Greetings from Team Carnelian!
Happy New Year - 2024!
We hope this letter finds you in good health and high spirits😊. Turning of the calendar is usually a good time to reflect and plan. As we close a remarkable year and embark on a bright 2024, we are delighted to take this opportunity to reflect on the growth, achievements, and significant milestones that we at Carnelian have achieved over the past twelve months.
2023 was a momentous year, marked by a lot of uncertain events – the US banking crisis, increasing interest rates, US-China geopolitical tensions, Israel-Hamas conflict, etc. Throughout the year, most investors were worried about the risk these events would bring; but despite that, the Indian markets continued to remain resilient, driven by growth in domestic manufacturing, China + 1, increasing global market share in merchandise exports, robust infrastructure & railway capex, and a strong credit growth. Corporate earnings continued to surprise the market on a positive side. After witnessing an outflow of USD 6bn during Jan-March 2023, FII flows came back strongly towards the end of the year (USD 4.5bn inflow during Nov-Dec 2023). Through the year, we had communicated via our letters (link)/quarterly connect calls/media interactions (link), that India will emerge stronger on account of the global crisis and FII flows will eventually come back. Domestic money continues to pour in due to financialisaton of savings.
Nifty was up 18.8% (in USD terms) during CY23 vs EM up 6.4%. Small and mid-cap continued to surprise everyone. Nifty mid cap index was up 43% & Nifty small cap index was up 55% vs Nifty up 20% clearly showcasing the interest in broader markets. During the month of May, we wrote our letter on – “Small is beautiful” (link) - why we think it is a great opportunity to invest in Indian small and mid-cap companies, especially when they are undergoing transformation.
Now let us move to update on Carnelian. We believe you as an investor and partner must know the developments at the organization level.
2023 was a satisfying and enriching year for Carnelian – with the overall team size going up from >15 to >35. We shifted to a larger space – at One Lodha Place in mid-town Mumbai. Our Asset Under Management grew to Rs. 4,400 crs. (USD 525mn), almost 2.6x vs the start of the year. Our client base has gone up from 500 to 1300. We now have our people across ~4 cities vs only Mumbai previously. Our performance across all our product baskets was exceptionally good and market leading. Our flagship Shift Strategy has delivered a robust 39.1% alpha during the last 12 months.
Performance Review
Our proprietary MCO framework helped us in finding path-breaking ideas delivering robust returns while mitigating risks. Our CLEAR and CONNECT framework has helped us avoid the “Type A” risk. Throughout the entire year 2023, our portfolio attributes remained much better vs the benchmark. We have been able to create a Faster (Growth), Stronger (Higher ROE & lower leverage) & Cheaper (valuation with respect to growth) portfolio. We are proud to share that the large alpha generation has happened with a low beta of the portfolio (0.9x)! Notwithstanding the fluctuations and uncertainties prevalent across the geopolitical scenario, our Shift Strategy has outperformed market benchmarks, achieving an impressive 39.1% alpha over the last 12 months. The YnG Strategy which focuses on high dividend payout companies has also delivered a stellar performance. Refer our performance below:
Research: The zeal for finding the “Magic” with “CLEAR” lens is deeply engrained
Process is what determines your outcome over long periods of time. Our processes around our proprietary frameworks have served us well.
“Magic” forms the core of our MCO framework. The framework encompasses identifying opportunities with a view to capture both earnings growth and a valuation re-rating. Our Shift Strategy was also born from this framework in August 2020. At any point in time, we monitor about 80 -100 ideas under this framework.
7 of our portfolio stocks more than doubled during 2023. This framework has allowed us to pick interesting alpha generation names. Despite heavy clouds of uncertainty encompassing the IT sector during the year, all our mid/small IT picks delivered 40% to 250% return during the year. One of our CMO/CDMO portfolio companies received strong traction in the CMS segment, delivering astounding returns. Another portfolio company (engineering) engaged in the business of heat exchangers and reactors had a change in the top management accompanied with a pick-up in the order book - the stock is up >3x in the last 1 year.
We continue to strengthen our team (added 4 team members during the year) with people having strong research background, good work experience and an encouraging idea generation mind-set. We have always believed in building talent ahead of the curve. We have a sector dedicated structure enabling us to build in-depth and connected research. While experience is important to us, we give more weightage to learnability of the person, as we would like to follow our own investment philosophy.
Our active coverage has gone up from 103 stocks to 170 stocks now. Interactions and plant visits have gone up significantly – with the team now getting habituated to morning/late night flights 😊. We have empanelled most major sell-side houses, helping us in our research process.
CLEAR and CONNECT framework has remained the backbone of our forensics and we are satisfied that right from inception, we did not have any accidents on “