The companies in the Little Champs portfolio of Saurabh Mukherjeaare doing quite well.
For 1QFY24, the Little Champs portfolio witnessed 12% growth in the median portfolio net earnings. This is lower compared to the 22% (median) net earnings growth seen in FY23. While the financial stocks (Aavas, MAS Financial, Home First and Prudent Corporate) in the portfolio witnessed healthy earnings growth, stocks in the chemicals space (Alkyl, Galaxy, Ultramarine and Fine Organics) witnessed challenging times driven by global demand weakness and clearance of excess inventory built during Covid-19 years.
On the other hand, the Rising Giants portfolio’s earnings de-grew by 12% YoY (median) in 1QFY24 after growing by 21% in FY23. Besides the financial stocks (Aavas, Cholamandlam), companies like Astral, Info-Edge, Dr Lal and Suprajit witnessing healthy YoY net earnings trend. However, here too, the chemicals (Alkyl, Galaxy) and Pharma (Divis) stocks dragged down the overall portfolio level earnings growth.
For both the portfolios, beyond the near- term headwinds we don’t see any structural concerns in the industry or the portfolio companies. The high level of reinvestments in FY23 and recent years has provided enhanced visibility on the earnings performance for the portfolio over the next 3-5 years.
Changes to the Little Champs portfolio: Addition of Rainbow Children’s Medicate Ltd
Rainbow Children’s Medicare Ltd was founded in Hyderabad in 1999 by Dr. Ramesh Kancharla (pediatrician) & Dr. Dinesh Kumar Chirla (neonatal surgeon) as a pediatric multi-specialty hospital (today pediatrics forms 70% of revenue). In 2007, Dr. Pranithi Reddy joined Rainbow to lead the company’s foray in maternity segment (today gynae & obstetrics forms 30% of 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 a customer convenience and experience perspective. Rainbow’s 24*7 doctor availability and its ability to attract & retain high quality pediatricians across specialties led to its stellar brand creation in Hyderabad and is their competitive advantage. Rainbow’s scale allows it to retain the existing talent (high volumes means more money for doctors) as well as run one of India’s largest govt. approved fellowship programmes for DNB pediatrics to create a continuous talent pipeline for fresher pediatric specialists. This flywheel is difficult to replicate for any new entrant in Rainbow’s core markets.
In the last 5 years Rainbow has entered 4 new clusters and has shown signs of initial success viz. Andhra Pradesh (Vijayawada, Vizag), Tamil Nadu, and Delhi NCR. Share of revenue from Hyderabad has reduced from 70% to ~55-60% over the last 5 years. 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. There exists no other integrated model like Rainbows and the business model can be termed as disruptive for Indian healthcare industry. While firm has taken baby steps towards professionalization, Dr Ramesh Kancharla is a key man for the firm. This has accounted for this risk in our scores & valuation of the firm.