India will be the place to come to put money in: Fairfax founder Prem Watsa

Billionaire investor Prem Watsa is excited about the India opportunity and believes that it will remain a favourable place for foreign investments. Despite the current slowdown in global markets and hiking of interest rates by central banks globally, Watsa does not see a need to ring alarm bells as yet.

Often called Canada’s Warren Buffet, Watsa was born in Hyderabad and went on to build a multi-billion-dollar company Fairfax Financial Holdings in Toronto. Fairfax has a number of investments in India including the Bengaluru International Airport, IIFL companies, Catholic Syrian Bank, National Stock Exchange (NSE), and Thomas Cook India.

However, its only startup investment in India is Digit Insurance, which was founded by insurance industry veteran Kamesh Goyal. Digit is an insurance manufacturer and provides motor, health, travel, fire and other small-ticket insurance. Motor insurance makes up more than half of the startup’s gross written premiums. The startup was the first unicorn of 2021, a year that saw a boom with 44 new unicorns being minted. The company’s valuation tripled in the same year to $3.5 billion after it raised $200 million in July 2021.

In an exclusive interview with Moneycontrol, Watsa and Goyal discussed the economy, growth prospects for Digit and their view on the current slowdown.

We are entering a tough phase with the US Fed raising interest rates, the Reserve Bank of India has also raised repo rates. What impact is this likely to have on investment sentiment and dealmaking going forward?
Prem Watsa: As you know, we are long term investors. So we don't look at every wiggle. But I'm really excited about the opportunity in India. I think the opportunity in India is huge for everybody. It will be the place to come to put money in -- growing economy, business friendly, and in my mind, very good government.

As you know, interest rates are going up all over the world. Inflation is a problem. I started my business career in the 70s. And interest rates were much, much higher. And they went right up to 21 percent in 1981- 1982. I don't think that'll happen. So there's a long way to go before the economy gets derailed. But the economy can slow. We look through all that and take a long term view.

In your recent annual general meeting you described India as a top investment spot. You also spoke about how it's a startup economy. Incidentally, India recently got its 100th unicorn. What potential do you see in the new economy?
Prem Watsa: It’s fascinating. The big advantage is that if you've got a good idea, you got the opportunity to build a good company, regardless of your background or education. You got 100 unicorns, and you'll have a tonne more in India. I'm optimistic because it provides opportunity for the common person, for the person has not gone to the best schools, best universities. Many companies like that will happen. That's the experience in the United States in Canada, people with no background, but a good idea, hardworking, passionate about what they do, can build a company. That's happening in India.

Digit has been one of your success stories in India. How do you plan to unlock value in Digit? I think you recently told analysts that you're looking for regulatory approvals to increase stake in Digit.
Prem Watsa: You know, we don't look at it like that. Kamesh is building a very good company over the long term. So when there was extra money, because the company is so good, there was a whole lineup of people wanting to provide capital and so Kamesh was able to do that. We're not like private equity. This is a company we're building for the long long run under Kamesh's leadership.

FY22 has been a good year for Digit in terms of gross written premiums. How will the next five years be? Will we see you entering life insurance? Will you be looking at focusing more on certain areas?
Kamesh Goyal: Last year has been great. In FY21, almost 85 percent of our premiums came from motor insurance, and in FY22 65 percent came from motor. Motor insurance is 55-60 percent for most players. New vehicle sales have been sluggish, and there was no increase in third party premiums. My sense is that new vehicle sales will pick up, especially in the second half of FY23 as the semiconductor supply issue should get sorted. So overall, I feel that motor will grow well this year.

We did fairly well in health insurance last year, especially on COVID-19 health insurance and others. We see an opportunity there. But our market share is still 2.4 percent. The opportunity to grow is across all lines of business. In the next two to three years our industry will grow by about 12-15 percent and. If we can increase our market share to five percent over the next 10 years, it's a massive opportunity that we foresee.

Do you believe Fairfax is being more cautious as compared to other global funds when it comes to India investments in the last couple of years?
Prem Watsa: No, we really like India. So, we look for opportunity and leadership, like Digit with Kamesh. When we find that we back them heavily.

Your investments in India are across airports, banks, startups, non-bank finance companies, etc. Where do you see the next set of opportunities?
Prem Watsa: The commonality of all those investments is tremendous leadership. We back leaders, people who've got a terrific record, got a good experience and good people. They want to build good companies.
Is there any reform that you think is necessary to make the investment atmosphere friendlier in India? Or anything that needs to be done from a regulatory standpoint?
Prem Watsa: Firstly, we are very pleased with the Insurance Regulatory and Development Authority of India (IRDAI). It is important to be business friendly. The large privatisation drive announced by India is a big plus because these resources will be more effectively utilised by the private sector. That is a big change I see. Because India had this idea that the government should do everything as opposed to private businesses, that is changing.

Will you look at stepping up your investments in the Bangalore International Airport Limited (BIAL)?
Prem Watsa: We will certainly do that. Anchorage Infrastructure, the holding company of BIAL, is going to expand in the infrastructure space, mainly airports.

Will you be looking at raising more funds for Digit or will you prefer to go for an initial public offering (IPO)?
Kamesh Goyal: Since we recently raised $200 million, we do not foresee any need for capital in this financial year. In the long term, we want the company to be listed. But as per IRDAI’s regulations, promoters cannot sell stake before completion of five years. That period will be completed for us in the latter half of 2022. Then we will be prepared, we will be happy to list because that is really the long term objective.

Motor insurance is your biggest vertical. Do you see electric vehicles (EVs) becoming a larger part of your motor insurance portfolio? In light of recent events with EV two-wheelers, will that be a good or a bad thing?
Kamesh Goyal: On one side with EVs you have a lot less accidents because of the sensors, etc. But each time the vehicle collides, the cost of that accident is very high because the cost of the sensors and cameras is humongous. In EVs, we should be already be among the top three players because I think that's what the future is.

But this is not an easy business to underwrite, because the technology is new. Secondly, the acceleration in level two vehicles can be significantly more than combustion vehicles. Which basically means that the chances of an accident could be more. So I would say that we have to work with the industry to ensure that things remain insurable. Right now, we're working with almost all players across commercial vehicles, two wheelers, etc. By learning and working together, we would be able to find a solution which works for customers. But it's not as simple as people assumed it to be. If you see other countries like the US and Hong Kong, insurers have lost tonnes of money on self-driving cars and EVs.

Mr Watsa, we would like to get your view on cryptocurrencies. Warren Buffet recently said he would not buy Bitcoin. Charlie Munger has been negative too. What is your view?
Prem Watsa: My views would be similar. To be quite honest, I don't understand it. Anything I don't understand, I don't buy.

Do you also believe that this is the year when we are going to see the gap narrowing when it comes to public market valuations and private market valuations?
Prem Watsa: Yeah. The private market valuations have gone through the roof, particularly in technology companies. People were just raising money at higher and higher price. And now that's coming down. When private valuations were going up, every company had higher valuations and perhaps that didn’t justify it. But there are companies that have got exceptional growth possibilities and they will always do well and will be valued at a higher price.

As you look forward to this year, and the next, will you be more cautious in light of the new normal? What worries you and what gives you optimism in the current environment?Prem Watsa: We say, jokingly, that our strategic plan is to wait for that telephone to ring. When it rings, we pick it up and some opportunity comes. So we just play it by ear and wait for opportunity to come our way.