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Dear Mr. Dilip Shanghvi
It’s said that silence is golden. But it’s really not that golden when it costs you and your shareholders Rs 11,000 crore in two days. Not only did investors lose money, Sun Pharmaceutical Industries Ltd.’s market capitalisation fell below Rs 1 lakh crore for the first time since August 2013. At its peak, Sun Pharma’s market cap topped Rs 2.5 lakh crore and propelled you to become the richest Indian in 2015. It’s still India’s largest drugmaker by market capitalisation and twice the size of the nearest competitor. But now it doesn’t have the bragging rights to being bigger than the next four rivals combined.
You held a conference call on Dec. 3 to calm investor nerves after the viral circulation of a recent Macquarie sales note and a report of a whistleblower complaint was filed against Sun Pharma with the market regulator. And while you answered most of the questions, the market is still concerned about the Rs 2,240-crore loans and advances to non-related parties in 2017-18—highlighted in Sun Pharma’s own annual report and the whistleblower’s complaint.
You said you haven’t received intimation from SEBI about reopening of an insider trading case, nor get any communication about the whistleblower’s 150-page complaint. A fair point; you can’t respond to something you aren’t aware of or haven’t seen. That brings us to what you are aware of:
"" - The undisclosed beneficiary of the Rs 2,240-crore loan.
You said the loan was advanced in the normal course of business at arm’s length, and at market rates. And that it was given to someone involved in the pharma business. Still, you stopped short of naming the person or the company. Your defence: business confidentiality.
It’s a structured business loan and can take two to two-and-a-half years to be repaid, with interest rate ranging from 0 to 15 percent depending on certain outcomes—again your words.
And yet, you are willing to do your best to reverse the transaction if that becomes necessary in the interest of shareholders.
Moreover, according to Kotak Institutional Securities, Sun Pharma was forced to seek a $500-million special dividend from subsidiary Taro to strengthen the balance sheet of the rest of the group. As the brokerage note said, this weakens the rationale of giving such a large loan to a third party adding that it does indicate that the company no longer has investment avenues to earn 15 percent internal rate of return on pharma or specialty projects.
Investors still aren’t convinced. Sun Pharma’s stock fell as much as 12 percent and ended 10 percent lower by the end of second trading session on Dec. 5 after the conference call (shares recovered part of the losses on Dec. 6). And since more than 87 percent of the ownership is with either promoters or institutions—including foreign investors—the steep fall indicates that it’s the large investors, not retail participants, who sold shares.
Brokerages, too, underscored similar concerns. Here’s what some of them wrote:
- Kotak Institutional Securities: Key concerns pertain to the repeated use of the balance sheet for third-party loans, as well as potential litigation overhang from a whistleblower investigation.
- BofaML: Lack of clarity on third-party loan of almost $300 million (counterparty not disclosed, company willing to reverse if needed) will worry investors.
- Credit Suisse: The explanation about the loan of $305 million was insufficient.
It’s not that investors and analysts didn’t push for a better explanation about the loan during the call. But that wasn’t forthcoming. You missed an opportunity to win the trust back.
If you decide to clarify now, we are all ears.
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