Carnelian PMS

PMS Background

Carnelian Capital PMS is a young PMS firm, that was jointly founded by Vikas Khemani, Sachin Jain, Manoj Bahety & Swati Khemani (all part of the senior management team at Edelweiss, prior to leaving to set up Carnelian Capital).

Built on impressive Founding Team The founders of Carnelian capital all come from a senior management team at Edelweiss prior to setting up Carnelian. Even though the AMC has an equities experienced team they do not have fund management experience. Thus, in order for them to translate institutional equities experience into fund management track record needs to be proven.

PMS Investment Philosophy

Investing in good growth businesses, managed by great management at fair valuations.

Strategy Overview Carnelian's fundamentally driven bottom-up stock-picking philosophy is a long-only, multi-cap, sector agnostic strategy.

Investment Framework

• Investing in good businesses: with traits such as profitable, robust cost leadership, opportunity and market size, free cash flow generation, the incremental return on capital, time test and easy to understand, and sustainable moat.
• Great Management: evaluated based on integrity, modesty and capability, efficient capital allocation and a record of strong governance and risk management culture.
• Favourable Risk Reward: upside potential with margin of safety (through business risk, balance sheet risk, and valuations)
• Negative Screening: Avoid companies based on Aggressive accounting principles, High financial leverage, Low tax incidence, Management having misaligned objectives, Management with poor governance record and/or Management in hurry to create value.

 

Carnelian's forensic analysis based on CLEAR Framework involves a 2 step approach:

1. Carnelian forensic check: An automated template screening last 10 years of historical data, highlighting potential minesweepers, which get rejected at this stage 
2. Forensic deep dive:  CLEAR Framework  Their forensic team will deeply analyse the annual reports % financials which will be presented in a prescribed format to the investment committee. 

CLEAR Framework CLEAR framework based on: Cash Flows (sustainable cash flows vs reported cash flows), Liability Analysis (True debt vs reported debt, contingent liability & likely impact on future earnings), Earnings Quality (True economic profit vs reported profit, discretionary vs non-discretionary profit), Asset Quality (Core vs non-core assets), and related party transaction & governance issues. Any Stock that does not qualify this framework will be rejected by Investment Committee. 

Portfolio Construction

The portfolio is built on their ‘MCO framework‘ – Magic, Compounder, Opportunistic.

“MAGIC” (50-60%)

Invest in companies during the life cycle in growth & valuation re-rating: Invest in businesses that have a chance in acceleration in growth profile by looking at historic growth trajectory with the aim to capture re-rating that is driven by magic moments that are yet to be recognized by markets.

• Regular tracking of corporate announcements, open offers to capture change in management, promoters 
• Periodic meeting with corporates, channel checks & calls with industry experts 
• Sudden spurt of revenues, operating profits, margins, improvement in working capital-running of screeners with identified parameters post quarterly and six-monthly results
• End of capex cycle-running screeners for additions in gross block

Catalyst for 'Magic' Companies Magic moments are either accelerated by: Management/ CEO Change, Change in Industry Structure, New Growth Catalyst, Product Innovation or Completion of capex phase. “COMPOUNDERS” (40-50%)Invest in stable and sustainable growth, capital-efficient businesses

• Structural screeners covering Carnelian parameters based on 10 years of historic data such as revenues/EPS, CAGR, ROE, cash flow conversion and debt-equity levels above their threshold
• Business should be non-cyclical, non-commoditized with no material regulatory headwinds and not complex either. 

Compounders are identified with the aim to capture smooth compounding with these traits (MRFG):

• Moat- stable business, large opportunity size & sustainable moat
• High ROE- efficient capital allocation 
• Robust Free Cash Flows Generation- well-established business models tested across  cycles 
• Growth & Governance 

“OPPORTUNISTIC” (0-10%)Invest in Special Situations: IPOs, Mergers, Demergers, Open Offer, Buyback, Delisting, Potential takeover target, Valuation dislocations-Deep value with cashflows; all while maintaining risk-reward.

Risk Management

• Single stock exposure: 10%
• Sector Exposure limit: 40%
• Single promoter group exposure: 20%
• Liquidity: 70% of portfolio can be liquidated in 5 trading sessions
• Re-evaluation: Any portfolio stock falling >20% against benchmark required PM to revisit and re-evaluate investment hypothesis and present to IC within 7 days.
• Investment Committee Veto: Any fresh buying of stock is allowed after the approval of IC. Stocks sold if IC not convinced with re-evaluation finding.

Sell Strategy

• When there is a material change in the investment hypothesis
• Error in initial investment hypothesis
• Valuation stretching significantly outside fundamental valuation
• Other lucrative investment opportunities offering better risk-reward metrics

Clearly Defined Investment Strategy Carnelian has a very clearly defined investment process, strategy and portfolio construction frameworks in place. The investment philosophy, driven by their MCO framework (seeks to invest in companies that fit within their Magic, Compounder or Opportunistic baskets) provides a fair degree of flexibility for dynamically changing the portfolio as markets conditions evolve. Suitable For Not a recommended PMS provider