ET Intelligence Group: A governance issue is the last thing that Sun Pharmas investors would want to see impacting the company that has been underperforming due to a host of issues ranging from regulatory to changing dynamics in the US market.Thanks to a subdued performance in the second quarter, the stock has been one of the underperformers in the pharmaceutical sector.
It is down 14 per cent this year even as the ET Pharma Index is flat year-to-date.While a gradual recovery in the stock was being hoped, a social media post flagging governance concerns created panic among the companys investors Tuesday.The post had raised concerns about the auditors of Sun Pharmas subsidiaries, alleged possible conflict of interest involving one of the promoters, alleged complicated web of entities associated with the promoter group, and other alleged lapses of governance in the operations of the business.Though the company responded that it is in compliance with all the applicable legal and regulatory provisions, the response may not be sufficient to allay the fears of the investors.The recent cases of Yes Bank and ILFS have accentuated the importance of corporate governance making the Street extra sensitive as well as unrelenting towards any lapse of governance, past or present, on the part of the management.From a pure defensive stock, Sun Pharma has steadily become a high risk-high return proposition to invest in.
Besides the regulatory risk (which is now inherent to all pharma stocks), Suns investors may now have to factor in the governance risk as well.The risk would be real if market regulator Sebi were to investigate any of the allegations made or if the companys institutional investors relooked at the companys governance standards and raised any apprehensions.Suns stock is down 60 per cent from its record high price of Rs 1,200 reached in 2015.
Only 40 per cent of the analysts tracking Sun Pharmas stock have a buy recommendation on it.Given these circumstances, investors would want the company to disclose more be it the price paid to settle the US antitrust litigation related to Modafinil drug, or the progress on approvals from its Halol plant, or any related party transactions having a bearing on the companys governance.When the largest pharma company in the country fails to deliver on investors expectations, there is little hope for the rest of the sector.