Cipla's Value Creation strategy based on Value Based and Ethical Based

 Value Creation

The Intertwined Linkage of Value-Based Management and Strategy at Cipla

Cipla, the prominent Indian pharmaceutical giant, meticulously orchestrates its Value-Based Management (VBM) and Strategy like a well-choreographed dance. Each element of VBM plays a crucial role in shaping and refining the strategic direction of the company, ensuring sustainable value creation for all stakeholders.

1. EVA as Strategic Compass: Economic Value Added (EVA) serves as the North Star for Cipla's strategic decisions. By exceeding the cost of capital, EVA guides resource allocation towards initiatives that maximize shareholder value. This translates to focusing on affordable generics, expanding market reach, and optimizing operational efficiency.
2. MVA as Building Block: Market Value Added (MVA) acts as the building block for Cipla's strategic framework. Understanding the gap between market capitalization and the net present value of all future expected cash flows helps Cipla identify areas for improvement. This might involve investing in R&D for specialty drugs, exploring strategic partnerships, or streamlining corporate governance practices.
3. FGV as Performance Benchmark: Free Growth Value (FGV) measures the organic growth potential of Cipla's existing business model. This metric informs strategic decisions around organic architecture, such as talent management, innovation culture, and employee well-being. By fostering a thriving internal environment, Cipla fuels organic growth and reinforces its competitive edge.
4. TSR as Growth Driver: Total Shareholder Return (TSR) acts as the ultimate measure of success for Cipla's strategic endeavors. By aligning all strategic decisions with the goal of maximizing TSR, Cipla ensures long-term value creation for shareholders. This drives responsible capital allocation, ethical financial decisions, and a focus on delivering consistent returns.

VBM and Strategy in Action:

• Capital Allocation: EVA and MVA guide capital allocation towards high-growth segments like specialty drugs while maintaining commitment to affordable generics.
• Strategic Financial Decisions: FGV informs responsible pricing strategies to balance affordability with profitability, ensuring long-term financial sustainability.
• Organic Architecture: TSR drives investments in talent acquisition and development, fostering a culture of innovation that fuels organic growth.
• Cost Management: MVA and FGV inspire continuous cost optimization efforts to improve resource efficiency and enhance profitability.
• Corporate Risk Management: EVA and MVA inform proactive risk management strategies to mitigate potential threats and protect shareholder value.
• Mergers, Acquisitions, and Restructuring: MVA and TSR guide decisions to pursue strategic partnerships or acquisitions that strengthen market position and generate long-term value.
• Corporate Governance: TSR emphasizes transparent and ethical corporate governance practices, building trust with stakeholders and enhancing access to capital.

Linking the Strategies with Past Performance

1. 

The graph covers the period from March 2019 to December 2023, allowing for analysis of Cipla's performance over a significant timeframe. The horizontal axis represents time, while the vertical axis likely represents return percentages, indicating the growth or decline in value for each entity.

• Cipla's return (white line) exhibits an overall upward trend, suggesting a positive growth trajectory over the period.
• The Sensex (red line) also follows a generally upward trend, with some periods of decline and recovery.
• The NSE Pharma Index (green line) demonstrates more volatility, with notable peaks and troughs, indicating a more dynamic industry landscape.
• Overall, Cipla's return has outperformed both the Sensex and NSE Pharma Index over the period, demonstrating a solid track record of growth.

Cipla's return appears to be closely tracked with the Sensex for most of the period, suggesting a degree of correlation with broader market movements. However, Cipla's performance diverges from the NSE Pharma Index at specific points, indicating periods where its strategic decisions or market positioning may have differentiated it from its industry peers.

KEY TAKEAWAYS

• Cipla has demonstrated solid growth and outperformed both the broader market and its industry peers over the period.
• Its performance is moderately correlated with the broader market, suggesting some influence from external factors.
• Cipla has also shown periods of differentiation from its industry peers, potentially due to strategic decisions or unique market positioning.
• Its risk profile is moderate, balancing the potential for returns with a degree of volatility. 

2.  

• Cipla's Equity Closing Price (White Line): The graph shows a general upward trend, indicating that Cipla's stock price has appreciated over the period from March 2019 to March 2023. This suggests that investors have generally perceived Cipla's performance and prospects favorably.

• WACC EVA (Blue Line): The WACC EVA line also exhibits a generally upward trend, aligning with the equity price for most of the period. This indicates that Cipla has been consistently creating value for its shareholders by generating returns above its cost of capital.

Divergence in March-April 2022:

• The graph shows a notable divergence between the two lines in March-April 2022, where the WACC EVA declined while the equity price continued to rise. This suggests that investors were more optimistic about Cipla's future prospects during this period, even though its short-term value creation (as measured by WACC EVA) experienced a temporary dip.

Potential Reasons for Divergence:

• External Factors
• Strategic Initiatives
• Temporary Cost Increases
• Shift in Investor Focus

Implications:

• The divergence highlights the importance of considering both short-term performance metrics like WACC EVA and long-term growth prospects when evaluating a company's value.
• It suggests that investors were willing to overlook a temporary decline in WACC EVA due to their confidence in Cipla's long-term strategy and potential.

3.

Table of Relative Valuation

• Market Cap: Cipla ranks #2 in terms of market capitalization, indicating a large-sized position within the industry.
• Last Price Closing: Cipla's closing price is near the middle of the group, suggesting a comparable valuation to several peers.
• Change % 1D and 1M: Cipla's stock price experienced a modest decline in both the short and long term, similar to the overall market trend.
• P/E Ratio: Cipla's P/E ratio of 37.01 is higher than the industry average of 36.81, suggesting that investors expect relatively higher future growth from Cipla than its peers.
• ROE: Cipla's ROE of 13.37% is within the range of most peers, demonstrating average profitability in generating returns on shareholder equity.
• Dividend 12M Yield: Cipla's dividend yield of 0.66% is lower than most peers, making it a less attractive option for income-seeking investors.

Overall, Cipla appears to be a moderately valued company with the potential for higher future growth based on its P/E ratio. 

• Cipla occupies a mid-sized position in the industry with a moderately valued stock price.
• Investors see potential for higher future growth from Cipla compared to its peers.

Graph- P/E Ratio

The PE ratio was higher than the comparative Average of the industry but went below in March 2023, and the company is Fairly priced at 24.2 compared to 26 of Industry's average.

4.  

The EV/EBITDA shows that a company is undervalued or overvalued when compared to the industry average. Here, Cipla's EV/EBITDA is 15.1 compared to 15.5 of the Average of the comparative price of the industry, which shows that the company is slightly undervalued but still near the average industry price, which indicates that it's valued nearly perfectly.

5.

The P/BV of Cipla was higher in the beginning compared to another Comparative average of Companies, but later in the end, it went below the industry average of companies, which means they are higher in earnings compared to the Market Share Cipla to other comparative companies in the industry.

Decoding our Value Creation through the ESG Lens

Cipla creates value for its shareholders with the help of Value Octagon. 

What is Value Octagon? 

• Top management uses the value octagon as a strategic checklist to post on their agenda board. 
• It must be examined while establishing goals, addressing issues, or assessing performance. 
• It offers eight levers that are meant to have proven effective in practical applications.

There are 8 Strategies to create Value Octagon for Value Creation

At Cipla, we believe that true value creation extends beyond profits and market share. Our commitment to ESG (Environmental, Social, and Governance) principles is woven into the fabric of our Value Octagon strategy, ensuring sustainable growth alongside positive societal and environmental impact.

1. Strategy and Business Model:

• Championing Affordable Access: We remain a champion of affordable generics, making essential medicines accessible to underserved communities through partnerships and innovative distribution models.
• Specialty with Ethics: As we expand our specialty portfolio, we prioritize treatments for unmet medical needs, ensuring ethical sourcing and development practices throughout the value chain.
• Digital Green Footprint: Embracing digital technologies like AI and blockchain optimizes our supply chain, minimizes waste, and improves resource efficiency, reducing our environmental footprint.

2. Capital Allocation with Impact:

• Balancing Affordability and Sustainability: We allocate capital strategically, balancing investments in sustainable drug development with maintaining affordable pricing for essential medicines.
• ESG-linked Growth: We prioritize renewable energy sources for manufacturing, sustainable packaging solutions, and community development projects, driving both financial and social returns.
• Transparent Impact Reporting: We believe in transparent reporting, disclosing ESG performance metrics alongside financial results, ensuring accountability to our stakeholders.

3. Strategic Financial Decisions with Ethics:

• Long-term Vision: We prioritize long-term profitability and sustainable growth over short-term gains, adhering to ethical practices in all financial decisions.
• Responsible Pricing for Access: We maintain transparent pricing and consider patient affordability while ensuring fair returns for investors, enabling wider access to healthcare.
• Responsible Tax Contributions: We implement responsible tax strategies, contributing to social welfare programs while adhering to ethical tax practices.

4. Organic Architecture for Social Impact:

• Diversity and Inclusion: We attract and retain diverse talent across all levels, fostering a culture of inclusion and equal opportunity, enriching our innovation and impact.
• Innovation with Purpose: We promote a culture of innovation focused on developing solutions for unmet medical needs, particularly in areas affecting underserved communities.
• Employee Well-being and Community Engagement: We prioritize employee well-being through robust health and safety programs, and actively engage with local communities to address their healthcare needs.

5. Cost Management with Environmental Consciousness:

• Green Manufacturing: We implement lean manufacturing principles, adopt energy-efficient technologies and renewable energy sources, and minimize waste generation.
• Sustainable Supply Chain: We partner with suppliers committed to ethical sourcing and environmentally responsible practices throughout the supply chain.
• Circular Economy Initiatives: We explore opportunities for product life cycle extension, recycling, and waste reduction to minimize our environmental impact.

6. Corporate Risk Management with ESG Integration:

• Compliance and Ethical Conduct: We have robust compliance programs across all operations, ensuring adherence to environmental regulations, labor laws, and ethical sourcing standards.
• Supply Chain Resilience and Transparency: We diversify our supply chains and maintain transparent sourcing practices, avoiding conflict minerals and unethical suppliers.
• Proactive Environmental Risk Management: We conduct regular environmental risk assessments and implement mitigation strategies to address potential pollution, emissions, and waste disposal issues.

7. Mergers, Acquisitions, and Restructuring with Responsibility:

• Strategic Partnerships for Impact: We collaborate with research institutions, NGOs, and other pharmaceutical companies for R&D initiatives, market access expansion, and social impact projects.
• Ethical Due Diligence: We conduct thorough due diligence during acquisitions, assessing target companies' ESG performance and ensuring alignment with our ethical values.
• Responsible Restructuring: If necessary, we restructure operations responsibly, considering employee welfare, community impact, and environmental consequences.

8. Corporate Governance for Transparency and Accountability:

• Board Diversity and ESG Expertise: Our board composition reflects diversity of thought and experience, including members with expertise in ESG considerations.
• Independent Oversight and Transparency: We have strong independent oversight mechanisms for corporate governance and ESG compliance, and maintain transparent reporting practices.
• Stakeholder Engagement and ESG Dialogue: We actively engage with shareholders, employees, communities, and NGOs to address ESG concerns and opportunities, fostering open dialogue and collaboration.

Our Value Octagon, guided by ESG principles, positions Cipla not just as a leading pharmaceutical company, but as a responsible corporate citizen. We are committed to creating shared value for our stakeholders, contributing to a healthier planet, and a more equitable future for all.