Carnelian Shift

PMS Background

Carnelian Capital PMS is a relatively young portfolio management firm founded by Vikas Khemani, Sachin Jain, Manoj Bahety, and Swati Khemani, all of whom were part of the senior management team at Edelweiss prior to setting up Carnelian. The founding team brings strong institutional equity research and capital markets experience. However, as a PMS platform, the translation of this institutional equities pedigree into a long-term fund management track record continues to be established.

PMS Investment Philosophy

Carnelian follows a fundamentally driven, bottom-up, long-only, multi-cap and sector-agnostic investment approach. The philosophy is centred on investing in good growth businesses, managed by high-quality management teams, at fair valuations, with a strong emphasis on governance, forensic diligence, and risk–reward balance.

Investment Framework

• Good Businesses: Companies with robust profitability, cost leadership, large opportunity size, free cash flow generation, strong incremental return on capital, time-tested business models, and sustainable competitive moats.
• Great Management: Evaluated on integrity, modesty, capability, capital allocation discipline, governance standards, and risk management culture.
• Favourable Risk–Reward: Investments require clear upside potential supported by margin of safety, assessed across business risk, balance sheet risk, and valuation comfort.
• Negative Screening: Explicit avoidance of companies with aggressive accounting, high financial leverage, low tax incidence, misaligned management incentives, poor governance history, or management teams perceived to be rushing value creation.

Forensic Diligence – CLEAR Framework

Carnelian employs a rigorous forensic framework known as CLEAR, implemented through a two-step process.

1. Automated Forensic Screening: A template-driven review of 10 years of historical data to identify potential red flags. Companies failing this stage are rejected outright.
2. Forensic Deep Dive: Detailed analysis of annual reports and financial statements by the forensic team, presented in a structured format to the Investment Committee.

The CLEAR framework evaluates Cash Flows (sustainability vs reported), Liability Analysis (true vs reported debt and contingencies), Earnings Quality (economic vs reported profits), Asset Quality (core vs non-core assets), and Related Party Transactions & Governance. Any stock failing this framework is rejected by the Investment Committee.

Portfolio Construction – MCO Framework

The portfolio is constructed using Carnelian’s MCO framework— Magic, Compounders, and Opportunistic—allowing flexibility across market cycles.

MAGIC (50–60%)

Investments in companies undergoing acceleration in growth and valuation re-rating, where “magic moments” are yet to be fully recognised by the market.

• Tracking corporate announcements, promoter and management changes
• Regular management interactions, channel checks, and industry expert calls
• Monitoring sharp improvements in revenues, margins, and working capital
• Identifying inflection points such as end of capex cycles

Magic moments are typically triggered by management changes, shifts in industry structure, new growth catalysts, product innovation, or completion of major capex phases.

COMPOUNDERS (40–50%)

Investments in stable, capital-efficient businesses capable of delivering smooth, long-term compounding.

• Structural screeners using 10 years of historical data on revenues, EPS CAGR, ROE, cash flow conversion, and leverage
• Preference for non-cyclical, non-commoditised businesses with limited regulatory risk and operational simplicity

Compounders are identified based on the MRFG framework:

• Moat – sustainable competitive advantage and large opportunity size
• ROE – efficient capital allocation
• Free Cash Flow – robust cash generation across cycles
• Growth & Governance – consistent growth with strong governance

OPPORTUNISTIC (0–10%)

Selective exposure to special situations such as IPOs, mergers, demergers, open offers, buybacks, delistings, potential takeovers, and deep-value dislocations, while maintaining strict risk–reward discipline.

Risk Management

• Single stock exposure: Maximum 10%
• Sector exposure: Maximum 40%
• Single promoter group exposure: Maximum 20%
• Liquidity: 70% of the portfolio must be liquidatable within 5 trading sessions
• Re-evaluation trigger: Any stock underperforming the benchmark by more than 20% requires mandatory reassessment and presentation to the Investment Committee within 7 days.
• Investment Committee oversight: All fresh buys require IC approval; stocks may be exited if the IC is not satisfied with reassessment outcomes.

Sell Strategy

• Material change in the investment hypothesis
• Error identified in the original investment thesis
• Valuation significantly exceeding fundamental value
• Availability of superior opportunities with better risk–reward