in 2017-18 (FY18).”
In its FY18 annual report, Sun Pharma disclosed its super-stockist distribution structure through Aditya Medisales (AML). This was because of the consolidation of Shanghvi Finance, where Managing Director Dilip Shanghvi and his wife have a 100 per cent stake. This requires its classification as a related party.
“This was compounded by an increase in AML sales from Rs 26 billion in FY17 to Rs 80 billion in FY18 (nearly all of Sun Pharma’s domestic sales,” Edelweiss noted in its report on the investor call.
Edelweiss also said the management’s reluctance to disclose details about unsecured loans and advances to employees was also a matter of concern. Jefferies also said it was “disappointing” to not get further details.
Sun Pharma has said it is open to winding down the loans.
The whistle-blower case is also another worry for brokerages. “The whistleblower issue remained unresolved as the company is yet to receive queries from Sebi,” said Motilal Oswal.
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