Sun Pharmaceutical Industries has shelved plans to invest in a $225-million wind energy project in the US following investor concerns.
On Tuesday, Taro Pharmaceutical Industries, its US subsidiary, withdrew the investment proposal in its annual general body meeting notice. In a notification to the BSE, Sun Pharma said some of its subsidiaries have decided not to pursue with the wind energy project after evaluation.
The investment was to be carried out through Taro and other group affiliates for the purpose of tax saving. Investment in wind energy projects results in tax gains through accelerated depreciation and production tax credits.
However, the move has not gone down well with analysts, who termed the proposed investment a non-optimal use of cash. The investment plan came nine months after Sun Pharma promoter and managing director Dilip Shanghvi bought a 23 per cent non-controlling stake in Suzlon for Rs 1,800 crore.
Suzlon would have been a beneficiary of the Taro transaction as it will supply wind turbine generators to the project.
Sun Pharma and its affiliates own 69 per cent in Taro, which is listed on the New York Stock Exchange. Credit Suisse had estimated tax savings to be at $175 million, through production tax credits and accelerated depreciation over 10 years upon completion of the construction.
“The tax savings are substantial. But it comes from investment in unrelated areas with no expertise. It has created strong value in past merger & acquisitions but the question raised is whether the same money in pharma could deliver higher value,” wrote Credit Suisse analysts Anubhav Agarwal and Chunky Shah in an investor note last week.
“Despite tax savings, we see the wind power transaction as an inferior method of capital allocation. While it might not reflect the lack of re-investment opportunities in pharma, we believe the company would be better off distributing the cash to investors, who can always choose to invest in wind power companies or seek other tax-efficient vehicles,” said Kotak Institutional Equities.
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