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DAILY VOICE: Carnelian AMC founder reveals their investment philosophy

Our investment philosophy is designed to invest in structural growth businesses, run by great managements at fair valuation within Carnelian risk-reward framework.

July 28, 2020 / 08:28 AM IST

Our investment philosophy is designed to invest in structural growth businesses, run by great managements at fair valuation within Carnelian risk-reward framework, Manoj Bahety, Founder – Carnelian Asset Management, said in an interview with Moneycontrol’s Kshitij Anand.

Edited excerpt:

Q) 40% rally on the benchmarks from the lows – who would have thought. Are we out of the woods?

A) While a large part of recovery has been contributed by the co-ordinated action of all the central banks across the globe pumping in record liquidity (twice of GFC Crisis 2008), the market has also presented an unprecedented opportunity in terms of irrational valuations.

Knocking off 40-50% of valuation because of a few quarters of temporary headwinds is what we call an irrational behavior, hence an investment opportunity.


We have stress-tested our entire portfolio on key parameters and followed one simple rule: If a company does not possess at least one year of liquidity or wherein the earning power has got structurally impaired; has to exit our portfolio.

Extensive stress test results have helped us to keep our objectivity and the much-needed optimism level high at a time when broader markets were engulfed in extreme pessimism.

We have not only kept the structural names intact in our portfolio but also got an opportunity to add a few more names at very attractive risk-reward metrics.

Q) Any particular investment philosophy which you follow while making an investment?

A) Our investment philosophy is designed to invest in structural growth businesses, run by great managements at fair valuation within Carnelian risk-reward framework.

Our investment philosophy involves bucketing our investments into 3 categories – Magic, Compounder, and Opportunistic.

The Magic Basket aims at capturing earnings growth and valuation rerating which involves investing in companies through a catalytic/ change-oriented approach. The Compounder Basket aims at capturing earnings growth over a fairly long period.

All our investee companies have to pass 2 hurdles:

A) MRFG - a combination of Moat, High Return On Equity, Free Cash Flows, Growth & Governance profile

B) Forensic deep-dive:  Thorough analysis of 10 years of financials involving cash flows/capital allocation, liability, earning, asset quality, and governance analysis (CLEAR framework).

Q) News about the privatization of some PSUs got the market excited. What are your views on that?

A) We believe that privatisation of strategic PSUs is a sensible decision at this juncture and is a win-win situation for all the participants.The government gets much-needed funds to bridge its fiscal deficit, the new/incoming investor will also get an opportunity to participate and contribute in India’s growth story and divested PSU will get much-needed transformation in terms of a culture shift, entrepreneurial spirit, therefore, imbibing best global practices, professional management and much more.We strongly believe that privatisation will create a significant wealth creation opportunity for all the players and hence vote for investors’ enthusiasm.A case in point is wealth creation post-Maruti’s divestment whereas non-divestment in BSNL and MTNL has resulted in massive wealth destruction.Q) Financials including NBFCs as a theme has turned volatile with selective outperformance. Considering the fact that it holds the maximum weightage in Nifty, should investors stay cautious as the skeleton of lockdown is still hidden in the closet?

A) We are watchful of the second-order effects on NBFCs as well as few banks with weaker liability franchises which may result in elevated NPAs once the moratorium effect is over.We believe the market is the under-estimating second and third-order impact of COVID on the balance-sheets of many NBFCs as well as the weaker banks.

We are extremely cautious around the credit sector and will only stay with risk leaders and strong liability franchises.

Q)  There are talks of another stimulus package that could well come after the vaccine? What would you be betting on?

A) India’s fiscal and monetary response to stimulate the economy has lagged as compared to other nations across the globe. India had been at a unique place with the most stringent lockdown and much lower stimulus.

There will be second/third order effects which can occur impacting the economy and markets. We strongly believe that the Indian economy needs significant fiscal measures for many struggling businesses.

On the positive side, we acknowledge that the strong forex reserves, divestment opportunities coupled with improving the current account situation leave enough un-used firepower with the government.

Q) At a time when the world is factoring in over a 5% decline in GDP growth for Indian markets and equally grim picture for the world. How can equity investors turn this around as an opportunity?

A) Every crisis brings an opportunity. The current crisis will bring multi-billion, multi-decade opportunities for manufacturing sectors in India. This is owing to the global diversification from China as well as India is considered as a trusted and preferred partner.

At Carnelian we will be launching a separate scheme to capture investment opportunities within the “Manufacturing in India” theme.

India is uniquely positioned with proven entrepreneurship, cost competitiveness, strong domestic market, and the recent government reforms to emerge as a preferred investment destination.  Fewer sectors which will benefit are auto/auto ancillaries, defence, consumer durables, Heath care/API & chemical sector.

We also believe that the Indian IT space is at a very sweet spot considering digital transformation across. Indian IT players enjoy a competitive edge considering advantages of the proven technological capabilities, a large pool of talent and advantages of scale and efficiency.

Q) Which are the investment themes that one could consider amid the COVID environment?

A) Along with the “manufacturing in India”  theme mentioned above, the COVID environment presents favourable risk-reward metrics to invest in sectors like telecom, IT, pharma, Chemicals/APIs, non-credit financial participants like insurance, capital market (AMC/brokerages), etc.

Most of the above sectors present dual benefits of less disruption during COVID as well as structural multi-decade growth opportunities post the pandemic.

Q) Lot of new investors have joined the party on D-Street in 2020 – could be largely due to work from home, muted returns from MF, or extra income at a time when there are job losses. What are your views – will the trend sustain?

A) We continue to advise investors to involve in detailed process-driven research before investing in the market. While this kind of rally gives an opportunity to create short term paper money, however, the ability to sustain the same over a long period requires much bigger efforts and discipline.

Our advice to the investors is to manage their hard-earned money diligently. I end this article with the golden words by the investment guru Benjamin Graham: “Return of capital is more important than return on capital”.

Disclaimer: The views and investment tips expressed by investment experts on are their own and not that of the website or its management. advises users to check with certified experts before taking any investment decisions.

Kshitij Anand is the Editor Markets at Moneycontrol.

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