India’s Growth Test, Bangalore’s Infrastructure Problem, India’s Tech Rivalry

27:01And so Bangalore has had its waves of where you suddenly felt that it was overheated. And then, of course, what happens is that, you know, politics eventually catches up or infrastructure development eventually catches up. As a local Bangalore, I would like to believe that, again, we need that next wave of infrastructure which has to come in. And so, therefore, maybe a few other cities are benefiting because of that. Some of Bangalore's fiercest competition comes from within India, from cities in neighboring states that have seen economic success, but also its side effects. Coming up, some people call Bangalore the Silicon Valley of India, but it has a close rival in Hyderabad.

27:41close in size, in innovation, and in rapid growth.

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29:58This is a story about Babashitu. That is a word meaning future in Telugu, the language spoken here in Hyderabad. Hyderabad is racing to catch up with its rival of Bengaluru. It is known by some as Genome Valley in India because it is dominant in the life sciences. It also has attracted many multinational corporations from around the world, including American companies like Amazon and Meta and Apple. They occupy facilities such as these, which is Sattva Knowledge City. Bangalore is a bigger market. I mean, it's approaching 300 million square feet. Hyderabad is much smaller. It's like 160 million square feet.

30:34So, you know, much smaller. But, I mean, a decade ago, Hyderabad was probably 50. Shirish Gadbale is the CEO of Knowledge Realty Trust, India's largest office REIT. We met him at Satva Knowledge City in Hyderabad, one of the developments financed by Blackstone. It's a sprawling, modern campus, housing tenants such as Apple, JPMorgan, and Microsoft. It's the crown jewel of the Knowledge Realty Trust portfolio. It's got 75 ,000 people working in all the buildings, in and out. Who are the tenants? What are all those people doing? Yeah, good question. So a lot of them are what we call Global Capability Centers.

31:18So these are basically offices, divisions if you want to call it, of foreign companies mainly. And they are providing technological support in a variety of ways for their worldwide employees and appraisers. I think part of what we did coming to India on the real estate side was, rather than the old model of build it as inexpensively as possible, let's create a great environment where you can bicycle around and you've got a bunch of little shops you can go to and there are actually parks and water and it feels great to be there. And you make that incremental investment and the tenants and the people working there feel much better.

32:00And it's part of this overall improvement of India as a country. Explain the financing side of real estate, because I think there's something like six REITs in India and Blackstone has been a sponsor of and the center of five of them. Yes. So how did that REIT develop? Steve Shortsman talked to the prime minister at one point. We talked to the finance minister and different people in the government and we said, look, if you look at all the countries around the world with major markets to get more capital into their real estate markets, if you could create a real estate market, a REIT market, you could get more capital flowing.

32:35That'll drive down the cost of capital. You'll get more development. And the government studied it for a number of years, looked at it, had a whole process and ultimately came up with REIT legislation. We, as a major owner of real estate, have utilized that to take our companies public and give public shareholders exposure to these great companies. The companies then raise capital and grow more quickly. And we've done it across a range of industries in real estate. And I think over time you'll see this REIT market there grow to be quite substantial. But to me, it's another evolution of a country that before was really constrained with access to capital.

33:16And as India changes the rules and makes it more and more growth friendly, which they've done, I think, really effectively, you'll see investors like us and now public market investors deploying more capital there, and it will accelerate this growth. Hyderabad's growth is partly because of its proximity to a steady stream of domestic talent. And it is no coincidence that a short drive down the road from Sattva Knowledge City sits the Indian School of Business, one of the most prestigious institutions in the country. Deepa Mani is a professor of information systems at ISB. So if you look at the development of the tech ecosystem in Hyderabad, it was an outcome of very careful policy decisions by the government.

34:03And one of those policy decisions involved creating a cluster of institutions that would provide the capacity, both engineering and managerial, to serve the growing demand of this region. So we have IIIT, which is close by. We have ISP, which is right here. So these were institutes that were set up by the chief minister then, Mr. Chandrabah Bhunaidu, as a conscious policy choice. So this was cluster development, you know, which he engaged in to build the capacity that was needed of not just the MNCs that were coming in and the global captive centers that were coming in, but also growing domestic demand for technology talent.

34:45So this was a very conscious policy choice. Conscious policy decisions are one way Hyderabad hopes its growth might differ from Bengaluru's and avoid some of the challenges it faced. I think there were two things that Hyderabad learned. One was about human capacity development, right? Because some of these, like I said, the Indian Institute of Science being set up in Bangalore was perhaps, I wouldn't say an accident, but it wasn't as much a conscious policy intervention by the government. But they learned that human capacity development was going to play an important role in the development of the sector.

35:25The second was to reduce barriers of entry in the sector. But Hyderabad also needs to grow differently from Bengaluru. And one way it's doing that is by growing into different industries. Yes, tech and AI remain key, but the city has also emerged as the center of India's pharmaceuticals industry. Dr. Krishna Ella is the chairman of Bharat Biotech, India's second largest vaccine manufacturer, based in the outskirts of Hyderabad in what's known as Genome Valley. I think there was no Genome Valley when I came to India. In 1996, 1997, I came back to India. There was no road, nothing in this place.

36:05Literally nothing. No electricity holes. So today, I know you see the transformation. So I want to create a... I'm a strong believer. India should not copy anymore. India should innovate. For that, you need to create an ecosystem. So Genome Value is becoming a brand for that, to create that ecosystem. What are the factors that came together to make India such an important player in biosciences, but particularly in vaccines? I think it's only entrepreneurs. See, you look at all the vaccine industries, all privately-owned and family-owned companies. It is not private equity or somebody controlling the company.

36:47It is all private-owned. No government involvement, zero role with the government investment, and all private owners. So the private owner means we can take a lot of risk and we can take a minimum profit and move on. There's genome value that you really helped create here. How important is it to the economy of Hyderabad overall? I think this is the most, not only for Hyderabad, for the entire country. This is the largest cluster in the country, in India today. Thanks to the local government, the present chief minister, industry minister, both were very proactive. They're proactive. See, for us, you know, if they don't interfere, it's the greatest benefit.

37:29And they're more proactive. There's a good transition of the government and helping the industry to grow and the ecosystem to build. So I think still growing, you know, Valley. And this is the largest cluster in the country itself. And this is a role model for the other states to follow. Yet, as Hyderabad continues as one of the fastest growing cities in India, it also faces some of the biggest challenges. Its tech sector has attracted investment from some of the world's largest companies. But many of the jobs in the city have been back office jobs, call centers and IT support, the roles squarely at risk from AI.

38:08A report from S &P found that tech services companies Infosys and Wipro had reduced staffing by around 5 to 6 percent from 2023 levels, with similar trends at other firms. So I think it's both a challenge and an opportunity. I think the challenge lies in the fact that India has had great strength in IT services and providing a lot of functions, white collar services at very attractive costs. Some of that will get replaced by AI. And so I think the India bears say, ah, that's going to happen. I think what they fail to recognize is that these companies will evolve. We own a large stake in a business called Emphasis, an IT services company, and they have pivoted their business to focus on AI deployment because changing companies utilizing AI is also going to require an enormous amount of manpower.

39:09I also think they underestimate the willingness of people in India to utilize the AI and what it will do there. The creation of new companies there, the creation of AI infrastructure. Those on the ground see AI as more of an opportunity. Tech Mahindra is a services and consultant company with offices across India, including in Hyderabad. Nitesh Agarwal is the company's chief strategy officer. It's the question of today's times, right? And the way I look at it is, I think AI requires a lot of reskilling, right? So what's obviously going to happen is the new alpha generation which comes in, probably they will live or they will be brought up in an AI native world.

39:51but a lot of us in some sense have to reskill ourselves right so I'm sure in your job or in my job you know there are cases where I need to now know how I need to run the strategy of my firm and how do I use AI in that so it's not just about the economic opportunity that AI presents but it's about how do I use AI in my role and so I think it's it's not so much about the technology but about the curiosity and the learning that talent at scale needs to provide and and there is where I would say, I would want to believe that India actually stands a very good chance, you know, because it has talent, it has talent at scale, but it has talent which is actually learning ready.

40:31And so they don't mind pivoting. Now, again, I'm not trying to say that every individual will pivot, but as long as that culture is there, the pivot happens and then people will therefore acclimatize themselves to the AI first way of working. The IT services sector employs about 6 million people in India and contributes about 7 % of its GDP. So the ramifications of the AI rollout will stretch far beyond just Hyderabad. The AI is moving so fast so that in 10 years, it's hard to really predict. But today, you'd be surprised, really, that in fact, we've had robust demand and the demand seems very, very much there, at least for the foreseeable future.

41:14So what's happened is technology and the need for technology across the world has in fact meant that the demand for the GCCs has gone up even more. If I look back two decades ago, we were like a call center. That call center has gone to a back office. The back office went to a mid office. And the mid office now is literally a front office because tech is really part of the business, right? And that's why I feel despite AI, we're doing very well. The demand's very robust. And we look forward to a really strong rest of the decade. Up next, with all the differences among places like Delhi, Bangalore, and Hyderabad, we turn to what pulls the wildly diverse country of India together into a single whole.

42:00It's love of cricket.

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44:04www.bloomberg.com London. At cricket, a word understood in every language throughout the 28 states of India. Cricket was introduced to India by the British, but it became a national obsession here, an obsession that in recent years has exploded in interest, including from foreign investors, as we saw recently when Blackstone participated in a group that invested$1.75 billion to buy the royal challengers, Bengaluru. Across India's sprawling cities, you're never far away from a cricket ground. Close your eyes and dream of what is possible and then multiply it by any number that you want and you'll get an obsession for cricket in India.

44:53It's always been big, but it's just got bigger and bigger. So big that even U.S. investors are taking notice. This can be good B-roll. This is the logo, right? Yes. When John Gray's Blackstone stepped up to help buy the Bengaluru team earlier this year, his firm became part of the second most valuable sports league in the world on a per-game media rights basis, behind only the NFL. In India specifically, cricket is the passion. I'm still struggling with the rules. making slow progress on it. But now as an owner, part owner of a team, we've got to understand this. Fortunately, my colleagues in India do.

45:34But there are only 10 teams in a country with 1.5 billion people. That is a lot of eyeballs. And then this team in Bangalore has won the last two championships, won the second after we made the investment, has a terrific team, terrific management, and is in the fastest growing city in the country. So it all lined up for us. The Royal Challengers are part of the Indian Premier League, which created a form of cricket very different from the version first brought to India by the English in the 18th century. His Majesty the King at Lord's, where he greets the English team and the All-India 11. Hamar Singh has scored his 50.

46:14Incidentally, a tough score for his side during this match. Originally a slow, dawdling game that would last days, It's now been turbocharged into a shorter, faster game that lasts just three hours, called 20-20, referring to the number of overs or sets of six throws of the ball. Each team gets 20 overs in its innings at bat. Harsha Bogle is a cricket commentator in India. The younger generation in India couldn't be bothered five days of cricket. And so India took the 20-over game, and like you play with the dog in the bone, they just took the handkerchief and ran away with it. So 20 overs cricket, perfect.

46:52And everyone can watch. The grandmother can watch. Your sister can watch. Your uncle can watch. The little kid can watch. The explosion in popularity traces back to 1983, when India defeated the heavily favored West Indies to win the Cricket World Cup. That was a watershed moment in Indian cricket. And entire nation rejoiced. And when something like that happens, entire nation rallies. The kids started playing. Parents started encouraging them. So that was a very important moment for Indian sports and cricket in particular. Since then, it's only grown. And it's now moving cricket from a game traditionally played between competing countries to one now dominated by competing franchises.

47:40And if one franchise team has harnessed that growth better than anyone, it might be Royal Challengers Bengaluru, the two-time defending champion. On the game day, the entire planning is with the head coach. So head coach along with the support staff plans. A former marketing executive, Rajesh Menon, is their CEO. And we met him at their home ground in Bengaluru. He ties the success of his club and of cricket overall in India to the essence of India today. If you look at everything starts from the belief system, the philosophy. And the philosophy should be aligned to the country's philosophy. So when I looked at RCB per se as a team and we looked at India, India was a closed economy.

48:27But when the Indian economy opened up, people started to migrate from small town to big towns. Then came the startup boom. And every Indian wanted to start their own business. And we all know saying one in a million succeeds. there was fear of failure. People were failing, there was no safety net, and hence there was fear of failure. And that's the cultural tension which we saw. We all knew India has to move forward, people have to try. But as a human being, we don't know what's on the other side. Until now, you go play bold. That's the philosophy for RSV. Go play bold. We don't know what's on the other side.

49:05Until now, you go and play bold. And that philosophy is young India's philosophy. It's not a philosophy of one region, one culture, or one thing. So it's a philosophy of young India. And that resonated with young India. And it was not a tagline. It was a belief system. And what we did with that was we manifested that on every aspect. And that resonated with this young India. The Indian Premier League has seen major growth in recent years. And both Gray and Menon think there's more to come. I think the growth is what we've seen in the United States in the expansion and value of media rights. If you think about what the NFL has done or the other leagues, it's still much earlier in the Indian sports process.

49:52So it is, I think, how you monetize these teams. Obviously, it's the branding related things. And then it's just the growth of that underlying economy. I mean, an economy growing 7%, there's going to be a lot of wealth creation. And India's GDP per capita is going to, at this rate, double every 10 years. But they'll still be passionate. It's the same thing we see here. So to me, there's a real scarcity around sports teams. So very strong demand and a finite number of teams to absorb that demand. And this team in a particularly good city. So we feel very lucky to invest here. Point number one, India is a massive consumer market.

50:351.5 billion population, growing economy. If you are owning a team like this, it gives you that expanse to get into that market. Second one is media keeps growing in all aspects. One is the penetration of media is growing. Consumption of media is growing. Number three is the scarce resource. Any scarce resource has a premium to it. And if the scarce resource is growing, there's much more premium to it. And if scarce resource, you know the cash flow and it even becomes even more valuable. The fourth aspect is, it is just 19 years old, this league. Whereas globally, other leagues are 90, 100 years.

51:18In 19 years, what we have achieved here, the sentiments inside and outside is that in next 20 to 30 years, this league will be globally one of the biggest leagues which ever you can see. and this league is currently two and a half months. Think of this league becoming four months. Think of women's league becoming bigger. So I can see only opportunities. Fourth and fifth one is expansion. How can you make this brand around the year? Because currently if you look at 80 % is coming from media. So there are only opportunities I see and I feel I'm 100 % sure this is the opportunity which the investors also have seen while investing into an IPL brand.

51:58But Bogle warns that there could be a plateau ahead for cricket in India, at least when it comes to media rights. The value of the digital rights through competition kept going up. It got to a stage where you cannot not have it, which is a win-win for the person selling the rights. So there was one entity that bought the television rights for a large amount and one entity that bought the digital rights for a large amount. The amount of money that Disney-owned Star paid was not sustainable. They were going to make huge losses on it, but they just had to have it. And so we had a buyout that audiences in the US would be very well aware of, a buyout where the digital-owned entity buys out Star Sports.

52:37So now their bill, their rights bill is huge. So the fear going into the next television rights is, with one predominant entity owning the media landscape, will the rights be as big? Or will the cricket board play it very smartly and say, come what may, you can't do without us. So I'm expecting the rights to be slightly divided. We had the head of Netflix in India recently, and he said we're not interested in bidding for the whole thing. But yes, only the weekend games. That would be very interesting for us. Beyond prospects for growth, Cricket in India offers an attractive business model for investors, particularly given the cost structure compared to all those revenues.

53:22While European and American sports stars have seen their salaries balloon in recent years, Indian Premier League cricketers are paid just a fraction of that, with player payroll as a percentage of team revenue among the lowest in major global sports leagues. If you divide the rights and say what percentage of the rights are given to the players as fees, it's among the lowest in the world. But because cricket has traditionally not been a huge paying sport, what they're getting already is considered so valuable that it'll require a rebel to say, you know what, you are getting 25 crores. Divide that by the current dollar terms.

54:03But you're getting 25 crores to play six weeks. But you know what, you're actually worth 60. So do you want to rebel and say this is what we want? It'll come down to that. As the league surges in popularity, Indian Premier League teams have taken stakes in franchises in South Africa, the U.K., and even the U.S. in a bid to grow their global footprint. But the biggest opportunity remains at home. India is the largest country in the world, divided by language, region, and income, but united by a passion for cricket. And if India's economy reaches the potential it hopes, and if incomes rise and consumption increases, more of that spending will flow toward leisure activities.

54:46Few industries are better placed to capture it than the game India already loves. Bringing together 28 states and 1.5 billion people speaking 120 different languages behind a single goal. It's an aspiration of young India. We're not tapping into any other insights there. It is basically what young India wants. Indian economy is growing. The 1.4 billion, 1.5 billion population is young. Different industries are growing. And hence, if you look at the philosophy, if you don't play bold, then we won't move forward.

55:24That does it for us here at Wall Street Week, coming to you from India. I'm David Weston. See you next week for more stories of capitalism.

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