Temasek is bullish on India, bets on insurance, IT & pharma

Temasek is upbeat on India and has been consistently increasing investments in the country. Rohit Sipahimalani of Temasek tells CNBC-TV18 that India is an attractive market and his fund is positive on consumer related sectors including insurance, IT, pharma and financial technology.He said that India is the fastest growing economy in the world. It doesn't have many of the issues that other markets have like deflation. "Capital production has been increasing here."

He said that he is a bottom-up investor. Below is the verbatim transcript of Rohit Sipahimalani's interview with Nisha Poddar on CNBC-TV18.Q: Last financial year saw a dip in your returns; you got negative returns after many years of consistent performance. The last one was seen during global crisis of 2008-2009, what really happened this time?A: It is important to recognise, we are obviously not immune to market movements and if you look at last year, the Singapore market was down 15 percent, the HSCEI Index in Hong Kong which is mostly China H-shares that was down 26 percent and about two-thirds of our listed portfolio is in these two markets. In that context, our portfolio was down 9 percent.So, we obviously did much better than the markets in which we were operating in. However, it is important to realise that these are just mark-to-market movements on a particular day. They are not realised losses. So, if you just take the top three companies in our portfolio that we disclosed, Singapore Telecom (Singtel), DBS Bank and China Construction Bank (CCB), Singtel and CCB are over 10 percent since March 31. DBS is up almost 5 percent in March 31. So you are talking about portfolio value on a particular day and so it is not really realised losses.Q: Where does India really stand in the midst of all this?A: Firstly, in terms of just re-strategising, when you look at our portfolio over the last 3-10 years or more, we have almost consistently outperformed the indices in the markets in which we operate but for us that is not good enough; we have got to do even better than that because you want absolute return investor.So, about five years ago we said we want to shift the weight of our portfolio to have a greater exposure to sectors like technology, insurance, consumer, life sciences and energy and resources. These five sectors accounted for 8 percent of our portfolio in 2011 and were 23 percent of our portfolio this year. So, we have been actively reshaping the portfolio.India today is the fastest growing big economy in the world. The macro is looking very good, current account deficit, fiscal deficit, inflation under control. It doesn't have the issues that most other markets have around debt, demographics, deflation. It is one of the few markets where capital productivity has been actually increasing.So, from all those perspectives India is good and so from that perspective last year was the year where we made the highest investments in India ever since the global financial crisis. If you look at the last five years, we have been investing over a billion dollar here on average in India.Q: How much did you deploy last year and your divestments have also been at record highs in the last financial year? So how much of divestment did you really do and what is the plan for this financial year? How much money are we seeing being pumped into Indian assets?A: We don't disclose specifically how much we invest and divest, but as I said, last year was the most active year for us since the global financial crisis in terms of dollars we put into India. I can also say that over the last few years we have been seeing a steadily increasing trend in the amount we have been investing in India.Last year when we reported our total exposure to India by underlying assets, it was about 4 percent. This year it is closer to 5 percent. So, we have steadily been increasing our exposure to India. In terms of how much we will invest this year, ultimately we are very much a bottom-up investor, so it depends on what opportunities we see at the right valuations. There is no fixed amount but we want to do more out here because it is consistent with the theme that we are looking for.Q: Looking at your returns for the last financial year do you think that you will now re-strategise also to be more aggressive in emerging markets like India?A: I don't think anything has really changed in the last year. Like I said, it was just mark-to-market movements as of a particular date on March 31. We have been consistently looking to move our portfolio in favour of sectors that we see having secular trends and India falls in that bucket because India does have growing middle income population which is where the consumption themes come into play.India does have globally competitive companies in sectors like pharmaceutical and IT which is our theme of emerging champions and global champions. So, clearly India is a core part of our strategy and as I said we have been steadily increasing our exposure over the years.Q: Any new sectors that you are adding in India because IT, healthcare, consumers, these are darlings of most of the private equity players. You have some investments in e-commerce as well, some in energy, any new areas that you are looking at, any particular reason for that tinkering that you are going to make for India?A: Five years ago, our portfolio in India was primarily banks and telecom. Today we are much more diversified. Globally we are trying to have more of tech, insurance, life sciences which is really both healthcare and pharmaceutical and consumer and those themes are true for India also. We are looking to increase our exposure in all these sub-sectors in India and we have steadily been doing that. So, these were some of the more active sectors for us last year and I expect they will continue to be going forward.Q: What about banks and the insurance of course you have made two investments, you have investments in Max and ICICI Pru. Both could really see value unlocking going forward. How are you positioned in them, would you be exiting post the merger with HDFC Life for Max?A: We obviously cannot talk about specific investments and what our strategy would be. What I can say is that insurance still is very underpenetrated sector in India and it is a sector where we hope to steadily increase our exposure over time. There are not many opportunities because most insurance companies are being private and there were foreign ownership limits etc, so far, but has there more opportunities I would expect that we will try and increase our exposure to that sector over time.Q: What about banks of course globally Standard Chartered Bank is something you have so much exposure to. Do you see something like that in the Indian banks as well?A: Bank have consistently been an active part of our portfolio and continue to be, so even right now most of the larger banks in all public market positions, but we do have exposures to ICICI Bank, Axis Bank, HDFC Bank and so banks always do form a core part of our portfolio out here. Obviously we look at it in the context of valuations when they are attractive to buy and when we may trim our exposures at times we thinks that valuations have run off too much, but we do see banks to consistently be a part of our portfolio out here in India.Q: But not as a substantial part the way you taken in Standard Chartered, of course, regulatory hurdles may also be there, but have given that a thought and if approvals are given probably would you look at that?A: So it’s really comes out of value. On financial services we have reasonable and we have been increasing our exposure, so we also have 100 percent subsidiary in Fullerton India Credit, we have also bought Silicon Valley Bank India out here last year. We also have stakes in other NBFCs out here. So if you look at financial services as a whole, I think we have a reasonable exposure and now recently we have been doing other stuff around the Fintech space. So we invested in BillDesk last year, we have invested in PolicyBazaar last year, so broadly financial services globally is about 23 percent of our portfolio and we do think it will be a reasonable part of our portfolio in India for the foreseeable future.Q: So upbeat as far as financial services sector is concerned. What is your positioning on the healthcare space, of course, USFDA concerns have been looming large for most of the big pharma companies in India as well. Is that one of the restraints that you feel and how will your overall outlook be in terms of investments.A: Ultimately as I said, we are very bottom out so it depends company by company, but we like the pharma sector in India. The world has many issues right now in terms of growth and everything else, but there are some sectors which will always do well and we think pharma and generics companies is basically is one such category. So we have investments here in Intas, in Glenmark, in Sun Pharma and in the healthcare services side that’s an area which is so nascent in India that we see huge opportunities and we have investments here in Medanta, Global Health and we have investments in HCG and so there is a fair amount of exposure that we have overall to the healthcare pharma and healthcare services sector and we see that continuing.Q: What about the control deals, most of the other private equity firms, we have Blackstone, Advent and we have even Singapore's GIC which has made an investment in terms of control in the company where you have invested. Are you shying away from that?A: The great thing about our business model is that we invest out of our balance sheet and we have full flexibility on the types of investments we do. We can do minority stakes in private companies, we can do minority stakes in public companies, we can do control deals. You are right that the majority of our deals typically tend to be minority growth deals because our philosophy is really backing management teams and boards that we are comfortable with and really growing along with them, that is our main philosophy.However if we find a control deal that is interesting and meets our various value criteria then we will definitely do it. About a year ago, in fact less than a year ago one Silicon Valley bank was selling down their subsidiary in India which was in the field of venture debt financing, we acquired 100 percent of that business. So, we will not shy away from doing it where we think it makes sense. However beauty of our business model is we can look for where there is maximum value and just invest there.Q: You are not saying that either the quality of promoters or regulatory issues or any such other issues are the real dampeners in this particular case for Temasek?A: Not really, like I said there are some sectors where you can't do control deals because of foreign regulations but that really has never been an obstacle for us. The situations we have looked at its really been an issue about either the right value or us being comfortable with that particular investmentQ: For example Crompton deal that you did and you are so upbeat on the consumer side, you could have done a complete buyout or a control deal in that one, why did you have to partner with Advent in that?A: There were a number of reasons which I can't get too specifics on a particular deal, what got you to particular situation but Advent is a fund in which we are an LP, we have very good relationship with them and this was a situation where for a number of reasons made sense for us to partner together to buy effectively to become the largest shareholder of the company.Q: You are also taking forward the partnership with Advent, you had even looked at Lafarge in partnership with Advent. So, are we going to see more deals being done by Temasek in partnership with Advent?A: I won't comment on specific situations or Lafarge or any other company but we are LPs in a number of funds and we have good relationships with them and we do co-invest with them across the globe in different situations, it is not one particular fund, there are handful of them where we have very good relationships with and we partner on a case by case basis depending on what each party brings to the table and where it makes sense and that is something we will continue to do not just in India but globally.Q: But it is not a cautious approach where you hedge your bets?A: No it is not driven by that. The fact is there may be situations where each side brings certain skills to the table and then we feel it makes sense to partner, we will do that. There are other situations where it makes sense for us to go on our own and we will do that.Q: The hottest deal on the street right now is the Lafarge deal, USD 1.4 billion is what Nirma is paying, why did you drop out of that particular one and would you have not looked at tying up with one of the strategic's because this is one deal where a lot of strategic's did tie-up with private equity firms?A: I won't comment on a particular deal as to whether we did participate or not, all I will say is that we are very bad at winning auctions and therefore generally shy away from most auction situations.Q: Why I also asked you about this particular deal is because you have a huge exposure in cement, at least you had, probably you have sold off most of them and the valuations are really running high at this point and you understand that sector.A: Yes but if valuations are running high, that is not the time for you to invest. Having said that I won't comment specifically on this deal but I did say that generally speaking we are not very good at winning auctions and don't participate that often in auctions.Let me just step back and say the good part about our model is that we have the flexibility to do private growth deals when the valuations are right, public company investments when the public market valuations are right or control deals where we think that we can bring something to the table which will add value beyond what the existing shareholders can provide. So, depending on the situation we tailor our approach and make that call.Q: I wanted to understand how have you deployed between public sector and private sector in India out of the funds that you have here and with the markets really running up are you also looking at many exits in your stock market investments?A: I don’t want to split between public and private. I would say probably it would be more even. I don’t know exactly the numbers, but the reason is I don’t know the number is because we don’t approach our business that way. We look to see where is value and if it happens to be a private company that’s great and if it happens to be a public company that also fine. So we don’t look at it from that perspective, but we are pretty open to doing either public or private companies.Q: But the valuations are rich for you to make some exits and some quick bucks in terms of return?A: We are not really in the business of making quick bucks because our focus is much more on the longer term. Having said that we are value investors, so if we do think that valuations have run up, we will always look to sort of take some money off the table in that situation.Q: What is your view on the e-commerce space, how is the valuation been and how much have you really deployed and are you threading cautiously on that side or are you really upbeat?A: Just stepping back, I think e-commerce and broadly I would say the consumer internet space in general in India still at a very nascent stage and there is very, very long runway to go. I also think that the winners in the space are going to create a lot of value. There clear was a point where maybe valuation was little stretched, no different from how they were elsewhere in the world and globally you have seen some correction in tech valuations, but I don’t think that changes the fundamental thesis for the sector and the winner in the space will create a lot of value here to.Q: Energy space of course hasn’t performed that well. You have a lot of interest in GMR over here would you venture in the sector at all and in other high debt companies which has been theme on the deal street?A: I will come back to what I was saying in terms of the focus in India has been more around themes around consumption as well as areas where we see emerging global champions from India and that would continue to be the primary focus. Having said that we will always look at opportunities across the board where we see value and which we think make sense and there is no reason for us not to look at the opportunities in the energy sector to.Q: Some of the other funds like CPPIB has tied up with Kotak, Apollo has tied up with ICICI Bank, TPG could tied up Piramal that in the news, so are you also looking at something like this, could you venture into that space?A: We are always looking at opportunities where we think there is value and where we can make return and the good part is that we are not constraint by looking at sector A or sector B, so if there is a right opportunity we will look at them and I said the main focus will continue to be on sectors driven around consumption which means whether it FMCG, consumer cyclical, healthcare services and so on and so forth as well as tech, pharma etc, where we have global leaders coming out of India. So that will be always the main focus, but we will look across the board.Q: Taking forward the conversation on your overall investments, now how much of the Singapore Tax Treaty which will be reworked on between India and Singapore, how closely are you watching that one out and how will it make a difference in terms of your investments into the country because obviously Mauritius has been reworked and that means your capital tax gains exemption are set to go?A: Tax is something we have to take into consideration, we are looking at returns and therefore we are hopeful that we will have a constructive agreement on the Singapore Tax Treaty as it is being renegotiated. We don’t have set amount of money allocated to particular countries or particular markets, particular sectors. So, we are looking for the best opportunities and the best returns for us and tax is one consideration that we take into account. So whatever the outcome, it is something that we will have to factor in and look to see how investments in India compare with other investment opportunities we have.Q: As far as Indian investments are concerned, what are the key factors that you are watching out for and in terms of macros, how is it playing out for you. Are you looking comfortable when it comes to more investments into the country, is it looking more positive for you?A: If you look at the world today, you have a very slow growth environment and you also have structural imbalances in the number of markets which means you are going to see bouts of volatility. You also have central banks which don’t have that much fuel in the tank to address problems as and when they arise. So, when you look at that and when you look at India and the growth rates we are seeing out here, the demographics that we see out here, the absence of debt increases that we see in number of other markets, you haven’t seen that. In fact you look debt to GDP in India has been almost flat for the last decade from pre-Global financial crisis (GFC) which is very rare to see.So, overall, that combined with inflation being under control, FX being relatively stable, from macro perspective India does look very attractive as an investment destination. So, really then it comes up to bottom-up opportunities which we are actively looking to source but India will therefore for all the reasons I mentioned, could remain important priority for us.Q: Are there any challenges and factors which could really dampen the spirit of investors coming into the country?A: Almost half of the foreign investments, FII investments in India are from funds that are not India dedicated. So, if there is a risk off environment because of things that happened elsewhere in the world, you may see outflows of money from India and that will have an impact on the markets, it could have an impact on currency. However if you look at the underlying economy given that we are primarily a domestic demand driven economy, I think the impact is going to be much less. So, depending on global events, you could see impact on short term value in the markets, you could see an impact on the currency but the fundamentals we are reasonably comfortable with. The key issue we are waiting to see is recovery in private sector capex which is going to take time and it is good to see that we are having some step up in public sector capex in the meantime to fill the gap.So, the key issue here is going to be a recovery in corporate earnings which we are all tracking quite closely.Q: In terms of global events do you think Brexit will have a huge impact on the global way the things are working and the economics?A: UK itself is only about 4 percent of global GDP. So, what happens there is not really likely to have a major impact on the global economy. So, order impact limited. I think the key thing to watch is if you see a rise in euro scepticism in other parts of Europe, if we see other countries in Europe wanting to leave the European Union (EU) then that creates an issue of confidence and therefore a slowdown in growth in the rest of Europe and Europe is over 20 percent of the world economy then that obviously will have an impact. That is not our base case. To answer your question Brexit in itself is not going to have a major impact on the global economy.We will have to see how things play out in Europe over the next year or two to see whether hat extends to issues elsewhere which could have a bigger impact on the global economy.Q: You have been talking about value buying all throughout, could you give us three data points that you will watch out for in a company before investing, the most important ones?A: The most important is that we have to be comfortable with the management of the company and the promoters of the company because they are going to be our partners and without that there is no point making an investment. So, that is number one.Number two is we do look to see whether it sort of fits with our investment themes on areas that we see for long term growth and whether this fits the profile. Then ultimately its the execution capability of the company and its track record. Those are company specific things that at a point of investment you also look at valuations and look to see as to whether that will get you the returns that you think you want.