Mutual funds to grapple with side effects of Rs 12,000 cr exposure to Sun Pharma Sun Pharmaceuticals, India’s largest pharma company, is the latest firm whose skeletons have started tumbling of out of the shelves. The company has been accused of wrongdoings and several violations of corporate governance standards by a whistleblower, who has filed a complaint with market regulator SEBI, after which the stock took a major fall from Rs 480 to Rs 420 levels currently. The company’s management was forced to conduct a conference call to address the apprehension among investors, and the stock fall has been arrested at least for now.

All this has put the spotlight on mutual fund industry’s nearly Rs 12,000 crore exposure to the top drug-maker. RupeeIQ takes a closer look.

What happened so far

It was alleged that the audit firm Valia and Timbadia, the auditor of many Sun Pharma subsidiaries, was involved in a stock market rigging case. The company management has clarified that the matter being referred to is about 20 years old, and none of the members of the firm was party to this investigation.

It has been alleged that Lakshdeep Investments, a company owned by Sudhir Valia (brother-in-law of Sun Pharma promoter Dilip Shanghvi), is not classified as a promoter as per legal advice. The company plans to consider seeking a revised legal opinion. Like these, there are 15-20 such issues that have been highlighted. The management has tried to alleviate concerns by giving clarifications. This was one of the reasons why Sun Pharma shares has lost almost 20% in five days.

While analysts appreciate the management for arranging an investor call and giving its side of the story, a few questions still remain inadequately answered. These pertain to Aditya Medisales (AML), a related party, which was involved in the domestic business, and a $350 million unsecured loan extended by Sun Pharma to employees and others. While most of the other issues are dated, but the nature of the so-called corporate governance lapses have been used to question the track record of India’s largest Indian pharma company.

At this moment, there is a consensus that unless Sun Pharma re-evaluates some of its structures and transactions, investors’ confidence will continue to remain weakened. Unless these things are resolved and addressed satisfactorily, these can overshadow Sun Pharma’s overall performance too.

Analysts have cut Sun Pharma stock’s target price too. According to ICICIDirect, “These so-called corporate governance issues are likely to weigh on the stock in the near to medium term, especially in a period where these issues are extensively scrutinised by investors. We reduce our multiple to 20x (from 28x).” The broker has set a price target of Rs 460 based on 20x FY20E EPS of 21.1.

Year to date, the stock has already lost 28%, which is much more than pharma sector’s 9% fall and Nifty’s 2.4% rise.

Fund houses with Sun exposure

Fund Sep-18 Jun-18 Mar-18 Dec-17 Sep-17
ICICI Prudential Mutual Fund 2.956 3.137 3.115 2.622 2.662
SBI Mutual Fund 1.387 1.367 1.237 0.811 0.545
UTI Mutual Fund 0.688 0.671 0.704 0.643 0.665
Axis Mutual Fund 0.652 0.546 0.376 0.353 0.163
Reliance Mutual Fund 0.542 0.769 0.688 0.539 0.504
L&T Mutual Fund 0.312 0.227 0.129 0.221 0.19
Franklin Templeton Mutual Fund 0.261 0.268 0.293 0.27 0.26
DSP Mutual Fund 0.254 0.114 0.048 0.256 0.191
IDFC Mutual Fund 0.216 0.131 0.15 0.157 0.169
Kotak Mahindra Mutual Fund 0.195 0.156 0.368 0.313 0.239
Figures given above are % of equity capital

Mutual funds’ darling

It is no secret that the Indian mutual fund industry loves Sun Pharma. There are over 320 schemes that held Sun Pharma shares. According to calculations, the investment value of MF holding in Sun Pharma stock was Rs 11,985 crore at the end of October 31. This value would have reduced further given that the stock has been under pressure. It will be interesting to see how many funds still hold Sun Pharma shares. Do remember Sun Pharma shares are not just present in equity funds. They are quite popular among hybrid funds too.

In terms of value, ICICI Prudential Value Discovery Fund holds the biggest chunk of Sun Pharma shares, followed by Axis Long Term Equity Fund, SBI ETF Nifty 50, SBI Bluechip Fund, ICICI Prudential Equity & Debt Fund, ICICI Prudential Balanced Advantage Fund, ICICI Prudential Equity Arbitrage Fund, SBI Equity Hybrid Fund, Reliance Pharma Fund, and Axis Focused 25 Fund. They easily have crores of investor wealth riding on this stock alone.

Take a look at the top 10 funds that have the biggest bets on Sun Pharma.

Biggest bets by value
Fund Amount Invested (Cr) No. of Shares
ICICI Prudential Value Discovery Fund 1621.48 27944521
Axis Long Term Equity Fund 639.67 11024128
SBI ETF Nifty 50 605.3 10431777
SBI Bluechip Fund 495.47 8538846
ICICI Prudential Equity & Debt Fund 453.55 7816498
ICICI Prudential Balanced Advantage Fund 372.04 6411685
ICICI Prudential Equity Arbitrage Fund 347.41 5987300
SBI Equity Hybrid Fund 272.8 4701434
Reliance Pharma Fund 255.37 4400976
Axis Focused 25 Fund 236.16 4070000

In terms of net assets %, pharma funds have the biggest bets on Sun Pharma. It is quite common to see funds with 8-14% weight to Sun Pharma stock. Tata India Pharma & HealthCare Fund, ICICI Prudential Focused Equity Fund, Mirae Asset Healthcare Fund, SBI Healthcare Opportunities Fund, and ICICI Prudential Value Discovery Fund have the biggest exposure in terms of net assets %.

Take a look at the top 10 funds with maximum net assets % to Sun Pharma

Biggest bets by % weight
Fund % Net Asset No. of Shares
Tata India Pharma & HealthCare Fund 14.3 455100
ICICI Prudential Focused Equity Fund 12.58 1302299
Mirae Asset Healthcare Fund 12.06 634718
SBI Healthcare Opportunities Fund 10.78 2000000
ICICI Prudential Value Discovery Fund 10.05 27944521
UTI Healthcare Fund 9.58 728380
Reliance Pharma Fund 9.28 4400976
ICICI Prudential Pharma Healthcare And Diagnostics (P.H.D) Fund 9.15 2354766
ICICI Prudential Bharat Consumption Fund – Series 2 8.4 392575
DHFL Pramerica Equity Savings Fund 7.88 44100

The Sun Pharma fiasco will weigh on many of these funds, and it will be a while till the company takes corrective measures and recoup investor confidence.

Author
Rahul Sharma

Rahul Sharma is a contributing writer with RupeeIQ. He can be contacted on contact@rupeeiq.com