Very bullish on e-commerce, digitisation; both have long runway in India and will see migration of new categories: Temasek

THE IMPACT OF COVID -19 ON THE TEMASEK INVESTMENT STRATEGY

Q: Ravi, these are quite challenging times that all of us are operating in. So, for starters, could you just outline the impact of the sudden global outbreak of COVID-19 on the Temasek investment strategy in Asia and India? And has Temasek perhaps looked at the pandemic as maybe a once in a lifetime chance to make timely opportunistic bets at valuations, which may not necessarily sustain once normalcy is restored?

Ravi Lambah:

We all look at it as an unknown, none of us has obviously lived through a pandemic before. And our view was of caution. We looked very hard at investments that we already own in our portfolio, we wanted to protect them, ensure that we had the ability to support them when necessary, because it was unclear how long the pandemic would last.

And really, our investment strategy was, I could describe it in two folds. One was to protect our portfolio and help the companies in any way that they might need to navigate all the challenges that were hitting them. Some sectors were very badly hurt. Travel, as a matter of example, was very badly hurt as we know.

At the same time, we saw parts of our portfolio benefiting because of what COVID did to economies, the shutdown of a lot of physical activity meant that the world was really operating on digital platforms. And then we saw some of our portfolio companies that were well digitised, and perhaps were ahead on the digitisation game, were able to gain from a lot of the winds that were sort of behind them when it came to the pandemic.

So, we saw those valuations go up. I think we benefited from those valuations as well. And as we look from our perspective, our investment philosophy has always been to apply our intrinsic value test when it comes to looking at valuations, or where we felt there was value, and we could get our spreads above our risk-adjusted cost of capital. We put capital to work.

And where we felt that we had reached a sense where the intrinsic value test told us that we should divest, we divested. So, we had a  very active year. We put about $49 billion of new investment to work and we had about $39 billion of divestments. So, it was an active and very robust year for us.

Promeet Ghosh:

Yeah. So, what we particularly saw, now that we can look back into the pandemic, with a little bit of hindsight is that these trends actually were in a way accentuated during this period. And there was also a time when there was far more openness to adoption of technology to digitisation. So, in effect, what happened is that some of the trends that we have been quite focused on, came even more into play.

And I'd say as a consequence during this period, our portfolio has been quite resilient. So, as Ravi said, we spent the initial part of the period working closely with our portfolio companies, to see how this period could be dealt with. How business models can be pivoted, cash could be conserved, et cetera. But in the end, I'd say that, overall, our portfolio has been quite resilient in this.

DOES THE ZOMATO IPO SIGNAL THE BIRTH OF A BRAND NEW INDIAN INVESTOR?

Q: Ravi, TMT is a sector that is close to your heart, Temasek had invested in Zomato, what is your take to the strong response to the IPO? It’s seen a record number of anchor investors. And do you think it also sort of signals the birth of the new Indian investor who has matured and is ready to accept these business models, which may be loss making and built on aggressive valuations as compared to the traditional Indian profit-oriented business models?

Ravi Lambah:

Sure, I mean, the IPO policy does not permit us to comment on the IPO. So I will not be able to comment on that Ashwin, unfortunately. But look, I think, what you say is a very important question. And we recognised this trend many years ago, when we started investing in some of these e-commerce and some of the direct-to-consumer-based businesses, both in India and globally.

And I think what we find is there's a significant runway yet in India. E-commerce has a long runway, digitisation has a long runway, there's a lot of runway around the consumption patterns, which is obviously being fuelled by these business models. So, we actually are very long-term believers in this entire space. I think we will see new categories migrating into the e-commerce ecosystem.

In that regard and marketing is a big element of what they spend as well, and marketing costs, I've always felt from an investment perspective in technology, marketing cost is almost akin to capex that the traditional businesses will do. For example, a telecom company will lay fibre and telecom towers, et cetera. The sort of more digital online businesses will have to spend marketing to get customers on.

And as they get them on and they start consuming, when their business model turns from cash burn to positive and then their cash flow starts funding their business. So, I think we've seen that cycle, the early life cycle, and then the mature and then the growing. So, we like that space a lot. We think the disposable income in India is rising. Internet access is rising. And all of that is actually fuelling the growth of these models. So, we're very, very bullish about this sector.

Q: Right. Promeet just to take on from what Ravi has just enunciated, Temasek, of course, in India has a lot of new range consumer internet and FinTech firms like CarTrade, Ola, Pine Labs, Policybazaar, Licious, Upgrad, Cult.fit. What are your thoughts on the current IPO wave in the internet and e-commerce sector and can we look forward to any of your India portfolio companies likely to soon make their D Street debut?

Promeet Ghosh:

Temasek has had what one might call a bubble strategy, right. We have been investing in a bunch of early-stage companies in the tech space over the years. And also we have investments into more mature companies, both in the listed as well as the unlisted space. Now, exactly, as you say, many of the investments that we made in the earlier stage companies in the tech space have now matured.

And like Zomato, you're obviously aware of a number of situations where there are discussions about potentially taking these companies to public markets. And we do hope that as and when they come to the public markets that they will be well received. Of course, time will tell exactly what the timings of these will be. But I think it's fair to say that, over the last year -- investments that we've made over the last five, six, seven years, many of those companies have matured, you know the names of them well, so I will not repeat them. But have come to a point where they could potentially list and, I'm hoping that they will be well received.

Q: Promeet, a quick word on a publicly announced deal, and that's the sale of your Indian NBFC arm Fullerton India Credit Company to Sumitomo Mitsui, which is clearly a big push by the Japanese firm in the Indian consumer lending and MSME segment. And, it was quite a big deal, valued at around $2 billion. Just a quick thought on why you thought it was the time for exit? And what's your outlook on the Indian NBFC sector? Do you think it's ripe for consolidation?

Promeet Ghosh:

Yeah, so actually, the right people to ask about the decision and the transactions for Sumitomo is of course and Fullerton Financial Holdings. They are the holders of FICC. That decision is their’s, so, it's only appropriate that you have their take as they take their own decisions. So, it’s best put to them. And so far as the broader question that you ask about Temasek India's focus on NBFCs in the financial services, Ashwin, as you are aware, financial service is a very large part of our portfolio in India.

It's a space that we've been extremely focused on and have made considerable investments in. So, it goes to show that we do think that's an industry that’s of considerable interest to us and has an important role to play in the Indian economy. It’s a segment that we do believe would be one that has very interesting investment opportunities. We have exposures in banks and lending institutions and fintech and insurance. And that has continued to grow year after year.

Ravi Lambah:

If I can just add, I think what NBFCs have done is actually really opened up a newer sort of avenue for lending towards a growing customer base that perhaps the traditional banks were not able to reach. Obviously, these lines keep getting blurred over time.

But I think we do see the NBFC sector as a core part of providing financing to the economy, and then driving the growth of the economy. So, we have in the past, as you may know, we’ve invested in Bandhan Bank, we invested in AU Small Finance Bank, these are companies that are sort of catering to this part of the lending population.

Q: Right. Ravi now a subset of the entire e-commerce and consumer internet boom is the fintech space, especially the payments space which is buzzing with a lot of activity. Temasek backs some of the giants like Visa, PayPal, and MasterCard; Paytm is soon likely to launch its much-awaited mega IPO. Mobikwik as we all know has filed for its IPO papers. There's another B2B player called Paymate, which is backed by Lightbox and Visa which has listing aspirations. From an India point of view, what opportunities does Temasek see in the fintech space going ahead, especially because the pandemic has accelerated digital adoption?

Ravi Lambah:

Yeah, that's a great point. Look, I think we have been investing in fintech for quite some time, because of exactly what you say. I mean, pandemic or no pandemic, I mean, digitalisation of financial services is already happening. And it was happening in two ways, right. One was some of these more independent of bank companies like PayPal, that you talked about, we invested in those firms.

Then, of course, we have our investments in banks that have also been driving a lot of the fintech activity through digitisation of the bank itself. So, we believe that India is very well positioned to witness long term growth in the fintech space.

We think it's going to probably create outsized opportunities for firms that can provide something of a customised and a more localised offering, so in a way that they can use the customer's data, and help them empower the spending patterns and what we have now is a truly rich digital age. And our trend of digitisation plays very well into this entire fintech investing opportunity space that we see.

And I think what we're seeing is in fintech, there are different kinds of opportunities, and you talked about the wallets, like Paytm, you talked about investments in, for example, we invested in Billdesk, which is sort of the core of the plumbing behind some of the payments networks. There are opportunities in emerging technologies such as blockchain, which are also getting to a stage where they will probably start disrupting some of the existing industries, which only just recently got disrupted.

So, it is a space that we're watching carefully. I think we will continue to review and invest more capital as we go forward. And I think we will find, as we've seen in China, as we’ve seen in the US., that the fin tech space in India will become a pretty important core part of not just the economy, but also a part of the capital markets.

In fact, Ashwin, adding to Ravi’s point, as a demonstration of our keenness on the fintech space, not only are we invested in Billdesk, but now also Pine Labs and also Policybazaar. These are investments of some vintage. So, this is a trend that we've been watching quite closely for a while in India.

THE ALL-NEW ESG FOCUS & SUSTAINABLE INVESTING

Q: ESG is a theme that is getting worldwide acceptance, and rightfully so. Sustainability has long been one of the dominant investment themes of Temasek. And we've spoken about that in the past. How do you think Temasek is making the shift to ESG in its portfolio companies? And do you broadly think corporates are really taking the theme seriously? Or is it for the time being just optics to tick mark new boxes?

Ravi Lambah:

Okay, so we'll break that up into two parts. I'm not going to comment on corporates specifically. Temasek has taken ESG obviously, very seriously. We have hired a head of ESG recently. We are engaging our portfolio companies very actively on adoption of ESG policies and compliance. We are being guided by our investing principles, which basically talk about opportunities that we invest in being ESG aligned.

So, if there's an opportunity that comes around, which is not aligned to our ESG goals and ambitions, then likely we will not make that investment going forward. We're looking at companies where we can also not only help but also drive the improvement of the own ESG efforts to create value. And we are stepping up our investments in sustainable living.

For example, sustainable living is a trend that we are closely tracking as part of our four core trends. It plays very well into our ESG efforts. We've also looked at that, India for example, you may have seen we closed the investment in Schneider. We have a JV with O2 Power and both of these are examples of stepping our investments in the whole sustainable living trend.

And then we also have an impact investing fund called ABC World which is invested in an agritech platform called CropIn, which looks at data-driven farming. So, I think a lot of these things are all connected to our ESG efforts.

We're looking at reducing our net portfolio emissions to half of 2010 levels by 2030. And also, we're looking at going net zero on emissions by 2050.

We have also done a couple of things around carbonisation. We have invested in a carbon exchange in Singapore, along with some of our joint venture partners, and we also have a JV with BlackRock. So, there's a dedicated effort on ESG. All I can say is that, as we think about our investing efforts going forward and managing our portfolio, ESG will be front and centre of our objectives.

PHARMA & HEALTHCARE: JUST WHAT THE INVESTOR ORDERED!

Q: Promeet, lets shift focus now to a sector that has clearly been one of the biggest beneficiaries of COVID-19, because of the conscious shift in India to health, hygiene and wellness. And that's, of course, the pharma and healthcare sector, where the valuations have really become rosy.

Now, if you look at sectors like API, there have been many deals as well as the diagnostic sector, the healthcare and the hospital space, so, this is one space that is really booming with a lot of deal activity. And many of these deals, the control ones are being led by private equity. What’s the Temasek take on domestic pharma & healthcare and which are the pockets where we can see investments in the coming months?

Promeet Ghosh:

This has been an area of long term interest for us. As you may recall, we identified healthcare as a particular area of focus. And we have created a platform called Sheares which is going to specifically focus on taking controlling investments in the healthcare space. And there has been a team which has been built out for this purpose.

So, suffice it to say that it's an area that we are tracking very carefully. And in due course, I'm sure Sheares will announce the transactions that they are progressing on. But as a general matter, over a period of time, again, we have announced investments in eye care chain Dr. Agarwal’s .

We have also announced an investment into PharmEasy, which is at the confluence of our interest in the tech space, digitisation, adoption of technology and pharma. And you are aware of how that space is evolving as well. We do believe that this will be an area that we will continue to make investments in and in particular, I would expect Sheares to be the vehicle for us to make control investments in the healthcare space, which is basically in the hospitals diagnostic space.

Q: Promeet, we’ve spoken a lot about e-commerce, digital and pharma. But what are some of the sectors which Temasek is bullish on in India going ahead in this year beyond these segments? For example, sectors like consumer and real estate. So, I mean, could you give us a sense of any new sectors which Temasek is perhaps looking at for opportunities domestically?

Promeet Ghosh:

Yes. You know, Ashwin, our interest in India is fundamentally structural. We think that the long-term trends in India in terms of the young population, the relatively advanced, developed digital infrastructure, the emphasis now on adoption of technology, etc, these will continue to play out for a period.

In particular, we think that homegrown demand is a theme that will continue to be one that we will invest in. Now that has manifested itself in a plethora of investments across various industries. So, if you look at our portfolio, it's pretty diversified.

We have financial services, we have healthcare that we spoke about. In consumer, one of the earliest investments that we made was in Godrej Consumer as you'll recall. Subsequently, we made an investment in Crompton Greaves. We have investments in industrials, like Schneider, so it is a very well diversified portfolio.

Now, what specific opportunities we will invest in, well that is a decision, which we drive bottom up. It's something that is based on an individual assessment of the risk return that we'll find in individual opportunities. But suffice it to say that, we find the net intrinsic long-term attractiveness of India, the homegrown demand that we think the Indian economy will continue to throw out and will manifest itself in demand for services, demand for products, and we will bet on those trends.

Ravi Lambah:

Maybe I can just add one more thing that Promeet said earlier. I think the one new sector, that we have been tracking specifically in India and globally, is Agri and Agritech. And we think it's a very exciting opportunity, which sits across the Agri input and the farm output industry. And I think the key issue here is a fragmented supply, marginal farmers, small land holdings, dealing with a lot of volatility in commodities and pricing.

And so, we think that there will be a trend going forward when new Agritech firms can help connect these farmers to both the input and output facing businesses, layer on financial services will provide credit and insurance through the entire digital layer and that will then help aggregate the supply and demand and also address inefficiencies that exist in the channel. And also reduce wastage because a lot of leakage in Agri.

So, in light of that you may have seen recently, we announced an investment in an Agritech company called Licious and that really is looking at operating on a farm-to-fork model and delivering food in a sustainable way. So, if you ask me where might be a new sector, we may focus on going forward in addition to everything that Promeet said, it’s probably going to be Agri and Agritech.

INDIA’S ROLE IN THE TEMASEK GLOBAL STORY

Q: Ravi, how is the Indian portfolio shaping up when compared to the rest of Asia and what would you say about the current investment and economic climate?

Ravi Lambah:

The India portfolio has been, as Promeet, very resilient. It continues to be around 5 percent of our global portfolio. Our global portfolio ended this year at about US$283 billion and our India portfolio is about $14 billion in value. And more than 50 percent of that portfolio is invested in direct investments and the balances in indirect. Indirect is as we talked about before, for example, our investments in Singapore telecom that then owns Airtel, that's counted as indirect.

So, India is very well positioned in our portfolio. We are bottom up driven for opportunities and as we see value, we will invest whether it's in India or China or elsewhere. But I think coming back to how the portfolio is trending. Look, I think structurally we are being driven by our trends. The two trends that play very well in India are digitisation and future of consumption.

A lot of what we do in India going forward and what we've done before will continue to be driven by these trends. The trends are not old, but the trends are evolving. And the businesses that are below these trends are evolving, if I can put it that way, whether its financial services or its technology or its healthcare, across the board, actually. We have put about $5 billion of capital over the last five years in India. And I think we will continue to see a trend that continues to put more capital in India as we go forward.

Q: Right. And your take on the economic climate and investment climate?

Ravi Lambah

We continue to be long term positive on India. We think that our outlook as investment destination in India is important. And we are obviously watching COVID-19 and the recovery from the second wave  and how India’s growth recovery will come back. We’re watching that quite carefully.

We are committed -- we feel that given the trends and given structurally how India is, we continue to think it's attractive, and I think the investment climate will substantially be driven by how the economy comes back. We'd love to see what the overall economic impact is of the second wave that just passed.

Despite all of this, we've seen foreign investor inflows have been very strong, which kind of gives a good proof point that not just us, but many investors feel that India remains an attractive destination for investment. We are looking at a few things that are happening in the economy and the government of India and the RBI have been proactive looking to provide monetary and fiscal stimulus.

While inflation is picking up, we've seen some of that is being driven a lot by some of the more global factors. And we believe that, going forward, the government will continue to have a reform stance and as more reforms come in and as India becomes more self-reliant in this post COVID world, we see a favorable investment climate to continue.

Q: Ravi, could you give us a ballpark figure as to the amount of money that has been set aside or earmarked for India to be pumped in over the next two to three years maybe?

Ravi Lambah:

You know, at Temasek we don't allocate to geography or cluster at all, we are very bottom up driven. I think as an indication I can tell you in the last five years, we put $5 billion to work. Out of that $5 billion, one transaction, Schneider was approximately a billion dollars. So, we are looking at doing different kinds of deals in India, where we're looking to do, continue to do what we did before, which is investments in listed companies and small startups because the startup ecosystem is very vibrant.

We're also putting money in private companies that need growth capital. At the same time, I think we're very excited about the fact that we can do deals that are larger, that are in the buyout category. So, I think the investment opportunity in India is expanding. I hope that we can deploy more capital in India going forward.