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Here comes the Sun, and do we say it’s all right

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Mumbai: Sun Pharma’s investors seemed a rather desperate lot of late – ready to cheer any piece of action considered even remotely positive for the country’s biggest drugmaker.

A four-fold rise in Sun’s thirdquarter net profit and the management’s reassuring commentary on corporate governance could just be the palliative the doctor ordered. Sun reported a 16 per cent growth in its net sales at Rs 7,657 crore, with net profit of Rs 1,242 crore, compared with Rs 321 crore in the year-ago December quarter.

Last year, Sun Pharma had taken a 513-crore hit over deferred taxes in the US: Adjusted for the one-off tax demand, the on-year profit climbed 49 per cent. The US business showed doubledigit growth at $363 million, led by new drug launches such as Ilumya.

Local sales were up 7 per cent at Rs 2,235 crore.

The management also indicated that Sun Pharma would unwind certain drug filings that are nonviable. At first glance, therefore, Sun’s operating performance appears to have put to flight corporate governance concerns that bogged down the drugmaker through most of the December quarter.

It beat Street expectations on all conventional metrics – profit, sales, or expenses. Forex gains and rationalisation of costs – especially RD expenses – enabled the 600 bps expansion in operating margin.

The company is building its specialty portfolio in the US – with four big product launches this fiscal to date.

The management had estimated the second-half performance to be better than the first half and the third-quarter earnings reinforced this assessment. In the earnings call, the management also clarified the role of Atlas trading company and that Aditya Medisales was never favoured over minority shareholders. Before the earnings, about half of the 40 analysts tracking the Sun Pharma stock had been bullish on the stock.

The Q3 results and the earnings call should trigger more upgrades. The moot question is whether a strong performance, underpinned by the management’s assurance, would suffice to overcome governance concerns.

The answer will be yes for short-term investors, although long-term and institutional investors may still seek more clarity. They would expect the management to walk the talk on increased disclosures and better corporate governance standards.

The regulator’s verdict on the whistle-blower investigation remains an unresolved risk.

The management is evaluating its disclosure policies and is going to make changes in its disclosures from the first quarter next fiscal.

A more transparent communication from the management would be more than welcome by the Street. For long-term investors to make good money, the drug major has to continue this growth momentum into the quarters ahead and provide clear and candid disclosures on its related-party transactions.




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