MC Interview: Temasek's mega India plan to pump in up to $10 bn over three years

Shrivastav: A couple of clarifications before we dive into the answer. You know the way we measure our portfolio is really through the net portfolio value. The profit and loss number is just an accounting number, which is calculated in a certain manner. We don't necessarily optimize for that. So really the number to focus on is the net portfolio value. Now, as you point out, it has been negative this year globally. But again in light of what most public market indices have done across the world, it's not too bad a performance overall. And more importantly, we don't really measure our performance by annual changes in TSR (TSR meaning Total Shareholder Return). We look at our performance over a longer period of time, and we think that's a better indicator of how our portfolio is performing because typically we invest for the long term and that's how we like to measure our returns because that washes out a lot of the short term volatility in any measurement, which is shorter term.

So with that caveat, I think the easy answer to your question is that, no, we are not going to be circumspect on investments in India.

And the reason for that is as we have reported, India today is 6 percent of our portfolio. It was 5 percent of our portfolio last year. And it was about 3 percent five or six years ago. So clearly over time, the salience of India to Temasek’s overall portfolio has been increasing. The reasons for this are manifold. We believe India brings a lot of positive drivers for growth. Just naming three of them, one is clearly the demographics. Our per capita income is on track to double from $2,000-$2,500 per capita to $5,000-$5,500 in the next few years. Our demographic is highly aspirational. A lot of youth in it and a very steadily growing middle class, which should augur well for consumption. Then, the second point we are quite optimistic about is stability in policy.

So all the steps that have been taken over the last few years - the introduction of GST which formalised the economy, the PLI and Make in India schemes, the India Stack, which is encouraging digitisation, the rationalisation of corporate tax rate and the incentive for local manufacturing. So government policy is stable and enabling. And then finally, the quality of entrepreneurs and management teams that we've seen in India makes us quite optimistic. So these three things make us long-term positive on India. As you've seen, we've invested more than $2 billion in a single transaction. If you look at the last 19 years of our history in India, we have on an average deployed about a billion, billion and a half each year. Going forward, we think we can triple that number. So in the next three years, we can deploy $9 billion to $10 billion into India, and that should give you a good sense of how we look at India from a global perspective at this point.

Q: In India, Temasek has substantial exposure to startups and tech-enabled emerging businesses - Pharmeasy, Zomato, CarTrade, Unacademy, Upgrad, Lenskart, PineLabs, Policybazaar and others. How has the funding environment changed in this space which continues to see financial stress, job losses and a tougher part to profitability in a few pockets.  Are valuations realistic and do you expect an increase in down rounds going ahead?

Shrivastav: I think I will try to frame this by taking you back in history. So I think what happened in, let's say, circa the 2019-2020 timeframe, not specific to India, but globally there was an abundance of capital and interest rates were very low. There was general over-optimism about the potential of tech companies, and clearly there was exuberance in how tech companies were being valued. Now, obviously, a number of the drivers behind that exuberance have gone away. Interest rates are higher, the case for unprofitable tech is much weaker, the availability of capital for deployment to technology is lower. And so like everywhere else in the world, even in India the tech sector saw a tempering in enthusiasm. The best indicator of this is just the stock market valuation, right? A number of companies went public in 2020-21 and they saw a great exuberance in stock prices, which then turned into a drastic correction from their all-time highs. I think this is part of the natural cycle of capitalism, if you will.

And what this dearth of new capital availability has done is it has helped companies focus towards becoming more relevant for their customers, developing much better path to profitability. A number of them have already turned profitable, the rest are on their way.

And some of the experiments which were ancillary to the core of the business, they have now been stopped. And some of that is getting reflected in the public markets. I think the real test will be when the IPO market reopens for tech companies. And this time around, we believe that companies are going to be valued much more on profitability and sustainability of their business models versus just growth. I think the way we look at it is that the tech portfolio or the early-stage portfolio, as we call it, serves as an important function. It's not just value creation within that portfolio, which for us has been quite decent given we came in early in a number of these companies. But it also gives us important insights into potential disruptions or potential trends in what we call the traditional portfolio.

So just to give you an example, what we have seen in Zomato impacts all food services or what we have seen in Policybazaar gives us a good sense of what's going on in the insurance market, right? So it's not just early stage for the sake of early stage that we play and we will continue to be as measured as we have been in the past.

Q: Will Temasek look to unlock value by listing any of its startups to take advantage of the current public market buoyancy before election frenzy takes over and investors get into wait-and-watch mode?

Bhandari: Ashwin, possibly. I mean, it's not just our decision. It has to be what is right for the company. I think the learning from 2021 where the first wave of listing happened has been that don't rush in just because you think this is the window for capital markets. You want to be ready for it. And by ready, I mean, a story that is close to profitability or has a clear path to profitability, which can be communicated in a far easier way to capital market investors because they have a different lens. So I don't think the idea is to be opportunistic. If markets look good, can we rush through things? I think people will be far more prudent or perhaps conservative this time. That's how I think maybe one or two will list before. I also do think that many advisors, and by advisors I mean investment banks may perhaps advise that it is prudent to wait for the elections. Because the capital market investor community may feel more confident once the election is out of the way. But I would think business requirements will dominate the discussion instead of being driven by these secondary factors.

Q: One last question on the startup space before we move on to other sectors. Vishesh, Edtech, consumer tech, food tech, agri tech, health tech, fin tech - in terms of returns and growth metrics, which do you think is the most promising startup segment from an India perspective and why?

Shrivastav: So we have exposure across all of these areas. It's like asking your parent who's your favourite child. So in every sector literally I can point to one company that is doing really well as a market leader and then other companies that are not doing so well within the same sector. The lens we take is much more bottom-up and much more company-specific. So what we look for is, obviously, large addressable markets, depth and management quality, great governance, clear path to profitability, demonstrated ability to engage and retain customers. And these things are present in some companies in every sector and are not present in some companies in every sector. We recently came out with the Google, Bain, Temasek report on the internet economy. And there we have put out statistics that from zero about 10 years ago, today the internet economy is worth, you know, give or take $200 billion. And it has the potential to get to almost $1 trillion in the next seven, eight years. Now, it could be a few years earlier, a few years later, but the point is that very large companies, very large sectors are getting created here.

Q: Temasek along with its healthcare platform Sheares Healthcare Group has multiple hospital assets in its India portfolio. Manipal Hospitals, the listed firm Global Health, which operates Medanta and Medica Synergie. Manipal Hospitals is seen as the frontrunner to acquire Kerala-based KIMS. Rather than running all of these assets as separate entities, wouldn't Temasek India be inclined to merge or combine some of them with the mother ship Manipal Hospitals to achieve scale and maximize returns prior to its proposed IPO?

Bhandari: So Medica is under Sheares, and to that extent, you're right. Sheares is our platform and then we also have Manipal as a separate entity. Sheares is 100 percent controlled and in Manipal, we have a majority control. What you make is a fair point and I guess things will evolve and I don't know how they will evolve. But at this stage, the way we look at it is these two have two separate stakeholders. Both have their own mandate and both will pursue their own growth opportunities. Manipal historically has followed inorganic opportunities. I think in future as well it will follow both organic and inorganic opportunities. And to that extent, both will look to grow in their own way.

Q: Temasek has a diversified presence in the domestic public markets. From Larsen and Toubro and Adani Ports to Devyani International and Maruti Suzuki. How much more will you look to bulk up your presence in the listed world in the next year or so and which sectors seem attractive currently from your lens?

Shrivastav: We invest behind four trends as we call them, and these are true for most parts of the world. One of them is clearly future of consumption. So as purchasing power increases, more and more consumption gets driven and India specifically is a highly consumer-driven GDP market. So we will keep investing behind that. And the natural sectors that emerge from that are, I guess, digital tech and consumer, you know, FMCG, retail and all of that. The next big trend that we invest behind is digitisation. And that leads to, again, consumer internet, software services, a lot of fintech I guess. The third trend is increasing lifespans which translates quite nicely into healthcare services portfolio, diagnostics, pharma, and biotech. And then the fourth one is sustainability, sustainable living, which throws up opportunities in the decarbonization space, in the energy transition space.

As I mentioned before, we are looking to triple our pace of investment in India. So we are looking at $9 billion to $10 billion to be deployed over the next three years. Again, this is very dependent on finding the right opportunities. But we are balance sheet capital, and therefore, we are kind of agnostic to private or public opportunity, right? Wherever the opportunities exist, we are able to execute against them. And so today our portfolio is roughly 60 percent public and 40 percent private. And I don't see that changing in a big way in the future. So I guess you could do the math and say that a large part of the incremental capital will also go into public markets. We will continue to deepen our presence across financial services, tech, consumer and healthcare. And we will look at some new areas in the energy transition and decarbonization space.

Q: Exposure-wise, financial services has been one of Temasek's key sectors. In India, you back the likes of AU Small Finance Bank, HDFC AMC, HDFC Bank, ICICI Bank and Axis Bank. Do you foresee consolidation and fund raising in this segment and if yes in which specific areas?

Bhandari: The banks in general are very well capitalised. So yes, some of the banks may need to raise capital, but nothing big or nothing in the immediate near term that you would expect. In insurance, again, there is limited need for raising capital. And the expectation is that if the regulator moves us to risk-based regime solvency, it may release capital. And therefore at least larger insurer players that we're talking about will in fact look prettier or better on that metric. Asset Management honestly is an asset-like business. They don't need to raise capital. So honestly we don't see a huge need for capital raise from banks, life insurance, AMC. Select NBFCs may need. Or you could see supply of paper from existing shareholders, PE-owned NBFCs or HFCs that have got listed, where you could see supply. Consolidation, honestly, I think is more organic, Ashwin, in the banks. I think the bigger are getting bigger. So that is happening organically. I think the same is true in life insurance. Asset management, I guess it's more the way the fee structure works, there is actually dysynergy of consolidating because your TR slabs reduce as you become bigger. So your fee would reduce if you were to combine A and B together. You could see somebody exiting, like for example, IDFC MF that got acquired by the Bandhan Consortium. So you could always have select M&A.

Q: Any specific change in domestic policy or in the regulatory regime that you are looking forward to which would make India more friendlier from an investment sentiment point of view?

Shrivastav: I don't think it would be prudent for me to comment on specifics, but I think one area that is globally of great interest from policymakers everywhere is how do you regulate AI. Or how do you enable innovation and still protect integrity and privacy? I think India also has to put its thinking hat on and try to figure out things like that. I don't know. Mohit, if you have anything to add?

Bhandari: Vishesh was talking about various reforms and policy measures that were undertaken over the last five, six years. We have just started reaping the benefits of that. So that's Part A. I think Part B is more fine-tuning of these reforms that have already been undertaken. So as an example, there might be a GST 2.0, which is fine-tuning what is already working well, but there's always some area of harmonising and improvement. Or IBC, again, a phenomenal reform from the corporate banks' perspective, but there have been big learnings from it.

Broadly speaking, given how important tech is becoming across segments, be it fintech, be it consumer tech, it brings two things into focus. One is data and who can get access to what data, use it for what purpose, and so on and so forth. And which is why there is a data bill which is likely to be discussed in this session of the Parliament. There has been an effort by both the regulator and the government to achieve a good balance between various objectives - from customer protection to data privacy to nurturing innovation to ensuring systemic stability and so on. So, I guess those are the areas that you would think the government is paying a lot of attention to and we will see more progress on it.