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MOSL: SUN PHARMA (Buy)-Clarification on corporate governance to allay investor concerns

Sun Pharma: Clarification on corporate governance to allay investor concerns

(SUNP IN, Mkt Cap USD14b, CMP INR418, TP INR560, 34% Upside, Buy)

 

• Plagued by increasing concerns about corporate governance, Sun Pharma (SUNP) has now extended clarification on this matter. The company has announced (a) some alterations to domestic formulation distribution, (b) unwinding of a transaction with Atlas Global Trading (Atlas), (c) appointment of a new auditor in subsidiary companies and (d) clarity on loans/guarantees to Suraksha Realty.
• Although we like SUNP given its promising specialty portfolio/increased traction from Halol and healthy growth in the domestic formulation business, efforts toward resolving the corporate governance issues will be closely monitored.

Key highlights from clarification extended by SUNP over corporate governance:

• One of factors concerning investors was the arrangement between SUNP and Aditya Medisales (AML) for the domestic formulation business. In this regard, the company has proposed to shift distribution of domestic formulation products from AML to its wholly owned subsidiary, effective 1QFY20.
• Loans and advances given to a third party had increased significantly in FY18. SUNP clarified that its FY18 consolidated balance sheet reflected a liability toward obligation of supplies worth INR22.3b to Atlas. The liability was in respect of Atlas assuming the damages on account of Protonix patent litigation settlement entered by SUNP (as disclosed in its AR-FY14). The past regulatory constraints at Halol led to non-adherence of agreed supply schedule to Atlas. SUNP has funded Atlas toward non-fulfillment of its supply obligations till the time such obligations are fulfilled based on the agreement. This was included in the loans and advances schedule of the company’s consolidated FY18 balance sheet. It has been agreed in principle that Atlas will assign its rights and obligation arising from this contract to a wholly owned subsidiary of SUNP, which would settle loans and advanced given to Atlas. As a result, the loan and obligation will cease to exist in the consolidated balance sheet as it would get squared up. This transaction is expected to conclude in FY19.