ValuePickr Forum

My Cipla Holdings - looking for advice and opinions

Hello everyone,

I have been looking at this forum for a while, and even asked one question recently. It does not look very active, but it also looks like quite a civilized place with literate and well-informed participants and thoughtful and valuable discussions. For example, I’ve been going through parts of the monster thread dating from 2012 entitled “Hitesh’s portfolio”. It’s quite interesting and educational reading.

I thought it seemed like a reasonable place to ask about an issue which is currently concerning me. It’s a relatively unusual situation, so I thought it would do no harm to ask the advice and opinion of people much more experienced than me.

I recently (December 2018/January 2019) inherited some shares of the Indian pharmaceutical company Cipla. These shares have been owned by my family for a very long time. They were originally owned by my grandparents. In 2009/2010 I wrote to Cipla to ask about the history of these shares. They said that the shares were first acquired by my grandparents in 1943/1944. Cipla was founded in 1935. As Cipla put it:

At the outset we would like to inform you that the information sought by you pertains to very old period…

I’m not sure of how they came to be acquired (Cipla didn’t say anything about that), but the version I heard from my mother was that the founder of Cipla, Dr. Khwaja Abdul Hamied, was a friend of my grandfather, and that he gifted my grandparents these shares. This may or may not be true. With the possible exception of Yusuf Hamied, there may be nobody left alive who knows the story. And it seems likely that my grandparents forgot about or mislaid the shares, otherwise they would have sold them long ago, and they would not have been passed down.

In any case, this brings me to my situation. I’ve been tracking Cipla’s share prices since around 2010/2011. I don’t have any background or knowledge of finance, so I left them alone. In hindsight 2015, when Cipla’s share price briefly touched 740, would have a good time to sell them, but I didn’t have the knowledge or confidence to do so. Around the time I inherited them, the stock price dropped steeply during 2019, to a level not seen since 2014 or so. So I let them be till such time as the share price would reach a more reasonable level. I had confidence it would do so eventually, because Cipla, which seems like an unusually stable and well-run company, was clearly doing well, even though its share price wasn’t. The early part of this year was particularly unpleasant, when Cipla’s share price briefly touched 350 or so. It was strange. I was wondering what would possess someone to sell
Cipla shares at under 400. The stock market can be very puzzling sometimes. I thought it would probably normalize at around 600, which has been its historic center of gravity in recent years. In the event, it jumped on the morning of 9th April from around 520/530 to 600, before falling back to around 590. It’s been hovering around there since. During the last close it was around 570.

With the arrival of the pandemic, as you know, the value of pretty much all the Indian pharma companies skyrocketed, included Cipla. So I’m now wondering what to do.

I don’t have a background in investing or finance, as I have already said. I’ve actually never purchased a single share in my life. However, I feel I would like to learn. I’ve been been doing some reading in 2019, and more in 2020. At the moment my overall conclusion is that the stock market is a really excellent place to lose money if you don’t know what you’re doing. You’d probably be better off gambling in a casino. The end result will be the same, but it will be more fun. So I’m not too inclined to get adventurous for the present.

For the moment, my pressing concern is what to do with these shares. I think it’s clear that just leaving them alone would not be a wise move. Cipla’s stock price movements of 2019 and early 2020 made that clear to me. So then the question is at what price to sell them, and if so, should I sell all of them? I was thinking that 700 would be a reasonable target to wait for, if it gets that high. I think Cipla is relatively unlikely to sustain at that level, and it seems “good enough”. And I’m currently leaning towards to selling all of them.

I spoke to someone at Standard Chartered recently who thought I should try to grab the opportunity of the state of the current market. He said the Cipla stocks currently offer a 10% upside, while the market offers a 30% upside or so. I think the situation isn’t so clear. The virus situation is ongoing, and it’s clear the Indian economy is going to be taking a beating in the short term. But it’s not clear how long the short term will be. And even after the virus has gone away, by the nature of capitalist economies, the economy may still stay down for a while. It’s also not clear if the market will fall further. So, I don’t think sticking with Cipla for the present is necessarily a bad strategy. Also, at present, I don’t actually know what stocks I would buy. I’ve been reading about it, but clearly making choices requires major time investments and a lot of background knowledge.

Currently the media is all abuzz about pharma stocks, though little has changed with the companies or their circumstances in 2019, when they were ignoring them. Right now my main concern is that in its manic-depressive way, the market may suddenly decide that pharma stocks aren’t so interesting after all, and the price will plummet and stay down for another year, or something.

I saw the recent Cipla earnings report for Q4 2019-2020; I even listened to the live earnings call on Friday 15th May. The results weren’t very good - I was hoping for better. And I’m not sure how the market will respond to it.

And it seems that the earnings for 2019-2020 have scarcely improved over 2018-2019, which means the P/E will stay about the same. Though they have managed to reduce the debt quite a lot, which is good. To quote from one article “The company’s debt stood at Rs 2,816 crore at the end of March quarter, 34.75 per cent lower from Rs 4,316 crore a year ago”.

But they are now planning to do fundraising of 3000 Crores, which presumably means they will be selling shares or something similar. I’m not sure what this means for the share price. I’ve read (and common sense suggests) that this can dilute the stock price and will certainly raise the P/E ratio. But I suppose they will try to sell them at the top of a bull run, or something. I have little idea how something like that would happen, and the announcement I’ve seen doesn’t give any further information. I’m also unclear why they have decided to switch from debt to fundraising. Any idea about this?

I realise it’s hard to predict where a particular stock is headed. Regardless, advice, thoughts, perspective appreciated. Thanks in advance.

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Very interesting situation.

Are the shares available in your demat account or they are still in physical form? Also I would assume that these are large number of shares so you have to factor the tax impact on selling. Also you should check with the company if any past corporate action like bonus/splits are accounted correctly, also are you getting the dividends ?

If I were in your situation and didn’t need the money, then I would let the shares be since the company is doing ok and will survive in the future (maybe taken over by another pharma co) and because of the sentimental reasons. Imagine if your ancestors had the option to sell the shares at the click of a button, then it would not have passed to the future generation. I believe we are only custodians of wealth and it’s our duty to pass on our wealth, values and wisdom to the next generation.

Regarding your comparison of stock markets with casino, the odds of winning is high in the markets plus it’s a game of skill and luck in the markets vs pure luck in the casino.

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Whatever you do, pls try not to listen to the bankers with complete trust. Look at it in the angle “What is in it for me” from banker’s perspective. In case you sell, they will persuade you to buy those shares where he mentioned a 30% upside and you will end up stuck again in stocks you do not understand and face same dilemma in next few years, while he will smile big with good brokerage and a big bonus.

Hi @bhaskarjain,

Thank you for your reply. Yes, the shares are demat, and have been demat for a long time. I was not aware that holding the shares in physical form was an option these days. And yes, I think stock splits and dividends are all accounted for, though I haven’t attempted to verify this. But I suppose it would do no harm to check, if possible. Checking whether dividends have been paid over a 75 year period would probably be next to impossible. But I know in recent years Cipla has been paying dividends. But I think Cipla would not be interested without evidence that something was wrong.

I don’t think it really makes sense to just leave the shares alone forever as has been done for so long, because there is no guarantee that the company will continue to do well indefinitely. There is a reason people don’t have portfolios consisting of just one company. :slight_smile: But the question still remains as to when I should jump ship. One thing about Cipla I don’t like is the nepotism. It seems the Hamid’s have appointed their family members to high ranking executive positions on the board. And it’s not just figurehead positions, they seem to be running the company. They don’t do that in the West, for good reason. For some reason, the shareholders don’t seem to have a problem with this. At least, I have not seen any complaints. But perhaps that is just the way it is done in India.

Hi @Investor_No_1,

Thank you for your reply and your concern. Don’t worry, I’m not about to hand off my decision making to a random stranger. This is a bad idea anywhere. It’s possibly a worse idea in India. I just mentioned it as one perspective. I think it comes close conceptually to timing the markets, which rarely ends well, I hear. Would it be fair to say that nobody knows what effect the virus will have on the market and the Indian economy, or how long it will last? That’s what I think, at least.

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1.Do these shares account for a significant percentage of your networth?

2.If it is significant then since you do not have any knowledge about the company,
you should sell the shares without waiting for round figure targets.

Keep the proceeds in a safe instrument like GOI bonds and then formulate a strategy.
If you don’t understand stocks and if they do not suit your temperament you should look at other avenues.

3.If it is not significant and you want to use this as an opportunity to learn then it is an experiment.

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Hi @Krishna1,

Thank you for your reply.

The answer is yes.

I’m familiar with the company. And there is no doubt that Cipla is a very good company, and CIpla shares are good to own. But as I already said, it’s obviously not sensible to keep everything in one company.

However, it seems reasonable to wait for a target, especially right now, since the share price seems to be on an upswing. And it’s not particularly high by historical standards. The P/E is relatively reasonable. And the share price all-time high was in 2015, at around 740, but that was around 5 years ago. And at that time I think the P/E was around 50. Someone sent me a list of Cipla P/Es for the last 10 years, and I’ve been meaning to make a graph.

One thing I don’t understand (and that could form a separate question), but why do the P/Es for he different pharma companies vary so widely? For example, currently Torrent Pharma is around 75. What am I missing?

I think I’ll keep the money in equity long term. I think that’s probably the best place for it overall. There aren’t a lot of alternatives. In the West real estate is a workable option, but in India real estate is something of a nightmare. But clearly the equity thing is going to have to be a long time learning experience.

Also, I’ve been reading about debt, but don’t pretend to understand it. GOI bonds are apparently not that safe short term if you need the liquidity. It seems the best option is overnight debt funds. If anyone thinks different, feel free to comment.

Hello,
Firstly i would not look at selling inherited shares. I would preserve them, live off the dividends and pass them onto the next generation.
Your thought process looks like a trade set up, trying get 10-30 percent higher and sell off and buy something else.
How would you feel if Cipla doubled from here and the switch fell by 50%?
Pls do not time the market and leave the shares alone (they have been resting for many years already).
This is just my advice!
All the best.

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Hi @Wolf,

Thank you for your perspective. That’s certainly one option. But does anyone really think Cipla’s share price might double? Perhaps in the next 5 years, but relatively soon? Just curious. I know that when it comes to the stock market, it’s all basically educated guessing.

And at least initially, once I’ve sold the shares (which may not be soon), I’ll just park the money and look around. Currently I’m just reading about finance. It’s hard work and confusing. I think buying into companies is something that needs to be done carefully, and with a lot of research. I’m also hoping to learn from this forum.

I am in a similar position. One stock occupies 80% portfolio whereas a meticulous SIP driven MF holding (over 15y) is the rest. And this company was a fluke, not inheritance…

I am in the process of rabalancing the portfolio and the below is my approach. Caveat: it’s just my approach and I don’t know if it will work well…

Step #1: Forget for a moment, the composition of the holdings. Concentrate on the requirements. In my case, it was 3 portfolios - one for kids education, one for emergency expenses and one for retirement earnings

Step #2: Look at how Cipla can fit in these portfolios and at what proportion. In my case, the company I owned fits 25% of kids portfolio and 15% of retirement portfolio

Step #3: Ongoing for me… Switch in tranches from the concentrated to diversified holdings. In my case, is divesting half of the shares into other investments.

Basically, all that I have done is

  1. Figure out what portfolios I want
  2. Figure out the composition of the folios and the overlap with your existing holdings. You can account for future growth/risk of Cipla here. In my case, the company I hold is fundamentally strong and in the right industry. Long growth ahead. Hence the 25%+15% allocation. You can use the wisdom in this group to assess and allocate
  3. Slowly migrate

Hi @lsubs,

Thank you. That’s helpful.

One question. Over what time frame are you doing the diversification? And are you trying to sell the share at high points, or just selling them at whatever value they have?

Also, I guess you have investment experience, correct? That would certainly be helpful in deciding what to do.

Sorry but I cannot offer anything specific to Cipla other than what is discussed above. But Nifty looks like its heading lower ( maybe to test the previous low made in March - But one can never know for sure and its not possible to time the market.
Secondly whenever I am in doubt on whether to sell a stock or not, I sell half.
Also I don’t agree that just because a stock was inherited there is any need to hold it forever. Never fall in love with a stock . The reasons for holding a stock should be based on its business and its future prospects. My 2 cents

Hi @kk82,

Thank you for your perspective. I agree it’s difficult (maybe impossible) to know what a stock will do, especially in the short term. Having said that, I hope Cipla’s stock price does not collapse in the near term. That would be bad news for me, though I would probably carry on holding it till the value went back up to something reasonable.

I also agree that having inherited a stock is not a reason to hold it forever, and I wasn’t planning on doing so.

And yes, selling some proportion might be an option too. I haven’t really thought much about that.

I started the migration 9 months back. I am switching a big chunk into debt MFs for capital preservation (retirement folio). As a result, I don’t need to time the purchase part of the switch. On the sell part of the switch, the plan was to switch every 2 months, and try to time within the two months. But, to the frank, I have only transacted thrice and paused over the current uncertainities…

The intention of the rebalance is to reduce risk. Preferably, the new asset should be low risk/return (debt in my case). If Cipla doubles after switching out, it does not matter as long as the new asset does not fall. (Also, philosophically speaking, it was the universe which conspired to give the initial gains. I can’t complain :slight_smile:)

Pharma is in a structural bull run therefore Cipla may do better than 25 percent a year but expecting anything more than that would be a bit excessive I imagine

can you pls elaborate why you think real estate in India is a nightmare? Do you refer here investing in appartments or land, residential or commercial and in Tier 1 or 2/3 cities?

I have seen this thought in many Indians settled abroad who gradually find very difficult to trust a real estate deal in India. Would be good to know your thought process as I was of opinion that after this pandameic, many NRIs would invest in Indian real estate, specially high end in Tier 1/2 cities as they need a strong foothold back home, which has become all the more important now. Thanks

Hi @Investor_No_1,

I was referring to the fact that there is a ton of whitecollar fraud surrounding property development (and not just property development) in India. And I was speaking generally. In part this is connected to the fact that land records are not secure in India. As far as I know, for the most part, they are not even computerized. So people can alter records. And property records are also not easy to access - you need to bribe people. You are also presumably aware there is lots of encroachment, particularly in cities. Illegal squatters, in other words.

My family owns (or used to own) property. Mostly in Bombay. Much of this has been destroyed, mostly due to fraud.

This isn’t just my opinion. You should do some checking.

I remember I once talked to a doctor who ran a swimming pool in Nariman Point. He said something to me like

If you own property in the United States (for example) you own it. In India you don’t own it.

In a nutshell, what he said was that once you purchase a property in India, then people will start coming out of the woodwork saying they have a claim on it.

And also builders do things like take money for a flat, and then either don’t complete it, or try to sell it to someone else as well. All sorts of stuff goes on. I’m no expert - you should ask around.

The bottom line is, if you are purchasing property in India, you need to be very, very careful.

In contrast, equities in India are relatively well regulated. There seem to be a lot of problems with brokers, so you need to be careful. Like the recent Karvy case, but it’s also a general problem. But at least if it is on record that you own shares in a company, you do own those shares.

It’s true that in some places land values are appreciating like crazy, so in theory one can make a lot of money on it. But it would be hard work, and probably mean dealing with some very unsavory people. Builders in India have a very bad reputation. I’ve actually had some contact with a few myself, and they seem like very dubious characters.

I hope this is helpful. This isn’t on topic, so if you want we can PM or something.

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I just came across an interview by Cipla’s CEO,

I don’t have experience in investing, as already said. So I’m not sure to what extent one can take statements like these at face value. Is this a honest take on the situation, or an attempt at marketing? Though if an attempt at marketing, I’m not sure what purpose would be served.I know it’s not uncommon for people to overstate things. This may include CEOs.

If I were in place of you, I would study the company and other pharma companies to understand the business of pharma and specifically Cipla . Promotors have more stake in company, also they have most of their net worth in single company so I would not mind having inherited investment in single company. At any point if I feel, I could lose my money, I would sell my shares and purchase Nifty Bees. It will give more than inflation, bond with less volatility.

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Hi,

I have been looking at Cipla and a lot of other pharma companies of late as I see a lot of momentum there. Q4 fy 20 results have been expectedly poor because previous quarter had a big one off due to cinacalcet opportunity. Market knew about it and was expecting the same. The concall gave idea about the way forward and there seems to be a big opportunity in g Albuterol with limited competition in the US markets. Besides this also, company seems to have mapped out growth strategy.

Coming to your problem, idea should be to bring down the level holding to where you can have peaceful sleep. You can convert the rest to some fixed income instruments. Or convert to other companies like Asian paints, pidilite, hind lever, colgate, or other such companies where longevity of business looks a given and favourable switching opportunity in terms of price.

As of now, cipla is on a strong wicket, having digested poor q4 results effortlessly and showing remarkable resilience in a weak market. You can take your time, deliberate on things and take a call.

You have 3 options viz, sit on holdings, sell partially, or sell fully. So take your time, and then take a call. Stock price action of cipla looks strong atleast for near future, so makes sense to be slow in taking a call.

Hope this helps. Regards and all the best.

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