Capital Protection: Margin of safety precedes return
Excellence: Excellence precedes
Law abiding: Compliance
Know what you don't know:
Stay within core, expand core
Patience & trust: Patience precedes impulsiveness
Customer first: Customer interest precedes everything
Reputation risk: Reputation precedes rewards
We look at growth in three baskets
Resonating with the qualities of Carnelian*, Carnelian Asset Management, an investment management firm was founded by Vikas Khemani, Manoj Bahety, and Swati Khemani to pursue their passion towards investing in the capital markets. Carnelian’s mission is to help clients create and protect their wealth in the best optimal manner through investing in equities. Carnelian aspires to create a global scale asset management platform known for its values and expertise.
In the Carnelian world, we believe investing success is an outcome of making good decisions consistently over a long period of time. Good decisions are those which are made “Objectively, Free of any bias”, considering “Probability of outcome” and factoring “Risk reward”.
(*Carnelian is a semi-precious stone which stands for motivation, endurance, leadership and courage; it is believed to bring about prosperity and protect from negative energies)
We look at growth in three baskets
Aims at capturing earnings growth and valuation rerating
Industry structure change
New growth catalyst
Completion of capex phase
Aims at capturing earnings growth over a long period of time led by MRFG
Large opportunity size & sustainable Moat
High ROE - efficient capital allocation
Robust Free cash flow generation
Growth & Governance
At Carnelian, we classify risks into 3 types
Risk of permanent loss of capital or Total loss risk: risk of losing ~70-100% of capital
Permanent Loss Risk
Disruption Prone Businesses
Quality of management
Quality of earnings/balance sheet
Volatility Risk (MTM loss Risk): risk of an investment temporarily going below the investment price
Geo-political / political issues
Temporary market dislocation
Underperformance risk/Opportunity loss risk: risk of investing into sub- optimal stocks/sectors/asset class due to various biases and lack of knowledge thereby missing superior returns
Opportunity Loss Risk
Lack of knowledge
In investing, avoiding an accident is equally important as getting the investment hypothesis right.
We come from Marwari families where our forefathers are used to seeing “where is our profit vs what is our profit”. We learnt our first lessons from them to ascertain profits from the balance sheet not the P&L. Our childhood learnings learnt working with them coupled with professional qualification of Chartered Accountancy has immensely helped us.
This Unique capability and rich experience of over 12 years on forensic research of the companies’ annual reports and seeing through some of the obvious accounting practices or frauds, helps us avoid accidents of investing in companies with dubious intent or misplaced objectives.
Our unique forensic framework deep dives into the following before investing, what we call “CLEAR”.
C – Cash flow Analysis & Capital Allocation. We assign zero value to profits without cash flow conversion. We deep dive into source of cash flow instead of reported cash flow
L – Liability Analysis, True debt vs Reported debt, Contingent liability and likely impact on future earnings
E – Earning Analysis, True Economic Profit vs Reported Profit, Discretionary vs non-discretionary profit
A – Asset Quality Analysis, Some worrisome points - huge built up in loans and advances, large quantum of long duration inventories/receivables susceptible to value diminution, large payables supporting large receivables/inventory, profits getting re-deployed in non-core/expensive/uncertain inorganic growth, profits getting into intangible assets/goodwill – without visibility of commensurate profitability, subsidiaries/JVs which require consistent infusion of profit without any visibility of returns.
R – Related party transaction & Governance issues
Pitfalls we avoid
Learned Investment Guru Charlie Munger says, Invert, always invert. Tell me where I will die, I won’t go there.
Below illustrated are companies / managements we will not invest with:
Companies with aggressive accounting practices
Companies with high financial leverage
Companies with low tax incidence
Companies with the management having no skin in the game or misaligned objective
Managements with consistent poor governance track record
Managements in a hurry to create value