Changes made to the Little Champs portfolio (4 additions and one deletion)

In the recent months Marcellus Investment Managers has made the following changes to the portfolio.

Additions to the portfolio:

1. RHI Magnesita

Highly critical nature of refractories: Even though it accounts for ~2-3% of overall cost, without refractories the customer’s plants cannot commence production. Additionally, they go through general wear and tear and requires replacement at regular intervals, a tedious and time-consuming process entailing plant shutdowns. Given low-cost but critical impact of refractories, a customer prefers products with highest quality and longest lives, thereby reducing downtime risks.

RHI’s Quality and R&D focus: RHIM India’ leadership in the Indian refractory market is underpinned by its superior product quality. This superior product quality is a result of RHIM Global’s high focus on R&D (1700+ active patents) and ability to continuously come out with better quality products that have longer lives. Our channel checks suggest that RHIM India is a dominant player with 40%+ market share in the Basic Oxygen furnace + Laddle segments.

Significant reinvestments by RHIM India in the recent years: In the last 5 years, RHIM India has added various flywheels and gained new capabilities. For instance, by merging all the subsidiaries of RHIM Global into RHIM India (listed entity), RHIM Global has aligned its interest with that of the minority shareholders. Similarly, the Dalmia acquisition has further fortified RHIM India’s moat through access to an extensive manufacturing base as well as facilitating entry into the Cement/Industrial and Blast Furnace refractory segments.

2. Rainbow Children’s Medicare

Rainbow Children’s Medicare, founded in Hyderabad in 1999 by Dr. Ramesh Kancharla (paediatrician) & Dr. Dinesh Kumar Chirla (neonatal surgeon) as a paediatric multi-specialty hospital (today paediatrics forms 70% of its revenue). As of today, Rainbow operates 16 hospitals with a capacity of 1,655 beds and 3 outpatient clinics in six cities viz. Hyderabad, Bangalore, Chennai, Vijayawada, Vizag, and Delhi NCR.

Rainbow’s multi-specialty children’s hospital along with maternity is one of its kind models in India and ticks all the boxes from customer convenience and experience perspectives. Rainbow’s 24*7 doctor availability and its ability to attract & retain high quality paediatricians across specialties underpins its stellar brand creation in Hyderabad. It’s scale allows retaining existing talent (high volumes mean more money for doctors) as well as run one of India’s largest govt. approved fellowship programmes for DNB paediatrics to create a continuous talent pipeline for fresher paediatric specialists. This flywheel is difficult to replicate for any new entrant in Rainbow’s core markets.

In the last 5 years it has entered 4 new clusters and shown signs of initial success viz. Andhra Pradesh (Vijayawada, Vizag), Tamil Nadu, and Delhi NCR. Hyderabad revenue % has reduced from 70% to ~55-60%. Rainbow is also widening its focus from doing only high-risk pregnancies in-house to regular deliveries as it has built entire spectrum of gynae, obstetrics, vaccinations in-house to widen its revenue base and create a funnel for NICU and beyond.

3. PDS Limited

PDS is a sourcing platform for retailers & brands in the Western world. In its core business of ‘Design-led Sourcing’ (90% of FY23 revenues), PDS acts as a link between retailers & brands in the West and small garment manufacturers in the Far East. PDS has 250+ designers and 600+ factories associated with its platform which enables it to provide entire design to delivery of apparels to its customers.

PDS’s key competitive advantage is its entrepreneur-driven partnership model which enables it to scale up efficiently without diluting management bandwidth and remain agile in a dynamic industry. Overtime, PDS has ventured into ‘Sourcing as a Service’ business model where it takes over the sourcing office of a brand in the Far East countries. This helps generate a steady stream of annual income and open opportunity to up-sell its design & compliance services. In FY23, PDS expanded its expertise into ‘Brand Management’ services by going up the value to take over the entire design team of brands in addition to managing their sourcing.

In the last 5 years, PDS has grown its revenues at 17% and PAT at 73% CAGR and ended up with a ROCE (pretax) of 27% in FY23. Key value drivers for the firm going forward are increasing share of value-added business, increasing wallet share and synergies between various group companies.

4. Cera Sanitaryware

Cera is the no. 2 player in the mass-affluent segment of the sanitaryware and faucets market in India. It’s a pan-India brand, with maximum revenues from the south (40% of total revenues) – a geography that is likely to continue growing faster relative to other regions. The company has grown revenues at 11% CAGR over the last 5 years, while earnings over the same period have grown at a CAGR of 16%, while maintaining an average RoCE of 20%.

The company’s moats are built on strong distribution, continuous product innovation and introduction and an established brand image. The company has also been focusing on deepening these moats, with regular capacity expansions, steady new product introductions, and investments in manufacturing capabilities that go towards improvement in product quality and finish. Working capital cycle has come down an average 111 days during F18-20 to an average of 77 days during F21-23.

Over the next few years, we expect to see strong a demand environment for Cera’s products. Cera is a mid-to-late cycle play on residential real estate. In the March 2023 quarter, new project launches in the top 7 property markets in India were at a decadal high. Large players such as DLF and Godrej Properties have reported record new sales bookings in F23 (up 107% and 56% respectively). These new launches would be ready for bathroom fitouts in the next 18-24 months and will translate to a surge in demand for bathware.

Exit from Amrutanjan: One of the key investment thesis of Marcellus Investment Managers for Amrutanjan revolved around its success in the Sanitary Napkin segment. However, its recent channel checks suggest that Sanitary Napkins has become a crowded space with many regional players as well as a few national players competing for market share. This has made it difficult for Amrutanjan to gain market share thus delaying the path to profitability in the Comfy segment. When the reduced estimates for Amrutanjan are fed into the position sizing framework, the result is an exit from LCP.