Carnelian Shift Strategy
“There is no better teacher than history in determining the future…… There are answers worth billions of dollars in a $30 history book “– Charlie Munger. History has consistently taught us that bull markets are always borne on the back of some crisis, as crisis usually bring some natural or forced structural shifts. This time should be no different!
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The 2001 dotcom crisis led to a substantial cut in interest rates, leading to a boom in infrastructure and industrials.
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The 2008 financial crisis led to a series of populist measures sparking a consumption boom.
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And now the Covid-19 crisis has sparked a sectoral SHIFT in manufacturing and technology, which we believe will bring a huge wealth-creation opportunity for investors.
The “SHIFT Strategy” is a long only, multi-cap strategy with a predominant focus on mid & small cap companies with an objective to generate sustainable alpha and compound capital over a long period of time. We foresee a ~USD 500 bn manufacturing opportunity and ~USD 90 bn digital opportunity over the next 5 years as a first order effect with second and third order effects yet to follow.
What are the SHIFT's?
The SHIFT strategy focuses on investing in the following two sectors:
Manufacturing
India is on the cusp of multi-billion, multi-decade manufaturing boom considering
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Manufacturing growth led by India’s focus on becoming Atma Nirbhar, supply chain diversification by global players on account of China + 1 strategy, ongoing sectoral reforms and increased cost competitiveness
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India’s manufacturing GDP is expected to grow from USD 450bn to USD 1tn+ over the next 5 years.
Technology
Aims at capturing the 4th wave of IT - Cloud is the new ERP
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Acceleration of Digitization and cloud migration
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Organizations gearing up to the new reality on an SOS basis
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Creation of ~90-100 USD bn digital opportunity flowing to Indian IT players over the next 3-5 years
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This Shift is likely to create USD 200-250 bn of wealth creation opportunity.
Forensic Expertise
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:
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Companies with aggressive accounting practices
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Companies with high financial leverage
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Companies with low tax incidence
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Companies with the management having no skin in the game or misaligned objective
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Managements with consistent poor governance track record
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Managements in a hurry to create value
Investment Process
Portfolio Construction
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Universe of 18-20 stocks
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Approx. sector concentration
-Manufacturing – 2/3rd
-Technology – 1/3rd
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Ensure adequate portfolio level liquidity- 30% of portfolio can be liquidated within 5 days
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Low churn
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Well defined internal risk management & insider trading policy