Rohit Sipahimalani, Co-Head-Invst Grp & Head-India, Temasek speaking about the prospects for India in an interview to CNBC-TV18 said the house has always been long-term positive on India and now with signs of a transforming economy, growing middle income populations and with companies in sectors like Pharma, IT having natural competitive advantage, things look even more better for India.
Talking about foreign flows inflows, he said the India will surely see a step-up in flows being the third largest contributor to the global GDP growth after China and US. However, investors would look for rmore clarity of policy framework, consistency of implementation and ease of doing business.
According to him portfolio flows haven't really gone away from India. Equity flows so far have been in line with USD 20 billion that has been coming into India for the last two years.
He also spoke about what the government needs to do to improve investments into India.
Below is the transcript of Rohit Sipahimalani's interview with Kritika Saxena on CNBC-TV18.
Q: Capital markets are pretty much excited about the new government and the possibilities of a turnaround, India being at a turnaround point - do you feel that this talk, the noise is just sentiment or do you expect a turnaround in terms of political clarity, in terms of reforms in India going forward?
A: I would say from a macro perspective, India today is looking better than a probably it ever has in the last three-four years at any point of time. You have got current account deficit (CAD) that is under control, under 2 percent of gross domestic product (GDP), in fact at current oil prices you probably would have a current account surplus if they sustain at current levels. Fiscal deficit seems to be on target, inflation which is a buck bear is finally coming under control. So from a macro perspective, things look quite good in India.
The key thing has been a slowdown in investment in the last few years and I think what is required to get that back is confidence and we are beginning to see that. And then again for the first time in 30 years we have got a single party majority government that at least seems to be very positive about doing what is necessary to remove the bottlenecks towards growth. So we take that all into account, things look quite good out here.
Q: With the new government in place has the way you look at India changed when it comes to increasingly investing in the country or putting your capital into Indian Companies?
A: From a long-term perspective we have also been very positive on India. The reason is that our main investing themes that we use globally are looking at transforming economies, looking at opportunities to leverage growing middle income populations and then looking at countries and companies that have natural competitive advantages which will allow them to become regional or global champions.
Now India fits all these buckets so you have got at one level it is clearly a transforming economy you have an emerging middle class and growing middle income populations. You have areas like IT and pharma -natural advantageous and global champions so it has always been an important investment destination for us.
What is changed right now is just purely there was a slow down in growth in the last few years and we are seeing steps been taken now to reverse that and step-up the growth trajectory particularly in an environment where growth of the rest of the world is slowing. So that is what it makes it little more interesting today that has not been in the past but it has always been an important market for us.
Q: If you look at capital deployment things at the government level, at the reform level have just started. How long do you think it will take for foreign investment as a whole to come back in full force that, when back in 2006-2007 where India was the hottest destination how long for India to return to the glory day's?
A: Well I am not sure you want to be the hottest destination but you want to be the destinations were people want to come for the long-term and you have steadily recurring capital flows.
Q: When do you expect steady recurring capital flows to come back to India and by when do you expect that regulatory certainty and investment clarity in India?
A: If you look at portfolio capital flows, they have been quite steady even over the last three years. If you look at equity flows in India they are juts inline with what you had USD 20 billion a year for last two years and will probably end up at close to similar number this year so portfolios flows haven't really gone away from India. Foreign direct investment (FDI) is what you would want to see step-up and I do think you are going to see that step-up. Part of the reason is that today India is the third largest contributor to the global GDP growth after China and the US. There are few places where people can go to, to look at growth these days and India clearly is in one of those buckets.
What investors are looking for is clarity of policy, consistency of implementation and ease of doing business. They clearly seems to be a determination on behalf of the government to address those it will take time. So it is very difficult to say whether this happens in 6 months or 1 year or 2 years but as long-term investors when we look at the next 3-5 years we feel pretty positive.
Q: 3-5 years?
A: Definitely, that time period and we look at it from that perspective. We do not look at it from a one year. Inflows may start in 6 months and a year but from our perspective regardless of that happens or not if we see the country in the right trajectory for the next few years that is when we feel good about investing.
Q: Have investors been left with the bad taste because we have the Vodafone issue, we have the Nokia issue there have been several instances for investors to be cautious about India? At any point do you feel that from Temasek's point of view was there caution when you look at outlook in India and has that changed now?
A: As I said for us we specifically have not faced any issues in India. Clearly, what mattered to us was clarity and consistency of policies which would allow for investment in growth? Because we are growth investors and that is important to us. From that perspective the lack of clarity around certain issues was something that we were looking to have resolved.
Today, you at least have a government which really has an intention to do that. We still have to see some of these things play out and all investors are watching that to see how things will be play out. However the issue is India is no different from any other place. Investors everywhere need clarity and simplicity of policies to invest.
Q: Right now what are the bottlenecks need to be cleared out according to you?
A: I do not think there are that many bottlenecks, we seem to be on the right track on the macro. If you look at basically what are things that we are looking for? -The government should try and make India easier place to do business in. This is basically simplicity of laws and fewer laws. That is something we like to see and I know government seems to be working on.
Beyond that you want to see investment pick-up in India that again requires clarity around couple of areas. Clarity around energy policy, clarity around land acquisition both of these will help investment in infrastructure. So these are just some of the things I do not think that there is any one big thing that we are looking for. It just requires blocking and tackling, removing the bottlenecks to unleash the potentials that is there. We uniquely positioned right now to take advantage of the opportunities in India.
Q: Would implementation of goods and service tax (GST) remove some of the concerns that investors globally have with respect to taxation clarity and regulatory certainty in India?
A: I won't talk so much about the regulatory certainty but GST is going to be very important in allowing a step-up in growth rates in India. So it is clearly something that everyone is looking for because it will clearly remove certain barriers to operations out here for companies and should definitely to step-up in growth rates. So that is an important thing that people are looking for it
Q: Let me ask you India's global growth plans. Where does India stand currently in terms of exposure and in terms of the kind of capital intensive investment that you would look at say in the next one year?
A: We are very much bottom-up investors. India is an important market. We have got resources on the ground and we are looking for opportunities. However, we do not have asset allocation across markets, so whether we invest one dollar or billion dollar or USD 2 billion will really be the function of the opportunities we see bottom-up for us. We hope to be active out here but how much we actually deploy will depend bottom-up on what we get to see and investments we can do.
Q: From the conservations that you have had so far with investors what is the kind of capital that you would be open to deploying in the immediate term?
A: We are not constraint for capital, so globally if we find the right opportunity there is no limit to the amount we can invest in India. We have been active this year and the last year, we have been very active and made a number of investments in India. I would hope that we continue to do the same but the number of investments we do will be driven by bottom-up opportunities that we see that we can close at valuation that we are comfortable with, with people who are comfortable with us and whom we are comfortable with.
Q: From the conversations you have had lately investors seems to be staying away from the high risk sectors like infrastructure, real estate, power, the ones that have direct government involvement. The consumer, the IT space are usually the sweet spots. So from the conversation that you have had so far what are your investment sweet spots expected to be for 2015?
A: I would get back to our investment themes, I just talked about those and the sectors that were clear beneficiaries of those themes are as you said, consumer, healthcare, financial services, pharma, technology, these are areas where we have been pretty active investing in 2014 and I expect to continue to see that in 2015 but ultimately we are not wedded to any particular sectors. If we see opportunities in other sectors that sort of come up whether it is infrastructure, real estate we will be actively looking at those and if we find right opportunity we will invest there too.
Q: Government has been expanding or trying to increase investment when it comes to infrastructure. From your point of view is that a sector that you would look at actively getting involved with or does it still have a very high risk advantage?
A: We have invested in infrastructure in the last few years. In the last few years we have invested in power and in actually infrastructure enabling sectors like cement. We have invested in ports. So we have been investing in infrastructure too over the years and again it is a function of the right opportunities. If there is clarity of regulation and policy and the economies of transaction work for us, we will actually have to look at those. Like I said we had done so in the past and we will continue to do so.
Q: Tell me about exits because the capitals markets as we were discussing have picked up. Is this the right time to look at IPOs, look at exiting through the primary markets because there seem to have been returns substantially over the last say, six to eight odd months? 2015 how are you looking at the capital markets?
A: We are slightly different from most investors and funds in India in terms of exits and that is because we invest from our balance sheet, we have permanent capital, we don't have a fund life and therefore we are not forced to exit at a particular time frame. We invest along our investment thesis. We review that investment thesis as it plays out and at the end of the day if we look at divesting we have to look where are we going to deploy the capital elsewhere. So for us each particular situation is do we think it will continue to give us superior returns and if it does there is no need for us to divest.
Actually, we have never really been bothered or constrained with exits. When we have needed to we have always been able to, sometimes not exactly at the time when we want to but we can afford to be patient. So actually we think less of whether it is the capital markets or other sources clearly in a vibrant capital market all investors will have more exit opportunities but it is probably a little less relevant for us than for others.
Q: In that case how many portfolio companies have reached a maturity level for you to look at exiting completely currently, be it through the secondary market, be it through the primary market?
A: We clearly have companies that we could exit if we wanted to. They are mature enough that we can exit but as I said in a number of these cases we still see significant growth opportunities and we want to continue to be invested and there will be situations where you want to exit. So the point I am trying to make is that exits have not been a constraint for us. I know it has been talked about a lot because some people have felt constrained but it has really not been an issue for us. For us it is more of an issue of finding the right investment opportunities to invest our capital in a market that we think is important for us.
Q: Do you think valuations have picked up because given the currency activity that we are seeing in the capital markets specific sectors as well if you take, eCommerce for example, valuations seemed to have picked up in some sectors specifically. What is different now compared to one year ago when it comes to valuations?
A: I will separate the public markets and the private markets. You talked about the eCommerce companies, it is not just in India. eCommerce companies globally (interrupted..)
Q: e-Commerce is global.
A: Yes, and partly it is because people see the growth opportunities out there. So you have really got to look at valuations in terms of where the business will go over the next few years. In the public markets yes, obviously valuations have gone up but that has been a function of improved growth outlook for India.
So today forward PE multiples are around 15.5 to 16 times and it is about 10 percent above what the historical averages would have been, but also compared to a year ago the growth outlook for India is much better. You should see most analysts probably projecting earnings growth of between 15 to 20 percent for the Nifty group of companies over the next couple of years. When you look at it in that context then yes, it doesn't look that expensive, it is not cheap but it is not ridiculously expansive.
So ultimately you have got to look at valuations in the context of growth. If we do see earnings estimates revised upwards as we are beginning to see now you probably could see further support to the market but ultimately it is very difficult to look at averages. We as bottom-up investors will look investment by investment and look at valuations in the context of our growth for you. So in a nutshell yes, they are more expensive but there is still a lot of opportunities that we can find.
Q: You are talking about the eCommerce space. Are you actively looking at the eCommerce space for investment and I want to understand the valuation. I am curious to see the kind of inflated valuations we are seeing in eCommerce. Is that a bubble or is it justified?
A: We are an investor in the Indian eCommerce, we have an investment in Snapdeal. We have been investors in the eCommerce space globally since 2010 and we invested in a number of markets which is China, Brazil, US, south east Asia. So it is a space we feel pretty positive about because we do see there is secular growth in that segment. Ultimately India is at a very early stage of eCommerce penetration and there definitely will be a lot of growth whether it is next few years with a 50 percent per annum or 100 percent per annum take your pick but it is going to be several multiples of where we are right now in the next few years.
Q: How integral is Snapdeal in terms of how you see the company going forward in terms of your investment appetite for the company. Would you look at expanding your investment or increasing your holding there?
A: We are a small investor there but they have raised a lot of capital. So, we will look at each individual case as and when it comes about. I think broadly speaking as I said we are positive about the sector, we clearly are positive about the company that is why we are invested and as and when there are capital requirements we will clearly look at that.
Q: How do you see India versus the other emerging geographies or how does India stack-up versus the other emerging geographies in Temasek\\'s global expansion plans?
A: Most emerging markets play to the themes that I talked about. So, therefore we are positive on emerging market investments, it is a major focus area for us. India the reason why it looks very good today partly is - some of the steps that were taken to make structural changes in the economy in the last 18 months are now playing out.
One of India\\'s issues has been stubbornly high inflation. It is finally being addressed and we are seeing that being tamed. India benefits more than a lot of other emerging markets through lower oil and that is a positive. Overall in that context India looks very good. There are also other emerging markets we are actively looking at but India does look to be very attractive right now.
Q: How many deals can we expect from Temasek in the near term? From the conversations you have had so far, from the deals that you are likely to close soon.
A: We have done a number of transactions in the last few months. I would hope that we can continue to be active investors in 2015. As I said the number of transactions we actually end up doing will be a function of bottom-up opportunities and finding the right opportunities that are right fit for the company and for us. So, very difficult for me to make a prediction on number of transactions.
I would hope to announce at least some transactions but you never know, deal is not done till its done.
Q: You have invested over USD 1 billion in India at least so far till date in equity?
A: We have been investing here for the last decade. So, we have invested several billion dollars over this period.
Q: The pace of investment you expect to continue for the next 5-6 years at least?
A: I hope we could find more and more opportunities to invest. We are not constrained for the amount of capital, we really want to find the right number of opportunities. I will step back and say as a country and a country that sort of really builds on all our investment themes we are very positive about the outlook and we want to do as much as we can. However it depends on what opportunities we can ultimately find.
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