At Aurobindo, no cure for investor worries


“Subbu (Aurobindo’s chief financial officer Santhanam Subramanian),” said Prashant Poddar, a portfolio manager at ADIA, “there are two concerns I will point out. (On) corporate governance, you know, serious work needs to be done there about what the directors are doing. Just because some of them are promoters, they cannot do anything that they want, right?” Poddar also questioned the management on cash utilization.

It is rare for a large institutional shareholder like ADIA—the world’s third-largest sovereign wealth fund which manages $790 billion in assets on its government’s behalf— to make such a scathing attack on a company like Aurobindo, which until the end of last year was India’s second-largest pharma company by sales.

Shareholders in Aurobindo have lost 0.5% as against a 50.2% jump in NSE 50 between 1 January 2020 and 24 November 2022. This is even as some pharma stocks have outperformed, riding on the Covid-19 pandemic. Cipla’s stock has surged 137%, while that of Sun Pharma is up 132% during the same period.

Business has lately been tepid. Aurobindo’s revenue declined 5.3% from 24,775 crore in the year ended March 2021 to 23,456 crore last year. Profits more than halved from 5,334 crore to 2,647 crore on account of impairments.

But an equally disconcerting worry for shareholders has been on corporate governance and on the tricky issue of other business interests of the promoters of Aurobindo and whether the fallout from those businesses could impact the firm.

Many investors continue to be reluctant to invest in the company, two investors who spoke on the condition of anonymity said, despite Aurobindo’s shares being the cheapest among pharma majors.

A detailed questionnaire sent to Aurobindo seeking comments remained unanswered.

So what is going on inside Aurobindo and why are investors restive?

Arrest of a scion

On 10 November, the scion of one of Aurobindo Pharma’s promoter families got embroiled in an alleged corruption case pertaining to the award of licenses to liquor stores in New Delhi. Sarath Chandra Reddy, the eldest son of PV Ramprasad Reddy, the co-founder of Aurobindo, was arrested by the Enforcement Directorate (ED).

The ruling Aam Aadmi Party (AAP) envisaged a new liquor policy for Delhi in November last year, under which the government would exit from alcohol retailing and instead allow private retailers. Under the new policy, Delhi was to be divided into 32 zones.

Soon, allegations of cartelization and corruption surfaced, prompting ED to start an investigation.

ED, in its complaint, calls Sarath the “kingpin” and says he along with a few of his friends paid 100 crore in kickbacks for what the investigation agency estimates would have given him at least a third of the total liquor market in the National Capital Region.

“SR (Sarath Reddy) was effectively controlling 5 retail zones through his group company i.e. Trident Chemphar Pvt Ltd and proxy entities namely, Organomixx Ecosystems and Sri Avantika Contractors in violation of the Excise Policy which barred any person to control more than 2 retail zones,” says ED in its complaint, a copy of which Mint has reviewed.

Even though the AAP has dismissed allegations of impropriety, the party has jettisoned the new liquor policy.

Sarath, who joined the board of Aurobindo in September 2007, was wholetime director and oversaw procurement and IT at the pharma company.

Shares of Aurobindo slumped 12% to 464 on 10 November, after the news of Sarath’s arrest emerged.

The nine-member board of Aurobindo moved swiftly to troubleshoot. On 12 November, the company said it had relinquished Sarath from all executive responsibilities but allowed him to retain his position on the board.

Aurobindo’s revenue declined 5.3% from  <span class=₹24,775 crore in the year ended March 2021 to 23,456 crore last year.” title=”Aurobindo’s revenue declined 5.3% from ₹24,775 crore in the year ended March 2021 to ₹23,456 crore last year.”>

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Aurobindo’s revenue declined 5.3% from 24,775 crore in the year ended March 2021 to 23,456 crore last year.
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