Merger with IDFC Bank gives Capital First another opportunity to grow: Warburg Pincus

Kaye: Last year was as you referred, we have had a long history in India, it goes back more than 20 years, so, we have seen India really develop and shape over a long period of time and last year was a particularly special one for us. Our portfolio has continued to do quite well, and we see different versions of it, as I am sure we will talk about all kinds of macro noise and alike, but we have had an interest with – we have had a pretty constructive view on things here and have seen it play through in ways it has been largely quite beneficial to our portfolio. So it was a really good year from a performance point of view for us.

At the same time, we invested or committed probably close to USD 1 billion last year. So, in what I think a lot of people think of us as not just in India, but globally crowded markets, more complicated markets, we found that handful of really interesting things to do that played to the themes that we pursued in India for quite some time.

Q: Which are the sectors that we are hot on right now?

Mahadevia: There are a few that we have been very active in and we will continue to be active and financial services being a large part of them. You talked about demonetisation, you talked about GST, it also led to UPI, the payments interface and when you think of technology and you think of financial services, there is a wave of change coming, so, we would like to be at the forefront of that. We have played it through Capital First, through AU Small Finance, through ICICI Lombard, and will continue to play that going forward.

I think on logistics, as you think of the digital economy and you think of the rise of e-commerce, someone has to move all those goods and services and you look at companies that are disruptive in the logistics space, providing a better cost efficient solution, we are playing logistics in a big way. Consumer and retail as you know has always been and one of the things Charles Kaye mentioned, as you think of the shift and formalisation of savings, we have also got a formalisation of the economy where consumers from buying unbranded goods they are happy to buy branded goods that are better value proposition. As more and more of that happens, companies like Biba, Kalyan Jewellers, or PVR, will continue to benefit. So we play some of those themes.

Q: A large investment recently made by Warburg Pincus in India was again in Bharti Group. Your biggest investment and best returns have been in the past from Bharti Airtel, now you have made a big investment and big bet on Bharti DTH. So are you really banking on playing the same Bharti magic all over again?

Kaye: I would say a couple of things. One, Vishal talked about sort of the consumer trend being one that we have played over the years including in Bharti originally and more recently in things like Kalyan, Biba, and others, and Bharti DTH in that sense is a play on that same theme that rising consumption access to high quality entertainment. Obviously it is special for the firm and for me to have the chance to work with Sunil Mittal again. He is someone that I got to know well in the late 1990s, he is always typified to me what is the true spirit of Indian entrepreneurship and I think for both of us we are going to try to see if we can find that magic again.

Q: Overall television is considered to be a dying medium, I hope not here at CNBC-TV18, but that is considered. Now what is the main strategy and the philosophy behind investments in a DTH kind of a play and does it also mean a further consolidation, how do you see the future of this business?

Mahadevia: The good news you and I can agree on is I do not think television is a dying media. Particularly in India, in fact I would go even one step further, we were investors in a company called Dainik Bhaskar which is print media and at that time print media was dying all over the world. Print media in India continues to be alive and kicking, so forget television.

We think television will be there for a long time, I think the way television is distributed, is changing quite dramatically, from analog to digital partly because of the government push to digitization. When you think of India and Bharat which is the parts of India outside of Mumbai and Delhi and Chennai, those areas to get to by DTH is really the most cost effective and sensible way to do it. So, that is really the thesis, there is a lot more factors but we are excited about it.

Q: But more consolidation on the back of this particular investment can be expected or no?

Mahadevia: Anything is possible but with or without consolidation we think there is tremendous opportunity for Airtel DTH to grow to create a great customer value proposition and create value for everyone.

Q: Both of you at length spoke about the consumption theme which every private equity is really betting on and financial services because of the financial inclusion, demonetisation effect, consumption, all put together has become the hot sector again for all the private equity players and you have made some fair bit of investments. Let us start with Capital First and that has seen a large transaction with merger of IDFC Bank and Capital First and market understanding as per the merger swap ratio is that it is in favour of Capital First shareholders. Are you happy with that kind of a return and what is your way forward in that investment?

Kaye: Capital First is one we are quite proud of. We acquired control from the Future Group. Vaidyanathan really transformed the NBFC to a very consumer SME lending one, built a really robust franchise and in some ways the opportunity now combined with IDFC Bank is a chance to take that to the next level, chance to create a bigger platform to essentially combine the strengths of both of the institutions and create something larger. I would say from an economy wide point of view, India has need for more bigger financial institutions that can underpin its continuing economic growth. So it is a story we like and in some ways this merger is our reinvestment in that story. So we are quite excited about it.

Q: For that to happen and to have a more supporting role in terms of really taking Capital First IDFC Bank merger to another level altogether, do you think that a board seat is something with 10 percent stake that Warburg Pincus will land up holding in the merged entity, is that something that you are really looking at?

Mahadevia: I do not think -- the transaction is not contingent on Warburg Pincus having a board seat or anything. I would actually look at -- if I just step back couple of questions you asked, I think you have two complimentary businesses, and you have had Vaidyanathan and Rajiv on your channel and on your show and you grilled them already, so I do not want to repeat what they said, but to be honest, as Charles Kaye said, the opportunity to build something special I think is fantastic. As we look at it, we want to be supportive shareholders, supportive investors, and for us it is really a reinvestment decision.

You talked about the swap ratio, I would just give an interesting story. I have spoken to a lot of shareholders on both sides and there is a bunch of them that feel Capital First did not get a good end of it and there is a bunch of it that felt IDFC Bank did not. So what that probably means is that it is a fair deal.

Q: Are you happy as an investor with the valuation that is all I wanted to ask?

Mahadevia: To be completely honest, I actually think the swap ratio is not relevant. What we think is irrelevant is the opportunity to put these two complimentary businesses together and create something that is multiples of where it is today. So, if you ask me as an investor, I am thrilled with Capital First as it was. Vaidyanathan has done a great job

This is not -- I just want to point out, it is not an exit for us, it is a reinvestment. So for us to stay in this and own 10 percent, we have to be prepared to say we are in here and we think the next many years story is exciting for us to make multiples from where it is today.

Q: So no exit on the horizon even in a couple of years is what I wanted to check?

Mahadevia: Couple of years is – I think it is impossible to answer now but that is not the mindset we have. Going in, the mindset is not a couple of year’s mindset, it is a mindset of it will take time to build this institution and as long as the opportunity is there, and the value creation is there, we will be there with it.

Q: One more regulatory aspect, to be a 10 percent and above, you need Reserve Bank of India (RBIs) approval, do you have that already?

Mahadevia: No, we will apply to RBI for permission to go from 5 percent to 10 percent. As you know, in the past RBI has been open to providing that to fit and proper investors, but we will go by the directions of RBI.

Q: You have been talking about the insurance play as well and that is somewhere that big investment has already been made by Warburg Pincus, ICICI Lombard. Now how do you see the insurance sector developing and there are so many opportunities available. Is that where you are going to find your playground for deal activities going forward?

Kaye: I think it is a piece to the puzzle. As I said earlier, financial services as an area we have always been invested and I think if you look across the board, Indian sector is still quite underpenetrated and so across the financial services landscape, insurance included, we have been in life insurance previously with Max, we are now in the general insurance business with ICICI Lombard, we are looking some other spaces, so, it is a sector we like and to some degree by having a series of investments across the financial services landscape, it gives us the ability to benefit and aggregate from sort of that rising tide if you will. There is always sectors that go in and out of favour or regulatory change at the margin. So, answer is yes, it is one we are in and continue to do more in.

Q: Also that gives you a platform to expand further in the insurance, the general insurance space, there is a deal activity going on, Star Health is up there, your name appears along with ICICI Lombard in which you have an investment, so, is that going to be a really hotly contested battle suit to say?

Mahadevia: I cannot really comment on Star Insurance per se but I do think over time there will be strong players that emerge in the sector and we think ICICI Lombard who is already a leading private general insurance company will continue to build on its foundation both organically and inorganically whether it is Star or whether it is someone else. However, comment on which particular transaction, would be hard to do.

Q: You have also dedicated a lot of time on some of the exits in the IPO market like most of the private equity firms have taken advantage of the higher valuations. Now with markets really dwindling, looking more volatile than earlier and also long terms capital gains (LTCG) tax coming in, how has the IPO market exit scenario really changed for you as a private equity investor and is it still attractive?

Mahadevia: I think the market continues to remain attractive to answer the second part of your question first. I think as I look at this coming year, as long as you have a good company, and the bar on strong companies, high governance, proven track record, the IPO markets and the money flowing into the markets will continue. However, I think the bar will get higher, the markets will be volatile and so I think as long as you have good companies, there will continue to be an opportunity to exit through an IPO.

Q: Certain events may change the sectoral trend and the perception outside. Has that happened with jewellery sector?

Mahadevia: Jewellery sector from an institutional investor perspective, not today, we go back for the last decade, why was Kalyan Jewellers built? Why do we like Kalyan? Fantastic entrepreneurs, high standards of corporate governance, well run business – very different from the company you mentioned, obviously it is a retail consumer branded play in India, but they built their business on very simple premise – trust is everything. That is their tagline and they live and breathe that day in and day out. I have seen it ever since I have been involved with them.

Their initial success was really driven by a simple marketing campaign that did not even talk about Kalyan; all it talked about was be careful what you buy, make sure it is genuine, trust is everything and that has what has driven people to the Kalyan stores – trust is everything. They know that, we know that, and we have huge faith in Kalyan. We are obviously big fans, we think actually some of the things happening, keep the scam aside, as Charles Kaye said, there is noise, it comes and goes, scams in India are not new, they will not stop unfortunately, they will come and go, but for Kalyan Jewellers, the opportunity in that space and the shift from the unorganised to the organised, if you are doing business the right way, GST, demonetisation, all of that should only drive an acceleration in the opportunity for them and then it is up to them to take advantage.

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