Carnelian PMS Recommendation & Review

IME Rating

IME PMS Rating

Carnelian is a young firm in the Indian alternatives space with an impressive founding team from ex-senior investment team members of Edelweiss Securities. Vikas Khemani, the ex-CEO, and Manoj, the head of research, have strong research and investment business-building pedigrees. The investment philosophy and processes are well defined, and performance has been strong.

The PMS/AIF AMC Rating is derived on the basis of our analysis on 5 key qualitative parameters that we use to analyse the quality of a PMS/AIF Provider. These include an assessment of the size of the AMC, the pedigree of the AMC, the pedigree of the team, the value of the investment philosophy & the level of differentiation. These insights of our central research team are documented in the IME RMS, and can be accessed during a consultation call with an IME PMS specialist.

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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:

Carnelian forensic check: An automated template screening last 10 years of historical data, highlighting potential minesweepers, which get rejected at this stage
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

Investment Team

Vikas Khemani | 3-star rated FM

Co-Founder | 29 yrs Experience | 7 yrs at current firm

Past Experience: President (Edelweiss Capital), AVP (ICICI Securities)

Vikas Khemani has over 2 decades of experience of which he spent 17 years incubating and building several businesses to leadership positions including Institutional Equities and Equity Research as a CEO at Edelweiss Securities. He is associated with several industry bodies and committees including the CII National Council on Corporate Governance, FICCI Capital Markets Committee, Executive Council of Bombay Management Association. Vikas Khemani comes with strong business acumen and a deep understanding of the capital markets along with strong relationships with Corporate India.

Manoj Bahety | 3-star rated FM

Co-Founder | 28 yrs Experience | 6 yrs at current firm

Past Experience: Managing Partner (Omniscient Capital Advisors), Deputy Head Research (Edelweiss Securities), Sr. Manager (Morgan Stanley), Manager (Reliance Industries)

Manoj Bahety is a CA and CFA Charter holder with 20 years of rich and diverse financial services with marquee institutions. Manoj spent 11 years at Edelweiss Securities as Dy. Head – Institutional Equity Research, Head – forensic, thematic & mid-cap research. He is known for his “Analysis Beyond Consensus” forensic research approach which helped in avoiding pitfalls and identifying several multi-bagger ideas.

Swati Khemani | 4-star rated FM

Partner | 24 yrs Experience | 6 yrs at current firm

Past Experience: Edelweiss

Swati Khemani one of the Partners at Carnelian AMC. She brings over 13 years of experience in the financial services industry, with her previous stints at Edelweiss and her own venture Newedge Consulting. She is a CA and did her graduations in BCom.

PMS & Listed Equity AIF Schemes

Scheme	Category	1 yr	3 yr	5 yr	Since Inc
Carnelian Shift	Flexi Cap	22.6	30.2		41.5
Carnelian Compounder	Large & Midcap	11.5	16.2	17.5	18.8

Returns as of 31-Jan-25

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Note: PMS AMC & Scheme Reviews and Ratings are based on IME Capital’s Proprietary Review and Rating Methodology (read more here: AMC Rating & Scheme Ratings). These reflect the unbiased views of our central research team, based on our assessment of the investment value of these PMS/AIF strategies for our investors. We follow a highly stringent rating-criteria, where approximately 50% of PMS AMC’s & strategies would be rated 2-star or below (this is not meant to indicate that these funds are not investment-worthy, but that they do not currently fulfill the requirements we focus on for recommending funds to our investors — based on our internal views on the merit of the AMC/strategy relative to peers). Reviews & Ratings are primarily based on research of publicly available information (SEBI disclosures, PMS websites, PMS-aggregation platforms, webinar recording, media interviews etc.) and no explicit consent is required from AMCs for the same. While we endeavour to do further due-diligence via direct interactions with the investment teams of AMCs, this is typically restricted to AMC’s that meet our foundational fund selection criteria (reviews on lower-rated AMCs are often based solely on publicly available information). The views reflected in our Reviews & Ratings, are our independent views and may not be shared by the AMC’s and the investment teams. Please read detailed disclaimer for more.