Temasek has recently doubled its “soft allocation” towards India and is now seeking investment opportunities beyond the $1 billion it has invested annually in the country over the past six years, said Ravi Lambah, head, investment group and head, India at Temasek. In an exclusive chat with Vinod Mahanta, Lambah talks about Temasek’s evolving investment thesis, confidence in India’s long-term growth story, the Manipal deal. Edited excerpts.

Can you share Temasek’s investment plans for the next 3-5 years?
We continue to focus on themes that we like, such as digitisation, which we think India is well-positioned for, and consumption, which we believe is important for the long term. We will also focus on life sciences and healthcare due to the significant requirements of the country. However, we must also consider global macro factors such as rising inflation and higher interest rates, which could impact equity markets.

In the near term, we are watching for these impacts, but long term, we are focusing on businesses with strong governance and management teams, profitability, or companies that are on a path to profitability. India’s fundamentals are strong, and we remain positive about India’s sustained and consistent policy framework, solid foreign exchange reserves, ongoing good corporate earnings, and strong banks. The private sector’s capex is slowly coming back, which is a good sign.

Temasek has invested around $1 billion in India every year. Are you looking at increasing India allocation?
In the last six years, we have been investing a billion dollars annually in India. Recently, we have sought to double that investment every year due to our belief that India’s fundamentals are solid and we would like to deploy more capital if we can find the right opportunities.

We have doubled our ‘soft allocation’ and are looking for opportunities beyond a billion. We are happy to put in more capital in India, but the amount will depend on finding the right opportunities. The firm’s underlying exposure to India is $16 billion, including indirect holdings, which is over 5% of Temasek’s global $297 billion portfolio.

How has the firm’s investment thesis evolved over the last two decades?
Our story in India has always been about consumption, which we see as an important part of the economic story playing out. For the last two decades, everything has stemmed from consumption: financial services, telecom, NBFCs, healthcare, agri-technology and consumer products. Beyond that, we focus on technology and have invested in the internet space, digitisation and early-stage companies.

The digital India story has been very interesting for us, and we have seen early investments play out as the digital economy has grown. We have invested in Zomato, Pine Labs and Ola, and these investments have played out as the sector has matured. We see agri as an excellent area for growth in India, given the high demand, fragile supply chains and bottlenecking that will create value. We may initially invest in a business with a smaller stake. If, during our holding period, the investment suits our long-term portfolio construction objectives, we may also double down on the investment. An example is our follow-on investment in Dr Agarwal’s Health Care.

How has Temasek’s India portfolio performed?
The India portfolio has been among the better performing portfolios due to the fact the country is growing and we have done well in India. Globally, our returns over the last 20 years have been around 10-15%. In the last decade, India’s portfolio has delivered double-digit growth.

What was the driver for making a fresh investment in Manipal Health Enterprises?
This investment aligns with our perspective on future structural trends in the area of healthcare and longevity.

Temasek has invested in a bunch of internet businesses. Are you still looking at investments even after the correction in valuations of loss-making internet companies, or are you taking a breather?
Our long-term investment approach sees the internet sector as a big beneficiary of digitisation, which has helped the sector grow. This is a long-term structural trend in India that we believe in. Currently, unprofitable companies in the internet-driven economy are not getting the attention they received a few years ago when the market was bullish. Tech has rotated out of favour, especially when companies are not profitable. However, profitable businesses still present opportunities. Unprofitable businesses must adapt and cut costs to survive. They must raise capital or manage with what they have to live to fight another day. The market will turn eventually, as it always does. The public markets’ lack of favour for unprofitable companies increases our ability to look at promising private companies. We can negotiate better investments and find strong management teams that we want to fund. Timing and volatility do not constrain us, and we become more cautious when necessary. We look at intrinsic value and our investments globally, not just in the internet sector.

One important point to note is that many of the great, profitable companies globally were founded in an environment with high interest rates. If we look at big US tech businesses, they were founded and raised capital in an environment where money was not cheap, which made them more careful about building their business models. They invested sensibly and productively because they did not have much capital to work with. However, in a low interest rate environment where capital is abundant, discipline is different. But now, in a high-interest environment, management teams will become more careful about spending capital, and hopefully, they will build great businesses like we saw 20 years ago. This is a good time to stay focused, stay close to high-performing management teams, and deploy capital sensibly. Every cycle presents opportunities for investment.

You have invested in companies in promoter-led groups like Godrej, Max, Adani, and GMR. How easy or difficult has it been managing these investments?
When we make investments, we prioritise governance and depend on the board to work with the CEO and management team. As investors, we hold the board and management responsible for the performance of the company. We have a strong governance model and framework in place, and we have not encountered any major issues. In case there are any concerns, we work closely with the board, management team, and CEO to address them. Therefore, we do not see governance as a constraint for us. We will continue to consider investments that fit our requirements.

Is ESG becoming an important part of Temasek’s investment framework?
ESG is an important part of our investment framework. It has become an integral part of how we invest, and we ensure that every investment we make has an ESG component. We have implemented a $50 charge for people and carbon emissions in our investments, and we will raise that to $100 over the next two years to ensure our investments are sustainable.

We pursue ESG across various opportunities, including partnerships with GenZero, Decarbonization Partners, and BlackRock. We have O2 Power in India, which focuses on renewables. We have participated in impact investing through our funds and as a GP. We invest in ESG-focused companies and want to create platforms to drive ESG efforts. ESG is not just a part of our investment philosophy; it also guides our investments.

Why hasn’t Temasek invested in real estate in India?
Our teams and trends have led us to focus on certain end sectors and end companies, and real estate and infrastructure have been a theme for us through our portfolio companies. We own CapitaLand Singapore, and that has been our main real estate exposure. We have funded projects for many years to pursue real estate opportunities in China and India. We are currently investing in real estate credit globally and find it interesting. Real estate credit is a component of our investment strategy, and we are deploying capital there.

In India, we have a JV with Ascendas-Singbridge to invest in warehouse and logistics space. Real estate often tends to be very operationally heavy, so we do it through our portfolio companies.

Are there any larger trends, like China plus one strategy of MNCs playing out, that could favour India?
There is currently a lot of focus on Make in India, with many MNCs announcing their plans to manufacture products in the country to diversify their operations. Other regions have also benefited from this trend, and we expect it to continue as companies navigate geopolitics around the world. Every country has its own strengths and benefits for different investments, depending on the sector and requirements. For example, some require technology and talent, while others need a reliable supply chain. Some countries have created special economic zones to attract specific industries and supply chains, like China has done over many years. Companies will have to diversify and find what works best for them.

Are you looking at any opportunities that are emerging due to the Indian government’s asset monetisation exercise?
We have a bottom-up focus, and if there is something that’s interesting, we will look at it. But by and large, we have not participated in this space. But there’s no other reason, just that we’ve been able to deploy capital in places where our sector trends and themes have guided us. Financial services have been a place where we’ve been very happy to deploy capital, like when we participated in SBI Life, for instance. So, yeah, we will participate where we see the right opportunity.

Do you anticipate that the collapse of Silicon Valley Bank and Silvergate Bank will have global ramifications similar to the impact of Lehman’s implosion during the Global Financial Crisis (GFC)?
Our perspective is that the banking sectors in the US, Europe, and Asia, including Indian banks, are all in a good position. We are not concerned about financial contagion, although there may be areas of weakness that arise in a rapidly growing and capital-rich environment. The recent collapse of SVB, a major player in the market, sent shockwaves through the system and will have lasting effects on the tech ecosystem. However, we do not anticipate a repeat of the Global Financial Crisis (GFC), as the current situation is more related to timing and duration than the creditworthiness of borrowers. While there may be volatility and occasional pockets of weakness, these will eventually be absorbed by the financial system.