Suven Pharma: Refreshing Disclosures
Contract research and manufacturing space in the pharma sector is the equivalent of the offshore development model that helped propel the Indian software sector to global heights. Much of the basic research in pharma happens outside of India in the developed western markets. However, many Indian pharma players have spotted the cost arbitrage of using highly talented research professionals, who come at an affordable cost and in some abundance in India. This has created an opportunity that many have started to exploit. 
 
Suven Pharma has been around for many years but got a new avatar after its demerger in 2018. The financials look quite strong and the recently published numbers for the period ended 31 March 2021 foretell a robust road map for the future. 
 
 
Typically, companies that have a high promoter holding may feel less inclined to share information or not feel compelled to, as the rest of the investors may actually be existing at the pleasure of the promoter! With a 60% shareholding, the promoter, in this case is firmly entrenched. And, yet, the quality of governance and the transparency is excellent.
 
 
The directors’ report is quite informative to any reader and departs from the vague descriptions and discussions that are common in most other companies.
 
A key expectation for any reader of the annual report would be to have a true and accurate picture of the financial position and insights into the operations and risks and prospects specific to the company concerned. Most companies deal with this by bombarding the reader with generic and global information, typically, collated from the financial news media and research reports. The willingness to be specific and transparent on company-specific insights is more of an exception. 
 
Suven makes some difference, alerting the reader to the volatility that the business is subject to, because contract research is not a predicated annual revenue but depends on the pipeline of innovation and new product development of a particular overseas principal that the Indian company is working with.
 
In fact, the praiseworthy aspect is the articulation of the caution which the high growth that characterised the period 2020-21 may not be repeated in 2021-22.
 
Many investors tend to take growth and performance for granted in future periods, based on how a company has done in the immediate past. Also, each industry has many facets and parts; and not all players may perform alike. 
 
Pharma is a complicated industry, little understood by lay investors who may go by the generic recommendations seen in the financial press and social media. These may, typically, lack the discernment of the specific part of the value chain present in a particular company or the differentiation of the markets and product segments. 
 
This necessitates company-specific insights to be furnished in the annual report, which is unfortunately not a trend but an exception. Another noteworthy remark is about the growth factor of the business in the portion where the business risks are dealt with. The same risk analysis indicates the succession-related aspect, given that the promoter is past 70.  The fact that the promoter’s daughter may be in line is indicated, which is another aspect very few family companies are comfortable enough to be candid about.
 
A technocrat-owner prefers a complement of independent directors who sit on the board by virtue of their credentials rather than mere contacts. Suven has a board demonstrating the diversity of experience and professional qualifications.
 
The company, which has turned in a robust pre-tax cash generation of Rs492 crore at the consolidated level, is paying Rs25 crore as dividend. The figure last year was higher at Rs75 crore. It is important to create some predictability and balance in the distribution level compared to the free cash-flow. Investing the surplus cash in liquid mutual fund schemes is a disservice to the investors, unless the company has already outlined a long-term investment plan and needs the cash to fund it.
 
The company has taken a minority stake of a sizeable amount in a US company and it is not clear whether a related party holds the balance stake. The promoter’s daughter draws a salary in the overseas entity based in the US. The bulk of the business of the company is out of Europe and the US link is inadequately explained.
 
There is scope to improve and better inform the investors; but the intent to be more transparent than the average Indian company is discernible in Suven Pharma.
 
NOTE from Editor
 
Suven Pharma Ltd is one of the companies shortlisted for Moneylife’s first-ever Corporate Governance Awards based on direct nominations from active investors, rigorously processed and analysed to eliminate biases.
 
 
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(Ranganathan V is a CA and CS. He has over 43 years experience in the corporate sector and consultancy. For 17 years, he worked as Director and Partner in Ernst & Young LLP and three years as senior advisor post-retirement handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.) 
 
Comments
yerramr
11 months ago
Very good article and a guide to those who seek transparency as guide to their operations.
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