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Carnelian Compounder

Scheme Rating

IME Scheme Rating

3 of 5 stars

Can be considered for investments: While Carnelian is a relatively new fund, and the team does not have a direct past fund management record (even as they are highly seasoned investment professionals), the fund is well defined and performance has been strong since inception. This can be considered for investment, even as we prefer flexicap strategies of more established other PMS firms.

IME Strategy Rating

3 of 5 stars

Flexible Well-defined strategy: A well-defined, fairly concentrated strategy that works well across market conditions as it retains flexibility in investing style

PMS Scheme Ratings are driven by IME’s Proprietary Scheme Rating Methodology, which takes into account our ratings of the Scheme’s investment strategy, its maturity, the investment team, and our separate rating on the AMC that runs this particular scheme. Our views on each of these individual criteria are available via the IME RMS – which you can view by reaching out to one of our relationship managers (using either the live chat or book appointment feature on this site).

IME View on Carnelian Compounder

Type: Large & Midcap | GARP | AUM (564 cr) | Inc Date (15 May 2019)

Carnelian Capital Compounder- Investment Strategy

Carnelian Capital Compounder is a long-only, multi-cap. and sector agnostic strategy. The fund invests in good growth businesses, managed by great management at a fair valuation.

 

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.

Forensic Analysis based on CLEAR Framework

Carnelian’s forensic analysis 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. 

Portfolio Construction

The portfolio is built on their ‘MCO framework‘ – ‘M’agic, ‘C’ompounder, ‘O’pportunistic.

“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
“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
Things that are avoided
  • Aggressive accounting principles
  • High financial leverage
  • Low tax incidence
  • Management having misaligned objective
  • Management with poor governance record
  • Management in hurry to create value

Trailing Performance

1yr 3yr 5yr Since Inception
Carnelian Compounder 48.7 20.7 20.6 21.2
S&P BSE 500 TRI 34.7 18 18 19.3
Alpha over Broad Mkt BM 14 2.7 2.6 1.9
Nifty 500 33.8 16.9 16.6
Alpha over Category BM 14.9 3.8 4

Performance as of: 31-May-24 | Inception Date: 15-May-19

Fund Managers

Manoj Bahety | 3-star rated FM

Co-Founder | 27 yrs Experience | 5 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.

Fee Structure

Fee StructureFee
Fixed Fee Structure2.3
Variable Fee Structures1.5% fixed + 15% above 8% hurdle
Exit Fees

AMC

AMC: Carnelian PMS (click link for detailed AMC review)

Not a top recommendation (at this time) due to lacking long term credentials : While Carnelian has an impressive founding team, they lack actual fund management experience (even as they have strong research & investment business-building pedigrees). With Carnelian Capital yet to prove its longer-term investment credentials, we think it is better for investors to wait for the strategies to mature to get a clearer view of their longer-term performance.

AMC Rating

3 of 5 stars

AMC Pedigree

3 of 5 stars

AMC Size

4 of 5 stars

Team Pedigree

3 of 5 stars

Inv Philosophy

4 of 5 stars

Performance

3 of 5 stars

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