Description

 Investment Summary

India among fastest growing economies in the world. Thousands of listed companies make it an interesting place to fish for smaller companies with growth over the next decade or two. I track hundreds of small, mid and nano caps in India and around the world to build a portfolio of companies with growth potential

Rainbow Children’s Medicare listed in India is a $1.2 bn market cap business with profitable growth and operating cash and incentive alignment by owners and doctors

The company is the largest private multi-specialty pediatric and obstetrics hospital chain in India. The niche pediatric market presents a large growth opportunity for specialized child healthcare and maternal services and is underserved.

India has the largest adolescent population in the world, 260 million as compared to under 20,000 pediatric beds. Demand exceeds quality supply.

India has 1.9 million beds for private and public hospitals, but out of this just 18,000 are pediatric beds. The mismatch is significant.

The total bed capacity of Rainbow group is 1,655 beds (1186 operational beds) as of Jun 2023 with operational bed capacity to grow by 40% by 2026

Rainbow adopts an asset light model with a hub and spoke model in the following Indian cities: Hyderabad (830 bed capacity), Bengaluru (352 beds), Chennai (190 bed), Delhi (154 bed), Visakhapatnam (129 bed), Vijayawada (130 bed)

Over the next 4-5 years, 1000 beds will be added, 400 beds in Delhi NCR and 600 in South India through spokes in cities of Hyderabad, Bengaluru, and Chennai

Hyderabad is the model for the company to pursue a asset-light hub and spoke model

Higher proportion of sales (70%) is derived from pediatrics which leads to higher margins relative to the industry and average revenue per operating bed  

Bed utilization is ~50%, improvements will manifest in operating leverage, higher margins, and free cash

The management team is led by Dr Ramesh Kancharla and Dr Dinesh Chirla who own just under 40% of the company. They eat their own cooking.

Rainbow has an ESOP plan for the employees with over 100 doctors own considerable equity capital of the company

In the last 12 months, the company generated roughly $150mm in revenue and roughly $40mm in operating cash. In my base case, Rainbow should grow revenue to $370mm and $100mm in operating cash over the next 5 years. Investors can use any declines in the stock to build a larger position.

History

1999: Began Operations with first hospital at Banjara Hills, Hyderabad

2007: Added hospital at Vijayawada. Expanded into obstetrics and gynecology

2009: First spoke established at Vikrampuri, Hyderabad

2013: Established hospital in Kondapur, Hyderabad; CDC Group invests

2015: Established two hospitals at Hydernagar, Hyderabad and Marathahalli, Bengaluru

2017: Expanded into North India with Madhukar Rainbow Children’s Hospital at Malviya Nagar, New Delhi

2018: Expanded into Chennai with launch of a hospital in Guindy

2019: Started IVF facility at Kondapur, Hyderabad

2020: over 125,000 outpatient video consultations during the pandemic

2022: Got listed on BSE and NSE

2023: 7th hospital at Financial District, Hyderabad expanded our count to 16 hospitals

Business model

Incorporated in 1998, Rainbow Children’s Medicare is India’s leading multi-specialty pediatric hospital chain with 2 decades of experience in pediatric, obstetrics, gynecology, and fertility care

The company has 16 hospitals (8 old>5 years, 8 <5 years), 3 clinics in 6 cities with a total bed capacity of 1,655 beds

Cities: Hyderabad (830 bed capacity), Bengaluru (352 bed), Chennai (190), Delhi (154 bed), Visakhapatnam (129 bed), Vijayawada (130)

90% of the beds offered by Rainbow are in South India region. In the appendix section are pictures of various hospitals and clinics

The company operates a hub-and-spoke operating model

hub hospitals typically 150-200 beds provide comprehensive outpatient, inpatient care, with a focus on tertiary and quaternary services

A hub is connected to several smaller ‘spoke’ hospitals or clinics typically 50-125 beds

spokes provide 24/7 emergency care in pediatrics and obstetrics, large outpatient services and comprehensive obstetrics, pediatric and level 3 NICU services

This model is successfully operational at Hyderabad and the long-term goal is to replicate this approach in the country, starting with Bengaluru, Chennai and NCR  

The company plans to grow capacity by 40-50% the next 4-5 years, and has acquired land to facilitate expansion

3,581 permanent employees, 730+ Full-time doctors

100+ research papers published in 2022-2023

95% survival rates for complex cardiac surgeries, include extremely complex congenital defects

90% survival rates on transplant cases (Liver, Bone Marrow, Kidney)

The company has an 87% doctor retention ratio. The high retention ratio is due to financial incentives and availability of a 24x7 team

The below is an approximate table of hospitals, commencement year, bed capacity and land

Source: Company, analyst estimates

Below are pictures of the various hospital hubs and spokes:

Hyderabad

In Hyderabad, Banjara Hills Hospital, 250 beds, serves as the hub, and is complemented by six spokes located in Vikrampuri, LB Nagar, Kondapur, Hydernagar, Financial District and RCHI, Banjara Hills

Bangalore

similar hub-and-spoke model in Bengaluru, with hub at Marathahalli

Chennai

hub-and-spoke model in Chennai, with hub at Guindy and spoke at OMR(Sholinganallur)

Delhi

Visakhapatnam

Vijayawada

The below map highlights operations in current cities and major cities in the target regions

Management

The promoters currently hold around 49% of the company.  Dr Ramesh Kancharla and Dr Dinesh Chirla hold the highest equity capital (31% and 6.5% respectively) in the company. Related party transactions are minimal

Below are their bios:

Dr. Ramesh Kancharla is the Chairman and Managing Director of the Company. He holds a Bachelor of Medicine and Bachelor of Surgery (“MBBS”) from Sri Venkateswara University and a Doctor in Medicine (“MD”) in pediatrics from Mangalore University. He is a member of the Royal Colleges of Physicians of the United Kingdom. He has over 23 years of experience with the Company. Prior to setting up the Company, he was associated with King’s College Hospital

Dr. Dinesh Kumar Chirla is Whole-time Director of the Company. He holds a MBBS degree from Marathwada University, Doctor of Medicine in pediatrics from Dr. Babasaheb Ambedkar Marathwada University, Doctor of Medicine in Neonatology from the University of Mumbai. He is a member of the Royal College of Pediatrics and Child Health, London. He is on the Specialist Register in Neonatology at the Specialist Training Authority of the Medical Royal Colleges, London and was a fellow in Neonatology at Mercy Hospital for Women.

Valuation

The company’s current market cap is $1.2bn; cash equiv and long term investments account for $78mm. short/long term borrowings are negligible. Enterprise value is approx. $1.1bn

The below are the company’s high-level reported financials converted to $:

Rainbow's revenue heavily relies on two key clusters: Hyderabad, Telangana (contributing over 57% of revenue) and Bengaluru, Karnataka (contributing 18%). Together, these clusters account for 75% of the overall revenue.

It takes two-to-three years for a hospital to break even at its hub location v/s two years for a spoke location. Matured hospitals have a 300-400bp margin higher than company level

margin.

The below table highlights key operating stats:

Rainbow expects overall ARPOB to grow by 6-7% yoy, through price hikes and mix improvement. Taking into account old and new hospitals, I expect 20% revenue growth over the next 4-5 years around $380mm. At this level, the company will generate nearly $100mm in operating cash and $80mm in free cash.

For a growth company, looking at trailing multiples is misleading, so I am looking at a business with $100mm in operating cash flow in 4-5 years, available at $1bn enterprise value.

I believe that to be reasonable with

1. Growth being 15-20% over the next decade
2. Returns on capital around 30%
3. Net cash business
4. Strong operating cash conversion from revenue

Investors can use any declines in the stock to build a larger position.

Risks

Negative FCF due to higher levels of capex as company grows beyond Hyderabad and Chennai

Low bed occupancy rate

Doctors leaving for competitors

Owners misallocating capital 

Catalyst

Faster growth the next 12 months 

Higher bed occupancy rate 

Ramp up of new hospitals