ETMarkets Fund Manager Talk: This money manager with AUM of Rs 1600 cr sees growth coming from BAM stocks

In an interview with ETMarkets, Bahety, said: “We also like telecom space in India, which after years of consolidation is well placed to reap benefits of operating leverage, robust cash flows and consistent improvement in return ratios,” Edited excerpts:


Markets are about to make history probably in November. How has your fund grown as markets probably touch October 2021 highs?

We started our journey about 3.5 years back since then our Compounder Fund has delivered ~17% CAGR, outperforming the benchmark by 3.6%, and our Shift Strategy has delivered 44% CAGR, outperforming the benchmark by 18%.

We have consistently delivered superior risk-adjusted alpha.

How much AUM do you manage? Has the fund AUM grown in 2022?
We manage ~Rs. 1,600 cr AUM and have seen consistent flows throughout 2022.

What has been your portfolio strategy amid the volatility seen in the past 1 year?
Our advice to the investors is to embrace volatility as volatile periods provide the best investment opportunities at reasonable/fair valuation.

Over last one year we were able to add various structural names within our risk-reward framework.

Our portfolio strategy revolves around 2 major pillars – risk and reward. Our proprietary MCO framework (Magic, Compounder, Opportunistic) has helped us to identify various companies undergoing transition like management change/ Balance sheet improvement/industry structure change/business strategy change etc.

The aforesaid transition leads to an accelerated growth trajectory leading to both superior earning growth and P/E rerating. All our portfolio holdings are screened using our proprietary Clear framework (involving forensic deep dive).

Which sectors are you currently bullish on?

In our view, next leg of growth will come from BAM (B)anking, (A)uto & Auto Ancillaries, and (M)anufacturing stocks.

We also like the telecom space in India, which after years of consolidation is well-placed to reap the benefits of operating leverage, robust cash flows, and consistent improvement in return ratios.

India with its 4Ds (Demand, Demographics, Democracy & Domestic markets) is uniquely positioned to capture the global shift from China. India at ~18% of the world’s population, is a large consumption market and most global MNCs are exploring expanding their base in India which provides a combination of a large domestic market and the potential to export to other markets easily.

Unlike China, India with its democratic government, stable policies, and open-economy structure provides an attractive choice for global investments. Interstate competition to attract investment is making things only better from the past.

Banks are well capitalized now than ever before with Tier 1 capital at its best and leverage at its lowest. NPA problems are behind, and banks are now looking for growth.

Retail growth has been robust, and with the capacity utilization’s picking up, it is a matter of when (and not if) that we see corporate credit growth picking up.

Government’s capital expenditure as a % of GDP has been on a constant rise. Private capex was at one of the lowest in FY 21 during the last 15 years, but with new areas of manufacturing opening led by the import substitution and export theme, we believe that all the avenues are now aligned for a private CAPEX upcycle

With chip and demand-related issues behind us, we believe auto stocks should do good from here. For, select auto ancillary companies along with domestic demand, export opportunities are also opening up.

We were very early in picking up manufacturing as a trend for India and continue to be bullish on the same. We have launched a specific strategy – “Carnelian Shift Strategy” to capture the manufacturing theme in October 2020.

Manufacturing companies have a long runway, they will be beneficiaries on account of not only domestic demand but export opportunities opening up across the globe.

Any new stocks which you added or sold off amid the rally we have seen from the June lows?

We have added stocks in auto and auto ancillary, telecom, capital goods & BFSI sector. We have reduced our weightage in IT sector owing to global uncertainty.

As SIP cross Rs 13000 cr per month – what does it tell you about the retail investor behaviour? Can we say that they have come off age?

What is heartening, is INR 13,000 crores SIP has come in when markets have been volatile which has neutralised the impact of huge FII selling. India’s dependence on FII is coming down. It is heartening to see the long-term approach of retail investors.

We as a country are all set to take advantage of demographic dividend in our favour and as the increasing working population grows further – so will the savings that would come into f
inancial markets. Share of household savings in equities is yet only ~5% and has a long way to go.

What is your take on the new-age tech companies? Are your comfortable adding them to the portfolio?

Newly listed new-age tech companies have limited history and have grown without profitability so far with no or very minimal operating cash flows.

The path to profitability so far seems to be hazy and to top it up with astronomical valuations make us uncomfortable.

However, in some cases business models will evolve over a period of time and we are watching them closely.

How does your fund manage risk?

Our risk framework is classified into 3 broad buckets:

Type A: Risk of permanent loss of capital (~70-100% of capital)

Type B: Volatility risk (MTM loss risk) and

Type C: Opportunity loss risk; risk of investing in sub-optimal stocks due to various biases and lack of knowledge thereby missing superior returns.

At Carnelian, we spend a lot of time managing Type A & Type C risk and ignore Type B Risk. We have developed a detailed framework to manage Type A risk, which is our CLEAR framework.

Cash flow analysis – Liability analysis – Earnings quality analysis – Asset quality – Related Party & governance checks.

If someone plans to put in say Rs 10 lakh now do they follow a staggered approach or a lump sum approach as markets are on verge of hitting highs?

We always follow a staggered manner of investing for new investor money and follow stock specific approach while deploying new money. At times we also slightly deviate from our model portfolio while deploying money for new investors within our risk-reward framework.

What is the kind of cash levels you are sitting on – to be deployed on dips?

We generally do not sit on cash as there are ample opportunities available in the Indian market.

However, at times we may hold around 5% to 8% cash which helps us to take advantage of opportunities that come up amidst market volatility, otherwise we are fully invested and continue to maintain our bullish stance in the long term, ignoring volatility in the short term.

A little about yourself and how you started your equity journey?

I came to Mumbai in 1994 from Tier 2 city to pursue my Chartered accountancy with a dream to do something big, wherein I met other Carnelian founders.

We all (founders at Carnelian) studied together at RVG and know each other for the last 25 years and also got an opportunity to work a large part of our professional life together at

.

We used to discuss capital markets since our early days and wanted to pursue our career in capital markets.

I started my career with the corporate treasury of

wherein I got my first practical experience with capital markets on the debt and forex side.

Thereafter, I got an opportunity to work with the top leadership team of

, Morgan Stanley and finally with Edelweiss Institutional Equity research.

I started my equity journey with Edelweiss IE research wherein we started with forensic research for the first time in the industry and highlighted numerous cases of deviation between reported numbers and true logical numbers.

Our forensic research, popularly known as ABC, has helped investors across the globe to take informed investment decisions based on true numbers instead of reported numbers, thus avoiding pitfalls – one of Carnelian virtues.

I love to connect numbers logically, which helps to understand the inherent strengths or weaknesses of business in an unbiased manner.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)