Greetings from Team Carnelian!!

Every year, when we review the performance of our PMS and AIF strategies, we see strong compounding and resilient returns. But that’s only part of the story. What truly matters and what intrigues us the most is what lies behind those results. What has enabled us to generate alpha consistently over the years?

When we step back and reflect on some of our most rewarding journeys mentioned below, we see a pattern:

• ICICI Bank – Change in CEO and focus on risk calibrated growth delivered ~3.6x returns, ~22% IRR.
  
• Aditya Birla Capital – Change in CEO and focus on growth across businesses led to ~3.8x returns, ~46% IRR.
  
• Mahindra & Mahindra – A leadership reset focusing on growth and return matrices led to nearly ~3× gains, ~41% IRR.
  
• Tata Motors – Group-level leadership changes and a renewed focus on deleveraging delivered about 4× gains, ~35% IRR.
  
• Laurus Labs – An intentional change in its business mix (large capex coming on stream) drove ~2.9× returns, ~55% IRR.
  
• Tube Investments – A management shakeup and new growth engines resulted in ~6× gains, ~155% IRR.
  
• Praj Industries – A management reset aligned with the biofuels cycle created ~5.5× returns, ~77% IRR.
  
• Neuland Labs – Early recognition of a global API/CDMO shift delivered ~7.6× returns, ~55% IRR.
  
• Newgen – Partnership with global system integrators & new products created 4.4x returns, ~69% IRR.
  
• One 97 Communication – Change in business strategy delivered ~2x returns, ~67% IRR.

These weren’t momentum bets, nor were they consensus calls. Instead, they were investments anchored on structural change, often at a point when the shift was still invisible to the broader market.

Over the years, this way of thinking has become deeply ingrained in our philosophy. The pattern repeated itself so often that we eventually named it, not as a model to be followed mechanically, but as a mindset to be lived.

We call it the MAGIC Framework.

Today, we want to take you inside that framework: what MAGIC stands for, how it shapes our investment decisions, and why it remains a core driver of our long-term alpha.

What is Magic?

While the literal meaning of magic suggests supernatural powers, in the Carnelian world, magic represents something far more grounded: the obvious change that is not yet priced in or fully understood by Mr. Market. The Magic basket is our disciplined, research-driven approach to harness these opportunities. Hinge points are rare — but when they are spotted with conviction, they become engines of extraordinary compounding.

Every business goes through a natural life cycle — birth, growth, maturity, stagnation, renewal, yet the most powerful compounding doesn’t occur in the middle of these phases. It occurs at the hinge points — the moments where decline becomes growth, where uncertainty becomes clarity, where complexity becomes direction.

MAGIC is our way of finding those hinge points. Not through guesswork, but through pattern recognition, fundamental understanding, doing our due diligence and a disciplined reading of change.

We have identified catalysts that drive these durable hinge points:

1. Leadership Reset – When Quality of Management Rewrites the Outcome:
   New leadership often redefines strategy, capital allocation, culture, and execution.
   
2. Structural Industry Shift – When Macro Tailwinds Expand the Profit Pool:
   These include regulatory shifts, technology adoption, policy incentives, and geopolitical changes. For example – India’s PLI scheme and the China+1 trend in manufacturing.
   
3. Strategy Reset – A Company Re-architects Its Future:
   This can be a new product cycle, a pivot to adjacencies, sharper GTM, or exit from legacy drags. Strategic resets don’t show up instantly, but when they do, the earnings curve tilts sharply.
   
4. Post-Capex/Operating Leverage Inflection – When Heavy Investment Turns to Returns:
   Many companies suffer optics of low ROE and high capex for years…until the cycle turns, and those investments start pouring value back into the bottom line.
   
5. Balance Sheet Cleanup – When Uncertainty Disappears Overnight:
   Clean balance sheets simplify complex situations. Markets often overvalue complexity; when bad assets or debt issues are resolved, clarity and confidence return very quickly.
   
6. Sector Consolidation – From Gaining Share to Creating Value:
   In consolidating industries, early focus is on capturing market share — often through pricing, distribution, or agility. But once market leadership is established, the narrative shifts: return on capital, margin expansion, and operating leverage take center stage. That is where real alpha begins.

Why do these hinge points matter so much? Because as said above they fuel two engines at once: accelerating earnings and multiple expansion. As earnings start growing much faster, the market eventually re-rates the stock to a higher multiple, as investors update their view.

How Market Re-rating Works?

On average, within the BSE 500 universe, nearly 75–80 companies each year experience a meaningful catalyst or hinge point. These opportunities exist precisely because markets don’t always recognize them early.

Why the Market Misses These Hinge Points because most investors:

• Anchor to the past – they remember old narratives too vividly.
• Take time to notice long-term structural shifts.
• Update mental models too slowly- new information is incorporated reluctantly.
• Fear of being early more than being wrong – they prefer confirmation over foresight.

Most investors extrapolate yesterday’s news into tomorrow’s expectations. They may overlook what a new CEO could bring, dismiss an important product pivot, or simply fail to trust the data that signals change. That’s where the opportunity lies.

How We Approach It

We invest only when we truly understand the drivers of change — new leadership, market shifts, product innovation, or strategic realignment — and why these forces will accelerate growth. This requires deep, on-the-ground due diligence:

• Spending meaningful time with the new CEO to understand vision, strategy, alignment, and skin in the game
• Assessing organisational acceptability and cultural fit
• Evaluating new products in detail
• Conducting 360° market feedback through customers, distributors, vendors, and the supply chain

The Essence of MAGIC

We never bet on change when everything is already priced to perfection — that’s where the risk of de-rating is highest. Instead, we focus on classic asymmetry: heads, we win (if our thesis plays out), and tails, we don’t lose much (because valuations are not yet reflecting the change or the potential growth). At worst, we incur the opportunity cost of time. Essentially, risk-reward is favourable

There have been instances where MAGIC did not play out as expected as well, but even in those cases, we did not lose capital. A few examples:

• LIC Housing Finance:

Our investment thesis was built around a positive structural view on the housing finance cycle and LIC HF’s position as a market leader with cost of funds advantage and strong parentage. With a renewed focus on retail growth, a leadership change at the CEO level, and valuations below 1x P/B, the setup offered an attractive risk-reward. However, the delivery failed to meet expectations. LIC HF’s GNPA trends remained volatile, raising concerns on asset quality. Additionally, despite the macro tailwinds, growth lagged peers as banks — aggressively captured market share by offering significantly cheaper rates. This led to rising balance transfers away from LIC HF and slower loan book expansion. With core strengths not translating into performance, we exited with capital intact. The environment was right — but execution didn’t follow through.

• Fortis Healthcare: 

Another example was Fortis Healthcare, where we identified a significant promoter shift — from the Singh brothers (Fortis Group) to global healthcare major IHH. Backed by IHH’s strong pedigree and operational expertise across Malaysia, Singapore, and Turkey, we expected a similar playbook to drive turnaround in India. However, over time, it became clear that IHH’s execution strength abroad was not translating effectively in the Indian context. Adding to the overhang was the prolonged delay in the open offer process, which finally concluded only in November 2025 — nearly seven years after it began. With execution faltering and visibility clouded, we chose to exit with capital intact. The setup had promise, but the delivery didn’t match up.

MAGIC investing is about embracing change, not inertia. We systematically search for clearly identifiable MAGIC events — the moments when a business is poised to enter its best years — and we aim to own these companies before the shift becomes obvious to the broader market.

By the time everyone else “gets it,” much of the runway is already behind them. Our goal is to act ahead of recognition, not after.

Below graph explains the same

As Rakesh Jhunjhunwala said: “In markets, the rear-view mirror is always clearer than the windshield.” Magic investing is about looking through the windshield—when visibility is low, but direction is clear.

MAGIC exists in the narrow window between change beginning and belief shifting. Between fundamentals turning and valuations catching up. Between scepticism and acceptance. Our job is to stand in that window — with discipline, humility, and conviction. It has been the quiet engine behind our alpha for years, and we believe it will remain one of our strongest edges going forward.

Markets reward what everyone already agrees on. But they transform when a company steps into a future that only a few can see.

Thank you, as always, for walking this journey with us — through the noise, beyond the headlines, and into the stories that truly matter.