We plan to double our investments in India in next 3-5 years: Vishal Mahadevia, MD and India Head, Warburg Pincus

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Private equity firm Warburg Pincus has had an interesting year in India. The company, has invested in six companies – Ola, Good Glamm, MedPlus, BoAt, Parksons Packaging, Good Host Spaces – so far this year in the country, while exiting from others such as CleanMax Solar, Embassy Industrials Park and Gangavaram Port. The company, which according to reports has $65 billion of assets under management (AUM) globally and $5.5 billion in India, has a slew of companies from its portfolio including the likes of Ola, MedPlus, Ecomm Express lined up for IPO. Vishal Mahadevia, managing director and India head, Warburg Pincus, in a conversation with Nisha Poddar, talks about the company’s India strategy, its bets on India and view on investment scenario here.

Nisha Poddar: Vishal, always a pleasure to welcome you, and it’s really fair to take stock of what all happened in the year and also the outlook of what through the year. So, looking at the present scenario Vishal, how has this year been so far and in terms of recovery unlocking, the new uncertainties of Covid, how do you assess the situation?

So firstly, thanks, Nisha. And thank you for having me on the show. It's great to see you again and all your viewers. 2021 has been actually quite an amazing story of recovery for India, from what was a very difficult start to deal with, with the second wave of COVID from really a personal and human side.

But then to see the country come back on the back of a very strong vaccination, drive, more confidence in business. When I look at our entrepreneurs and companies, there's just more confidence in people to step up and really, now think about investing for future growth. There’s just massive disruption, leading large opportunities for the kind of companies in our portfolio.

So, I would say very optimistic coming out to the end of the year. Of course, the recent news about the new variants to the virus, are worrisome. But I remain actually quite optimistic that, that we will continue dealing with this and we're actually well positioned to deal with it and continue to be resilient on our growth path.

That’s right. So how does India picture in all this scenario in terms of your investment sentiment here in this country?

Yeah, it's a tough question to ask Nisha. You know Warburg Pincus has been in India now for 25 years through so many ups and so many downs, we've been consistent investors and consistently increasing investors at scale in India. So, India is there for us today. It's going to be there for us, you know, decades from today. It's part of our DNA at Warburg Pincus. So, we really don't think of it as cycles - up and down. We do see secular India continuing to grow. And as a firm we'd love to put more and more money into investing in India.

Warburg Pincus, as we understand has over $5 billion dollars of assets under management, and more than 10 percent of their overall global AUM is here in India. That's a sizable amount. But Bharti Airtel has been one of the oldest relationships and investments for Warburg Pincus. So we have to customarily start with the company, when we focus on your overall portfolio here. Let’s talk about the recent swap of shares. Do you think that the digital pivot as well as tariff hike in telecom sector and the government's focus in giving some leeway to the sector, in terms debt parameters, is giving comfort to the investors?

 Yeah. So, you know, I can't comment too much on Airtel as a public company. But the relationship with Sunil, a comfort with him, the team, where the company is going over the long-term remains steadfast as always. I give large and huge credit to the Government for coming in and doing what they're doing to help stabilize the sector. It's a very important sector. And not just when I talk about Airtel or the sector - the sector drives so much more economic activity in the country. Digital India doesn't happen without this sector. Start-up India doesn't happen without this sector.  In COVID, if we didn't have a resilient telecom sector, what would we all be doing today?

So, I really do give them high marks and I'm actually quite excited about the potential ahead.

And what about financial services space? Where Warburg Pincus has focussed a lot. Your largest and again one of your old investments has been in IDFC First Bank, which has evolved over the years into a bank now. Looking at the IDFC reverse merger, is that one of the critical junctures for value creation for investors in the company?

Yeah, I would say Nisha again, I wouldn't like to comment on the reverse merger. There's been so much in the press and in the news and public announcements. But what I will say, what is critical for the bank, is it focuses less on temporary events, like a reverse merger or other activities that go on. Really what is critical is continuing to build the bank.

And I think as the country recovers banks and financial institutions in general are a leverage play on the recovery in the macro of the country. And really what Vaidyanathan and the team at IDFC First Bank have been doing is laying the foundation to create a real bank, drawing out the branches, the liability franchise. Things that really didn't exist three years ago or four years ago when the merger with Capital First happened. So, I think that to me is critical to unlock value in the bank, is to continuing to carve out the growth of the bank, the expansion of return on equity, going out and investing in technology, bringing a whole new set of customers into your banking net. Those to me are the value unlocking devices that I really focus on.

So long term growth opportunity that you have been always stating when it comes to your investments especially in IDFC First Bank. But looking at the exit and exit is the key and cornerstone for any investment, we have seen a few of the exits from the Warburg Pincus portfolio: you had a solar company, Embassy Industrial Park, Gangavaram Port. But IPO and part exits in terms of stake and value unlocking, has been also a center stage for most of the private equity firms, including yours. CarTrade, Kalyan Jewellers, CAMS, Home First Finance – it’s a mixed bag. But I want to focus on CarTrade. What happened there? The IPO price is double than what the stock is trading at, right now.

It's a question that I wish I had a great answer for you Nisha. It's a terrific company run by an outstanding entrepreneur that we have a huge amount of confidence in. I personally have a huge amount of confidence in Vinay Sanghi, I’ve known him for years. And I think, the markets are the markets. Without getting into the IPO, the company just came out and released its first set of results.

I think when you look at the first half of the fiscal year, revenues were up 46%, adjusted EBITDA, which is a good proxy for operating cashflow, was more than double over the prior year. It's fairly profitable in a large market, in Google trends it’s the market leader, traffic to the site is now double what it was in pre COVID levels.

If I scratch my head a little bit and if I digress for just a second, one of the founders of Warburg Pincus once said, “You look at the stock price only twice - when you decide you want to buy, or when you decide you want to sell.” It's a tough thing to do by the way! But it's not something that we want to be looking at every day or every week. Really, as I look at CarTrade, I think if Vinay continues doing what he's doing and building this company, it's one of the rare plays on tech, on digital marketplaces that's highly profitable in the country.

So I scratched my head a little bit. And last thing I'll say on it, which is not to compare the two companies; but since you mentioned about Bharti Airtel, Nisha. Go back and look up, after Bharti Airtel went public, back in the early 2000s, the stock price dropped 50 percent after it went public in the next few months. And the only thing I'd say is just look how that story turned out. I can't say CarTrade will turn out like that.

You’ve chosen a very important data point. But I want to focus on the present and now. In this context, only on one thing: that is internet company valuations, that has been the biggest talking point. CarTrade is just one case in point. We have seen many other companies also not living up to the expectations of the valuations that have been put by the foreign investors and the people who been already invested into those companies as well as the promoters. What do you have to say about the current internet boom that we have seen and the IPO frenzy and valuations attached to that?

Yeah, look, I won't comment on any particular company. I would say, like you started off Nisha; it's a mixed bag. And I think when investors come in and invest in an idea, there are two types of investors that I've seen in our IPOs. And in India when there's an IPO for a large part, other than the anchor book, you don't get to pick and choose who you can allocate shares to.

So, there are a number of investors who are coming in to invest just for the first day. A quick sale and a quick profit. Not that there's anything wrong with that. And then there are a number of investors who say, Hey, I really believe in the story. And I believe over the long-term, this is going to create value. You've seen some companies that are in the internet space perform really phenomenally on the first day and over the first year of their listing and others who haven't.

I think the real question will come three or four years from today - has that business model really proved out, been sustainable and been able to deliver what investors wanted and that jury's going to be out three or four years from today. By the way, this is not just in the public markets. It's true in the private markets as well. So that's how I would really answer that question.

So, Vishal, you’ve made a recent investment in Ola this year as well as GoodGlamm. Let’s talk about Ola readying for an IPO. What is it that Warburg Pincus is really betting on?

Well, we always start with betting on Bhavesh Agarwal and his team. Outstanding entrepreneur, known him for many years. Long story for how the deal came to be, but that's for another day and not a time for this segment. But look at that business as an example, I think if you went back four or five years ago, the company probably had a negative net revenue in order to create the market in order to create the marketplace, you needed to provide subsidies to drivers, to customers to try the product.

And today I believe the company is profitable. They've got a fantastic technology platform; they're rolling out additional products and services. So, you know, for us, it was really a no-brainer to try to find a way to invest in Bhavesh. It’s always difficult with valuations where they are these days. But a lot of belief in him and what he can do with this company.

GoodGlamm is another point of interest. What is the proposition you’re betting on?

GoodGlamm is really, really interesting company. Firstly, again, you know how we are, Nisha. Darpan - outstanding entrepreneur, but what GoodGlamm has really been able to do is drive and use content-to-commerce. I think it has been a theme we've been investing in and have spotted probably 12 to 18 months ago, along with others in our industry. Direct to consumer - the way consumption is happening in India is clearly more digital. And clearly now different from the channels, which earlier where the offline channels, deep distribution and small mom and pop stores around the country. So really getting people to try out your products online, you need a terrific brand. You need a terrific value proposition, and you need to acquire those consumers.

You need to get them to come and try your product. And Darpan is really pioneering. And I think is one of the smartest guys in thinking about how to take content, attract customers with content and move them to commerce where you can monetize and actually get them to try your products. I think he's building GoodGlamm into something special.

We're lucky to have had a chance to invest with them. And we’re really, really excited.

And going forward, also the value unlocking by way of IPO and part exits would really continue. Atleast I have a list of companies like some of your recent investments like Ola boAt, Medplus, all of them really readying up for upcoming IPOs as well going forward. And also Ecomm Express and Capilary Tech. So, Vishal, help us understand 2 aspects: first have your recent investments been looking more at the IPO value unlocking, given the IPO frenzy we saw? And second, does it worry you that many talk about several factors which may really constraint the IPO market and therefore the window may narrow……

Terrific questions Nisha, let me take them one by one. The first one, when we make our investment, we usually have a general idea in mind, along with the entrepreneur jointly, that this would be a company that would make sense to take to-the public markets. We don't necessarily put a clear timing on it because you don't know when the company's ready or necessarily when the markets are ready to accept that business model of the company.

So, I would say our recent investments have been less driven by any IPO frenzy at all. We are not pre-IPO investors. We are really long-term investors that believe in the company and the entrepreneur. The fact that we have made investments, they have performed better than we expected from an operating and numbers perspective, and the markets are keen to, then accept them as IPO candidates, may have led us to come earlier to the market with them.

One last point I'd make is this is really less about value unlocking. In many of these cases, we aren't selling a large part of our shareholding. In most of these cases, you're creating the next funding capital for this company to grow, and then eventually providing them a currency, which they can use to acquire companies to do other things, and also provide value unlocking to, early investors, as well as employees who all participate in the stock plans we have at this company. So that's how I would answer your question on how we think about investing. On the narrowing of the window, and look, there's so many factors, global to start with, right; Warburg being a global fund that we think of that plays into liquidity that plays into markets.

I would just give you one last data point. Markets have gone up and down as we've been in India for 25 years, in the greater than 50 years, that we’ve been around as Warburg Pincus. But one of the things that I look at is making new investments and honestly, making new investments in a very frothy market in some places like this is very difficult, both from a valuation perspective.

So, I'm hoping if markets are more rational, if they're more stable where they are, that might actually increase the aperture for us to find new investment opportunities why entrepreneurs come to private equity.

You made two very important points. Two important takeaways are that you part exit most of your companies in the IPO where they get the currency for future growth which you’re going to ride, as a long-term investor. And the second very important point which interests me more and a lot of i-bankers who are watching the show, is that the frothiness of the market going away and bring some sensibility in terms of valuation also gives you more investment opportunities. So let’s focus on that, so what are the themes and sectors or companies that you’re going to value pick going forward?

Wow. That's a question I can keep talking about, but I'll try to be very crisp Nisha and say, let me pick three themes or four themes quickly - financial services - you already mentioned a big theme for us. But this digitization and getting to a whole wider set of customers to bring them into the financial services net, providing them access to financial products through digital means, which makes the unit economics of that proposition much, much more effective, I think going to be a big opportunity, big disruption. And the players that have invested in tech, this doesn't mean it has to be a FinTech by the way. It can be a bank that's invested in its technology and that's forward thinking, or an NBFC that's done so, I think would provide big opportunities for us.

The D2C space, which I talked about and the way consumption patterns are changing, no doubt going to be a big theme for us on the back of a boAt or a GoodGlamm. I think you're going to see more of that from us. I think your traditional, what I would call it traditional, but IT services and BPO that is now more platform, that is now more of specialized serving into special types of technologies like cloud migration specialists or UI UX type of specialists. I think customer experience type of products. Those are companies that are going to be very interesting for us. And the last I'd say is healthcare and pharma. We'd like to have done more. We've probably not done as much in the last few years as we've done in our past history in India. First investment was with Ajay and Nicholas Piramal. So we'd like to see more of that. And those are some of those are some of the themes we’re focused on.

So many new age companies that you’re focusing on, going forward. And is the percentage of the India portfolio, as a percentage of your overall global portfolio for Warburg Pincus also increasing, given the kind of opportunities India’s presenting?

Absolutely. And look, it’s increased consistently over the past 25 years, even as Warburg Pincus has grown and that's really on me and our team, right, our entire team out here. It's our job to make sure that that continues to increase, that we find terrific opportunities, that we’d lean in, the firm would like to invest more in India. And so if that doesn't increase and we're not talking three or five years from today, and I can tell you Nisha, that's a much higher number, then I haven't done my job.

Vishal, final question: then two pronged. First would you be looking at more buyout opportunities? And how much investment can be expected in 2022 in India from Warburg Pincus. Give us an estimate.

Yeah, definitely more buyout opportunities. We've been doing buyouts as you're well aware. We did one this year. We have one that's in the late stages of getting done and we've always done buyouts. I think the market in India has always been more of a growth market historically. I think that's changed. And I think because it's changed, you're going to see more and more buyouts generally in the market, including Warburg Pincus. But even when we do buyouts, we always backing a strong management team, or backing a strong entrepreneur. And our thesis is still, how do we grow the company. Whether we want a majority or a minority of that company. So, you will see more of that.

For 2022 Nisha, we don't really set annual budgets. But gosh, if we're not investing, like you said, we have $ 5 billion of AUM and if in three to five years, we’re talking, and it's not easily more than double that, I'd be disappointed.