Sun Pharmaceuticals spins off home formulation business
In a move that has rattled analysts and industry-watchers alike, Sun Pharma, India's largest drug-maker by market cap, has decided to spin off its domestic formulation business.
Sun Pharma has said that it is spinning off the business to a wholly-owned subsidiary Sun Resins And Polymers Pvt Ltd because of "concern regarding certain assets of the domestic business".
The move has sparked a fair bit of speculation about the future of the domestic business, where a range of theories like bringing a foreign partner to a possible sell-out is being talked about.
However, Sun Pharma clarified that the spin-off is only to "enhance focus on the business and allow for quicker responses to competitive market conditions".
"Historically, we have seen that whenever a company spins off its business, it is preparing for a strategic sell off," said Surjit Pal, an analyst with Elara Capital. The domestic business of Sun Pharma, which contributes one third to the overall business, recorded sales worth Rs 2,704 crore in 2011, according to figures available with All India Chemists and Druggists Association. It's domestic business has been growing at 20%, year-on-year.
But India's domestic market is also changing rapidly as government regulations and tax rebates are getting tighter, and analysts say that Sun Pharma's move to 'spin-off' might be an attempt to mitigate such risks which the domestic business will pose in the coming years.
"All these years, the tax rebate that Sun enjoyed in terms of MAT will no longer be available," said Ranjit Kapadia, vice president Centrum Capital.
He further explained that in the new drug policy of the government, six of Sun's high-margin drugs come under price control, which will have a significant impact on the company. "Suppose they form a JV, Sun will get capital and can share the risks with the foreign partner," Kapadia added.
However, fund managers of equity firms say that it is somewhat premature to read too much into the move, and the restructuring could be for better management.
Source: Economic Times