Industries, which is grappling with corporate governance issues, cleared the air on investor concerns on Tuesday as it beat Street estimates, posting a fourfold rise in net profit in the December quarter to Rs 1,241.85 crore from Rs 321.57 crore in the corresponding quarter last fiscal year. This came on the back of 16 per cent growth in revenue.
The company may also spend more on research and development (R&D) next year owing to clinical trials for new indications of its recently launched product Ilumya and others.
Sun Pharma’s managing director (MD) Dilip Shanghvi confirmed that the firm received two queries from the Securities and Exchange Board of India (Sebi) on its foreign currency convertible bond (FCCB) issuance in 2004 and for its transactions with Aditya Medisales (AML).
Speaking to investors in a Q3 earnings call, Shanghvi said the firm already responded to these two queries and does not have any update to share. Shanghvi also tried to clear the air about whether AML benefited in the past at the cost of Sun Pharma’s minority shareholders.
“AML’s financials are available in public domain and makes an earnings before interest tax depreciation and amortisation (Ebitda) margin of only 1.4 per cent from Sun Pharma
for distributing its products in India. Net margins are less than 0.4 per cent. This actually includes dividend income that it receives for its equity holding in Sun Pharma.
So, actually, the net margin is even lower than 0.4 per cent,” he added.
Given this low margin and the size of Sun Pharma’s domestic formulations business, AML had been operating on extremely tight working capital requiring Sun Pharma
to fund AML from time to time, the MD said. “I would like to reassure investors that at no point Sun Pharma shareholders have been disadvantaged due to transactions with AML,” he added.
Last month, the company said its domestic formulations distribution would be transferred from AML, the current distributor and a related party, to a wholly-owned subsidiary of Sun Pharma by the first quarter of the next financial year. Shanghvi on Tuesday reiterated the same, saying that it would be done by Q1FY20.
In January, seeking to ease investor concerns, the embattled drug major had announced plans to unwind loans worth Rs 2,238 crore given to a Dubai-based company Atlas Global. The company’s consolidated balance sheet had receivables of Rs 2,238 crore from a non-related party. Sun had said this was due to Atlas assuming damages on account of supply constraints from its Halol facility in Gujarat that had been impacted by US Food and Drug Administration’s (FDA’s) issues since September 2014.
On Tuesday, in an attempt to allay investor concerns, Shanghvi clarified that Sun Pharma had entered into the transaction with Atlas Global Trading to conserve cash so as to have flexibility to undertake mergers and acquisitions in the speciality space.
“Sun Pharma had given loan to Atlas on two occasions. First time a loan was given in FY15 to enable Atlas consummate transaction it had entered into with Sun as Atlas needed some time to raise the $400 million from the debt market. This temporary loan was duly repaid in FY16 after Atlas' fundraising from global banks,” he said.
“The second time that Sun funded Atlas with a loan of Rs 300 million was during FY18. This was as per the supply terms and conditions since we were unable to fulfill supply obligations towards Atlas due to good manufacturing practice issues at Halol,” the MD added.
The unwinding of the Atlas transaction would result in the assignment of this supply contract to one of the wholly owned subsidiaries.
“Hence in our consolidated financials for FY19, the $300 million loan will get squared off against our unfulfilled supply obligations,” Shanghvi clarified.