Carnelian Shift Strategy PMS Flashcards
About Carnelian AMC
Carnelian is a boutique investment management firm founded in April 2019 by Vikas Khemani, Manoj Bahety and Swati Khemani.
It is 100% founder owned, reinforcing trust and value for all stakeholders.
Carnelian has a team of 52 professionals. It has a strong investment team comprising of 9 research analysts, covering different sectors.
It currently manages ~ Rs 8,045 Cr of AUM across PMS and Cat III AIFs
Key Investment Team
Vikas Khemani (CIO):
Vikas has 27 years of capital markets experience, most recently as the CEO of Edelweiss Securities Ltd, where he spent 17 years incubating & building several businesses to leadership including Institutional Equities business and Equity Research.
Manoj Bahety (Fund Manager):
Manoj is a Chartered Accountant & CFA Charter holder (USA), having ~27 years of diverse financial services experience with marquee institutions.
Most recently, he has served at Edelweiss Securities as Dy. Head - Institutional equity research, Head - forensic, thematic & mid cap research.
He has pioneered differentiated forensic research, popularly known as “Analysis Beyond Consensus” (ABC research).
The Strategy
The strategy is designed to capture structural decadal shifts across the following themes -
Manufacturing led by conducive regulatory and global environment.
Tech evolution empowered by digitalization globally.
It follows a concentrated QARP (quality companies at a reasonable price) approach.
Portfolio has blend of mid & small cap listed companies.
Portfolio size: 35 – 40 stocks.
Investment Framework
Quality Business and Management
Growth
Magic Basket - Accelerated earnings growth & valuation re-rating
Compounder Basket - Sustainable earnings growth
Reasonable Valuation in relation to growth prospects
Forensic Analysis - CLEAR framework
C – Cash Flow Analysis
L – Liability Analysis
E – Earnings Quality Analysis
A – Asset Quality Analysis
R – Related Party and governance issues
Top 10 Stocks as on July 31
- Laurus Labs : 5.5% Magic
- Aarti Industries : 5.1% Magic
3.PCB : 4.6% Compounder - Quick Heal Tech : 4%
- Shaily Engg Plastics : 4% Magic
- Anup Eng : 3.8% Magic
- Syngene International : 3.8% Compounder
- CIE Automative : 3.7% Magic
- Kirloskar : 3.8% Magic
- L&T : 3.7 Compounder
- Tech Mahindra - Magic
Top 5 Sectors
- IT : 17.6%
- Auto & Auto Ancillary : 17.2%
- Pharma & API : 16.7%
- Engineering & Capitall Goods : 14.6%
- Chemicals : 8.8%
Market Cap Break Up
Large Cap : 7.7%
Mid Cap : 7.4%
Small Cap : 82.8%
Cash : 2.4%
About Portfolio
- No of stocks : 33
- AUM~2500 Cr
- AMC AUM : 8045 Crs
- Median MCap : 11,237 Cr
- Beta : 0.9
- SD : 14.1%
- Sharpe Ratio : 1.7
- Fund Manager : Manoj Bahety
- Exit Load : 1%<= 1 Year
- FMC : 2.5%
NRIs including US and Canada can invest on a case-to-case basis and in consultation with fund house (except for Hong Kong & China) . Minimum investment for NRI - USD 1,50,000
Client can opt for monthly STP. Maximum duration for STP will be 4 months. Minimum amount for STP is Rs 50 Lacs or more per strategy
Scheme Performance as on July 31,2024
Short Term
1m/3m/6m
Scheme : 6.5/13.5/20 Vs 4.4/12.7/19.6
1y/2y/3y
Scheme : 52.3/49.7/30.2 Vs 38.9/27.6/21
Inception Date : 06 Oct 2020
Stock Stories - Laurus Lab
Business Brief:
Engaged in offering broad and integrated portfolio of Active Pharmaceuticals
Ingredients (API) including intermediates, Generic Finished dosage forms (FDF) and
Contract Research services to cater to the needs of the global pharmaceutical industry.
Bucket – Magic
Investment Rationale:
Complete basket of ARV APIs from first line molecules to second line molecules
End to End Vertical Integration – In-house manufacturing of some key starting
materials (KSM), intermediates both used for manufacturing APIs which is then used
for manufacturing Formulations.
Execution from one API product co’ to multi-API product to formulations has been
excellent – showcasing superior execution skills.
Focused approach in select therapies where it can take advantage from cost
competitiveness with Scale, patented process, technology, and backward
integration.
Clean plant compliance track record with no major observations from regulatory
agencies during inspections. On time delivery of APIs hence reliability of supplies for
customers.
Margin of safety:
The company should do PAT of ~900-1,000 crores for FY25 – this translates to less
than 20 times P/E. Considering the franchisee, management pedigree and growth
optionality’s, there is an ample margin of safety in this stock.
Stock Stories - Aarti Industries
Bucket – Magic
Investment Rationale:
Aarti Industries India’s largest player in benzene chemistry in India’s Chemical
space. Company is doing a heavy capex of 3000 crores to enter to Chloro toluene
chemistry where it will be the only player.
With new chemistry capabilities as well expansion in the products in Benzene
space company will see massive growth in times ahead. Further China+1 and as
well Europe+1 will help company to further gain ground on the exports front.
Margin of safety:
Currently the company has the capacity to grow further. With new capex coming
on stream in FY 24 which help the continue to expand further.
Stock Stories - Anup Engineering
Business brief:
Manufacturing of critical process equipment required in various industries like oil & gas,
chemicals, power etc.
Bucket – Magic
Investment Rationale:
Mr. Reginaldo Dsouza has been appointed as new CEO effective October 2022 –
having 25+ years’ experience in Capital Goods sector and within that more than
20+ years with Godrej Boyce across diverse functions like Manufacturing,
Processes and last 5 years in sales.
The company is part of the decades old Arvind group and is amongst top 3
players in critical process equipment’s segment and dominant in heat
exchangers.
Beneficiary of capex up cycle – across private sector and government as main
supplier of process equipment’s across various industries.
Capex at present Odhav plant with further capex at Kheda presenting
opportunity to increase revenues fourfold in next 5 years coupled with margin
expansion.
Good Execution Track Record - company has been able to empanel itself and
further supply to large global MNC EPC players and customers including Lurgi,
Linde, Jacobs, Mitsubishi, Dangote Refinery etc.
Almost 85% of orders that they get are on a repeat order basis –testimony to
delivery.
Margin of Safety:
Net Cash company with continuous generation of further free cash flow and
capex managed from internal accruals.
Trading at attractive valuation – lower double-digit PE on FY25E.
Stock Stories - Syngene International
Business Brief:
Integrated research, development and manufacturing company providing scientific
services – from early discovery to commercial supply in pharma space.
Bucket – Compounder
Investment Rationale:
Increasing trend of outsourcing in research, development and manufacturing of
pharmaceutical and specialty chemicals should help companies on account of
experience obtained over decades.
High entry barrier business as it requires years to build domain knowledge which
further deepens with work – one of the few companies having presence across
entire chain of CRAMS.
Ramp up in biologics manufacturing (led by Liberela supplies to Zoetis)
Gradual ramp up of utilization of Mangalore API facility.
Beneficiary of trend movement of generics to bio similar as company has research
and manufacturing expertise of the same.
Years of established relationships with global marquee clients (8 out of top 10 global
companies) ensuring stability in revenues.
Margin of safety:
The company is currently trading at 45x FY25E. Global peers like Wuxi Apptech,
Wuxi Biologics, Pharmaron which trades at 60-80x at much higher valuation despite
Syngene having much higher ROE profile
Stock Stories - Neuland Labs
Brief Business:
Company supplies Prime & Specialty API’s along with providing Custom Manufacturing
Services (CMS) catering to the needs of mid & small biotech companies and global
pharma innovators.
Bucket - Magic
Investment Rationale:
One of the leaders in peptide molecules, some of which have a market size of above
billion dollars and are used to cure chronic diseases like diabetes and oncology.
Shift to higher value-added products in revenue mix with increasing sales of CMS &
Specialty API division which will help improve margins of the company overall.
Improvement in the number of CMS projects in pipeline by almost double the levels
over the last 3 years.
Capacity addition in the new Unit 3 facility could help increase revenue by the tune of
40% and bring in supply chain efficiencies.
Margin of Safety:
High barriers to entry in this business, which requires approvals from various
regulatory authorities and strict inspection from clients. Customers also tend to be
sticky in nature.
Run by a strong management team with deep chemistry skills. Along with this, has
deep capabilities in R&D with a team of 200+ scientists for the same.
Reduction in dependency of raw material supply from China from 50% to 10%.
Stock Stories - Cyient
Business brief:
Cyient is an Indian multinational technology company that is focused on engineering,
manufacturing, data analytics, and networks and operations.
Bucket – Compounder
Investment Rationale:
Dominant on the Aero ERD side – 20% of the business is aero – spends are
coming back in Aero. Commentary from Cyient, commentary from LTTS, Boeing
increasing supplier base in India, large Air India order to both – Boeing & Airbus.
All these point towards aero spends coming back.
There are lesser number of ERD suppliers on the Aero side – vs other areas such
as communication, health, energy & utilities, etc.
3 tailwinds – Bosch captive win, Honeywell order and Aero spends coming back.
Cyient is separating DLM – given the different nature of the business. DLM would
post a profit of ~85cr in FY24E vs Rs65-70cr in FY23 and Rs48cr in FY22.
Margin of safety:
Services business profit would be ~Rs700cr in FY24E & Rs.800cr FY25E.
Considering ~33% discount to LTTS’ valuation (historically traded around that
range), i.e., 22x FY25E & current valuation Cyient DLM the justified market cap
should be Rs. 21,000 cr v/s current market cap of Rs. 17,500 cr
Stock Stories - Tech Mahindra
Bucket – Magic
Investment Rationale:
Mohit Joshi is a great appointment. He has had a successful career at Infy. He was
the head of financial services and healthcare life sciences (~36% of revenue). He was
also responsible for leading the “Sales” at Infy. Ravi Kumar used to head delivery –
and Mohit was looking after Sales.
The key headwinds for Tech M to handle are - a higher BPO employee mix and
exposure towards telecom part of market. Global telcos have not grown over the last
5 yrs. – limiting their ability to spend.
Company should have margin recovery by 200bps at the EBITDA level. Building in
250bps EBIT margin expansion over FY23-25E, EPS works out to be INR 71 in FY25E
vs INR 52 in FY23.
Tech M does not cater to US banks currently – BFSI is only 15-16% and in that too –
the exposure is towards Asian banks (SEA). Mohit’s dominant experience has been
on the US BFSI side – this should help Tech M structurally.
Tech M trades cheap vs others – delivery by the new CEO should narrow down the
valuation gap.
Margin of safety:
Tech-M trades at 16-17x FY25PE vs smaller companies trading at 20x kind of
valuation. Delivery by the new CEO should narrow down the valuation gap.
Stock Stories - L&T Technolgy
Business Brief:
LTTS is an engineering services provider incorporated in 2012, offers engineering,
research and development (ER&D) and digitalization solutions to companies in the areas
such as Transportation, Industrial Products, Telecom and Hi-Tech, Medical Devices and
Plant Engineering.
Bucket – Compounder
Change in Industry
Investment rationale:
Strong parentage – the company inherits strong technical knowledge, domain
expertise and global relationships of its parent company Larsen and Toubro
(L&T).
LTTS is the pure play ER&D service provider which will gain high growth in the
coming years because of the capability of the company to innovate and play a
major role in the Product life cycle of the company.
LTTS has a relationship with 57 of the top 100 R&D spenders. In the
transportation verticals, it holds relationship with 8 of the top 10 R&D spenders.
In the Hi-tech vertical also, it holds relationship with 8 of the top 10 R&D
spenders.
As per leading industry consultants, LTTS has a leadership position across various
metrices.
LTTS targets $1.5bn still by FY25 vs FY22 revenue of $880mn.
Margin of safety
Commentary across the transportation vertical for R&D spend is very robust.
If we roll forward by 9-12 months, stock will trade at its 5 yr. avg valuations.
