- Private equity view on India
- Can valuations expand further?
- Spheres of growth in Indian landscape
Niraj Shah in conversation with Baring PE Managing Partner Rahul Bhasin.
For the latest news and updates, visit ndtvprofit.com
- Can valuations expand further?
- Spheres of growth in Indian landscape
Niraj Shah in conversation with Baring PE Managing Partner Rahul Bhasin.
For the latest news and updates, visit ndtvprofit.com
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TVTranscript
00:00 (upbeat music)
00:02 - Hello and welcome to Talking Point.
00:16 Joining me on the show is Rahul Basin,
00:18 Managing Partner at Bering Private Equity Partners.
00:21 The case for a chat of talking to Mr. Basin,
00:23 well, there could be multiple ways
00:25 or multiple conversation points,
00:26 but to my mind today,
00:28 I would love to understand from him,
00:30 what is the private equity view on India
00:32 as at the start of the calendar year
00:34 and how he thinks about calendar year 24.
00:38 Also talk about whether valuations can expand further
00:40 because in the private markets, as in the public markets,
00:42 the valuations have really soared
00:45 in select pockets, of course.
00:46 And what are the spheres of growth,
00:48 according to him within this Indian landscape?
00:50 Rahul, so good having you, it's been a while.
00:52 Thanks for taking the time out and speaking to us.
00:56 - Yeah, you just see you guys are trying
00:58 to revive your channel, it's great.
01:01 Wish you the best of luck for that.
01:02 - Thank you so much.
01:03 Two months or two and a half months and counting Rahul,
01:06 I'm glad that we're talking at least now,
01:08 but would love to understand Rahul,
01:10 at the start of, virtually the start of the calendar,
01:13 though we are about a couple of months
01:15 into the year already,
01:16 how do you see the landscape
01:18 for investing both private markets,
01:21 as well as some of the public market investing
01:22 that you would be doing?
01:25 - Look, I think, you know,
01:29 all your guests would have articulated,
01:31 I think India has been in a sweet spot
01:33 in terms of macroeconomics.
01:34 I think the balance sheets of the government,
01:37 the balance sheets of the banks,
01:39 the balance sheets of the corporates
01:40 are all in very good shape.
01:42 And I think that's a recipe for sort of ongoing growth.
01:46 You also have a situation where,
01:49 I think the real estate cycle,
01:51 which started after the global financial crisis,
01:55 and then showed some false starts in 2016, '18, '20,
02:00 and then got sort of knocked down again during COVID,
02:05 you're seeing a very strong revival in that,
02:07 and post the RERA cleanup, et cetera.
02:12 And I think that that has a lot of multiplier impacts.
02:15 So high capex by the government, good balance sheets,
02:18 revival of the entire real estate sector,
02:23 and also the entire push of the government
02:26 towards the early stage businesses,
02:28 the disruptive technologies,
02:31 and the very vital linkage of industry with academia
02:34 that one has seen, to my mind,
02:38 bodes very well for an ongoing resurgence
02:42 and a sort of great macroeconomic environment
02:44 for a long time to come.
02:46 I think the real challenge is that if you look at it,
02:49 a lot of this is already well understood,
02:51 and a lot of this is in the pricing,
02:52 which is why, in terms of multiples,
02:55 we are probably amongst the highest in the world,
02:58 with probably 23, 24 times earnings as a market as a whole.
03:03 And on top of that, you have a situation where,
03:06 high multiples, but you also have
03:14 a lot of high uncertainty in the world.
03:16 We all extrapolate sort of earnings
03:20 and sort of value businesses
03:22 on the basis of an environment that we know and understand,
03:25 but geopolitics is changing rapidly.
03:28 I mean, and that can throw up curve balls
03:30 from all kinds of places.
03:32 And the way trade works,
03:34 the globally integrated supply chains can have disruptions.
03:39 There are also issues around the fact that
03:43 there is this huge cascade of debt,
03:46 which is there in most developed markets,
03:48 especially in the US.
03:50 And so there are a lot of risks which also abound.
03:54 So I just think that from a macro perspective,
03:59 it's not an easy one-shot call that this is a one-way bet.
04:04 I think one has got to look ground up
04:06 and sort of be certain that what you're investing in
04:10 and how you're investing makes sense.
04:12 You talked about valuations in the private markets.
04:16 Private markets tend to be very fad driven
04:20 much more than the public markets, very strangely.
04:23 One would expect that when market more driven
04:27 by institutional players would not see that,
04:29 but human beings are human beings at the end of the day.
04:32 So whatever becomes fashionable tends to become overvalued,
04:36 but you've got to look at the areas
04:37 which are not so fashionable,
04:39 but which afford significant amount of growth.
04:42 And I think the very strange thing that I see
04:47 is that when you've had zero cost of capital
04:51 from 2008 until virtually about three years ago,
04:56 that whole period engendered a lot of disruption,
05:01 a lot of investment in core technologies, et cetera,
05:05 and a lot of the impact of that in terms of disruption
05:09 to whether it's in the public markets
05:10 or the private markets, one will see.
05:13 And I think that that impact has not been felt fully.
05:15 That will play out over the next five,
05:17 seven years going forward.
05:20 And I think that that will again,
05:21 it will create new winners and losers.
05:25 So I think my basic point is that the landscape
05:29 is evolving and changing quickly,
05:32 and one has to sort of be on top of that
05:35 entire disruptive landscape to be able to make
05:38 any kind of reasonable long-term bets.
05:41 - Wow.
05:43 Rahul, you've given me a chance to ask you
05:48 three follow-up questions on the basis
05:50 of your opening answer.
05:51 I'm gonna save the question around the linkage
05:54 of industry with academia for the last.
05:57 I'm gonna start off with something that you mentioned
06:00 around the certainty or geopolitical certainty
06:03 or political continuity, policy continuity in India,
06:06 but also the fact that the newer normal of higher rates
06:11 brings about a period of multiples coming off.
06:18 So from a private market investor,
06:19 both in India, a large player like yourself,
06:21 or your peers around the world who invest into India,
06:24 right, I'm trying to think about the Indian landscape
06:27 right now and not necessarily the world.
06:29 How do people juxtapose both of these?
06:31 That yes, there is policy continuity probable in India
06:34 versus the rest of the larger markets,
06:36 and therefore maybe let's go for India,
06:38 but at the same time, the new normal is different
06:41 because rates are higher,
06:42 multiples technically should be lower.
06:44 Do we still pay a fat premium to Indian startups,
06:48 Indian private markets, or Indian public markets?
06:51 - I think, now let me address this
06:55 since you alluded to the private markets,
06:56 let me address this first from that context.
06:59 You know, private equity is a sort of all-encompassing word
07:03 and it's like using the word manufacturing.
07:07 In most of the developed markets,
07:09 private equity is largely a financial engineering product.
07:14 And as a consequence of that,
07:15 there's often high use of leverage.
07:19 And when you have high use of leverage,
07:22 when rates go up, I think the impact
07:25 on the overall equity value tends to change a lot more.
07:30 In India, the private equity
07:33 is largely facilitation of growth.
07:36 So it's a very different kind of market.
07:39 It's not a financial engineering product.
07:41 It's much more about a catalyst and enabling
07:46 as a part of an ecosystem to enable accelerated growth
07:50 in businesses.
07:53 I think that's really the difference
07:58 and therefore the impact in India,
08:00 Indian private equity will be much less
08:03 than it is in the West or in the areas
08:06 where one tends to use a lot of leverage.
08:09 That's almost absent in the Indian context
08:12 and therefore the impact is much more muted.
08:15 Having said that, ultimately, if rates are higher,
08:18 that's the discounting mechanism.
08:20 Of course, it'll pull the value of all asset prices down
08:23 and quite rightly so.
08:27 - Okay, okay.
08:28 So you reckon that despite asset prices rightfully
08:33 at some point of time coming lower
08:35 or in certain cases coming lower,
08:37 the interest around policy continuity
08:39 could still help flows into India,
08:41 both in private markets and public markets?
08:44 - I think India is in a sweet spot
08:46 and I think India will continue to stay in a sweet spot.
08:49 I don't think that that's changing in a hurry.
08:51 But the reality is that,
08:56 if one looks, forget the Indian ecosystem,
08:58 I think the Indian ecosystem has seen very rapid change
09:02 in the financial saving mix.
09:06 If you think about it, as recently as three years ago,
09:10 only 2% of financial savings went into mutual funds.
09:16 That number has jumped to six.
09:18 Now, you know, it is 6% of financial savings
09:21 right for the mutual fund industry
09:24 or for equity allocation.
09:26 I don't think so,
09:27 especially in a younger country like ours,
09:29 maybe that number should be much higher,
09:32 but these changes tend to happen much more gradually.
09:34 So I think you might have some leveling off
09:37 as far as that is concerned.
09:38 You know, two to six is a big jump, right?
09:42 The second thing, according to me,
09:44 is that 35% of the free float in Indian markets
09:48 is still held by FIIs.
09:50 And I think the issues and challenges
09:52 in the overseas markets are still very high.
09:55 And as a consequence of that,
09:57 you know, you might get volatility.
10:00 And I think the biggest direct concern
10:04 for an Indian context is the fact that
10:06 if you look at the US,
10:08 see the US, you know, adopted the zero rate policy,
10:11 easy monetary policy, loose fiscal policy
10:14 kind of after the global financial crisis.
10:18 But about four or five years ago,
10:20 they changed back and they've gotten
10:22 to tighter monetary policy and looser fiscal policy.
10:26 Now, the problem is that the aggregate debt is so high
10:30 that they have to keep on borrowing more and more,
10:32 and it's actually widening the fiscal even more.
10:36 So it's become what I call an unstable equilibrium.
10:40 And the big challenge is that a lot of that borrowing
10:42 is actually happening in very short-term money by the US.
10:45 I think that once that mix were to change a little bit,
10:49 you might actually have a situation,
10:51 a strange situation, even if they're lower rates,
10:54 the long end of the curve might steepen
10:56 and as a consequence of that,
10:58 that's typically the benchmark
11:00 with which you sort of add an equity risk premium.
11:03 I think you might have a lot of cost of capital increase
11:08 worldwide and you might have outflows from India.
11:11 Now, remember that we are the most expensive market
11:14 in the world, so we are that much more vulnerable.
11:17 I mean, we are one place where people
11:19 are making money, so the probability
11:21 that they might pull out more is higher.
11:23 And that risk is something which is a reality
11:26 that we have to live with.
11:28 - You mentioned about how the changing landscape of higher,
11:32 correct me if I'm wrong, but I guess that's what
11:34 you were trying to say, that higher than normal
11:37 interest rates relative to the past 15 years
11:40 would create a completely different set of winners
11:41 and losers relative to what they would have been
11:43 in the past decade, if you will.
11:45 Could you elaborate a bit on that point?
11:48 - It's not just rates.
11:50 I think the real issue is the fact,
11:52 the point I made about the almost zero cost of capital
11:56 for a period of 12 or 13 years in the world economy.
12:00 I think that's been unprecedented.
12:03 You juxtapose that with the fact that you have more
12:06 engineers and scientists living and working together
12:10 than you've had cumulatively in the history of mankind.
12:12 I think that those two things together
12:16 is going to lead to a lot of disruption.
12:19 The way disruption works and the way it happens
12:21 is that you end up with two kinds of disruptions.
12:25 You end up with the incremental disruptions,
12:29 which means making something a little more efficient,
12:31 a little cheaper, a little better or more productive
12:34 at a certain price point.
12:36 And usually the incumbents tend to win those games.
12:39 And then there is what I call the disruptive,
12:43 sort of, the disruptive change,
12:46 which is really a new way of doing things
12:49 in a new sort of understanding.
12:51 And that usually the incumbents,
12:53 because they're protecting their old turf
12:55 and protecting their old capital assets
12:57 and trying to enhance that return on capital employed there,
13:02 they tend to miss out on.
13:04 And I think that the frequency with which you will see
13:07 these disruptive part will be much more,
13:12 at least for the next decade or so.
13:14 And that's the...
13:16 Now, a lot of this also comes from understanding.
13:19 So let me take one example.
13:21 I mean, one of the things that we lead our daily lives
13:26 and we sort of aspire to growth,
13:27 and a lot of growth has been,
13:29 the aspiration has been to sort of get the standard
13:31 of living in the West.
13:32 And I think that that's a great aspiration
13:36 as far as the country is concerned.
13:38 But what's also becoming apparent
13:40 is that it's not sustainable
13:41 and is not sustainable in many ways.
13:43 I mean, let's take agriculture, for example.
13:46 If you look at agriculture,
13:49 the sort of model which has been followed around the world
13:51 is shove a lot of fertilizer on the soil,
13:54 use sort of high yielding crops,
13:58 use monoculture, systematize,
14:01 and grow plants at scale.
14:04 Now, it's becoming apparent that that depletes the soil.
14:08 It kills the earthworms and the natural organisms
14:10 which make the earth more fertile.
14:13 And over a period of time,
14:15 it actually destroys your ability
14:16 to grow crop in that area at all.
14:19 Now, then came the incremental innovation
14:22 which said that, you know what,
14:24 instead of using fertilizer, let me use nanofertilizer
14:28 so that the efficacy of absorption of nutrients is higher.
14:32 And therefore you'll use less fertilizer
14:36 and the agriculture will be therefore better.
14:40 But then there's the next level of disruption.
14:42 And the next level of disruption is that, you know what,
14:45 why do I need to use fertilizer at all?
14:48 Why don't I use natural microorganisms
14:51 and I can epigenetically modify them
14:54 to fix more nitrogen in the soil
14:55 and more phosphorus in the soil, et cetera,
14:58 and release those microorganisms in small capsules,
15:02 which would then do the same job,
15:06 but not kill the ecosystem of the earthworms, et cetera,
15:09 not deplete the soil.
15:11 So I'm saying, you know,
15:12 you have multiple layers of technology.
15:15 Now, does this happen overnight?
15:17 It doesn't, but there's a clear path in understanding
15:20 where this will go as the understanding around this
15:24 keeps evolving and changing, right?
15:26 Similarly, you know, when we look at things,
15:30 we tend to look at it from a,
15:31 what I call a political economy only, you know,
15:34 whether you look at this agitation on MSPs, et cetera.
15:38 But if you look at it from a,
15:39 you sort of add on the sustainability oversight on it,
15:43 you know that in places like Punjab, et cetera,
15:46 the water table is falling every year.
15:49 And you know that this method of subsidizing
15:53 and giving MSPs in cash crops,
15:55 which are going to, which use a lot of water,
15:58 is not sustainable,
15:59 which means that the whole ecosystem has to change.
16:01 So there are new winners, new losers.
16:03 And I think that that's, you know,
16:05 I'm just sort of pointing that out as an example
16:08 of how in every industry,
16:12 this same kind of paradigm is playing itself out.
16:15 You know, the most well-known example probably
16:18 is this whole movement from IC engines to EV engines
16:22 and the challenges around that,
16:25 but you will see this everywhere.
16:27 I think the one other big place where this is inevitable
16:31 and likely to play out is in energy.
16:36 No civilization can work or evolve without a lot of energy,
16:41 which is not from us as human beings, right?
16:46 If you look at the amount of energy we consume
16:48 and over the last 200 years,
16:50 which is really where humankind has had the most development,
16:54 our consumption of energy has gone up considerably
16:57 and it makes sense.
17:01 So it's not that we are going to go back to a situation
17:03 where we don't have energy.
17:05 So I think clean energy is going to become
17:07 more and more vital.
17:09 And at least to me, it's very apparent that,
17:11 you know, solar wind will play its part,
17:14 but nuclear will have to be part of that solution.
17:16 And then there is a entire value chain around that,
17:20 which gives you good investment opportunities.
17:23 And there's an entire value chain which gets destroyed.
17:26 So that's another kind of, you know,
17:29 example in terms of how to think about some of these things.
17:33 - Got it, got it.
17:35 Rahul, would have loved to talk more
17:37 because I was really intrigued by the industry
17:38 and academia linkage,
17:39 but maybe we'll have to save that for another time
17:41 because we are completely out of time
17:43 on this leg of talking point.
17:45 But thank you for taking the time out
17:46 and being with us today on the show
17:48 and looking forward to talking to you more often.
17:51 - My pleasure.
17:52 - All right, that's the view from Behrings PE.
17:55 And I think the last part that he mentioned was interesting,
17:57 the value chain development
17:59 and the destruction or de-linking due to changes
18:03 is something around many spheres
18:06 that people need to watch out for.
18:08 We need to wrap up this edition of Talking Point.
18:10 Thanks for tuning in.
18:11 Stay tuned to NDTV Profit.
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