My 2 cents on this
1.Public investments -
(a) IIFL ( finance(327M) + wealth Mgmt.(202) + Securities(54) +5paisa(23) ) + CSB (230M ) = 834M ( 31 mar 2021). Conservative Fair Value in 2 years = 1.3*834 = 1.1 B
India's NBFC sector has gone through a tumultuous time in the past 3 years. First with ILFS crisis and then with two waves of COVID. This is possibly the harshest stress test any NBFC can go through and the fact that IIFL finance has come out of it unscathed tells you a lot about strength of their loan book. The loan book is heavily focused on retail and gold loans and a very small part is corporate . A well run NBFC in India should easily give you a 20%+ CAGR in earnings and coupled with a growing economy could be one of the best ways to play India story. IIFL finance is trading at an earnings multiple of 10 and I do not see it staying there as Indian economy starts opening up.
Only 3.7% of Indians invest in stocks vs 50%+ in US. India will mint new millionaires every year. These two factors alone are significant tailwinds for IIFL securities and IIFL wealth mgmt business . IIFL securities was trading at 4*earnings( net of 100M property that it owns in Mumbai) at the end of last quarter and is up by 80% since.
CSB is already a phenomenal turnaround story which is reflected in its financials and share performance. Its not too hard to imagine what a good CEO can do with a bank in a growing economy like India. It is extremely hard for a foreign operator to get a banking license in India .
5 Paisa recently raised equity worth 33M at a 70% premium to the share price and the stock has doubled since then .
(b) Fairchem + Privi = 64 + 163 = 227M. Conservative Fair value in 2 years = 163M + 64*2 = 291M
Privi has been liquidated for 163M already. The day the announcement was made FIH stake in privi was worth 233M. This deal puts Fairfax mgmt in rarified circles of investing community since its extremely rare(never) to sell your stake for a 30% discount to a promoter . Especially when there is no pressing need for cash. A self goal by the Fairfax team.
Fairchem is doing well and has a huge room for growth. The share price has doubled since the last quarter .
(c) Other public Equities = 160M .Conservative Fair value in 2 years = 160*1.2 = 192M
With the recent run up in India market . I imagine they are doing okay here.
2. Private investments -
Anchorage/Bangalore Airport - ( 1.4B ). Base case Fair value = 1.4B
PreCovid
A new runway at the current terminal has been operationalized which will help BIAL to overtake Mumbai in terms of domestic traffic. Second terminal on track for mid 2022. (It looks amazing btw.) A cybercity under construction on 400acres around the airport. A clear path to 70M+ passengers from the current 35M in 5 years.
Adani trying to list their airport assets for 4B+ .The other public airports around the world trading at 1.5-2 times the multiple of Bangalore airport.
BIAL has a claw back provision for Aero revenue which guarantees them a fixed 15% return on equity in any given control period. This should help them recover a significant amount of lost revenue over the next 2-3 years.
PostCovid -
I think based on the factors above FIH should not find it hard to list BIAL( via anchorage ) for 2.8B+ . Without COVID, the valuation could have easily been 4B+. Mgmt indicated in the annual report that despite covid, 2.8B valuation for BIAL is fairly low and they expect better pricing in public markets given the marketability of an asset like BIAL.
Sanmar - ( 338M ) . Base case Fair value in 2 years = 700M
This is a hidden gem in the portfolio which could be worth 3-4x from current prices ( 80%) or go to zero ( 20%) . PVC pricing is at all time high but sanmar is facing a liquidity crunch which has forced their hand to go for an IPO an year sooner than what they would have liked. If you read the IPO circular , it becomes clear how undervalued Sanmar is at 1B valuation. FIH is flush with cash even post tender offer and will not let their equity get affected and might provide a short term loan if needed. Sanmar merged their India businesses earlier this year and is going to aim for a combined valuation of 2B+ for their India business when they ipo this year. Then you have the Egypt business which could be worth another 500M easily. all this is dependent on whether they can tide over their current liquidity situation ( I think they will ). Post the equity raise there is a clear path to 200M in EBITDA within 2- 3 years for just their India business, which as per the valuation of their peers ( 20X multiple to earnings) should put just india business at 3-4B valuation. Sanmar is paying interest rates as high as 18% on their debt and will significantly bolster their cash flow if the IPO is successful since most of the IPO proceeds will be used to pare down debt.
Seven Islands - (104M ), Base case Fair Value post IPO = 200M
This business has been growing EBITDA at a 30% CAGR for the past 10 years. Past year revenue and earnings grew by 57% and 87% respectively . Promoter owned and operated . Should easily list at 20x earnings giving it a valuation of 400M+. FIH is marking it at 105M
NSE - ( 72M ) , Base case Fair Value in 2 years = 150M
Based on the transactions in pvt market earlier this year , FIH stake is easily worth north of 100M today and will be worth 200M+ when NSE IPO happens. FIH will keep marking it conservatively until the IPO. Covid volatility has given a tremendous boost to another already growing and monopolistic business. Here are the numbers
NCML - ( 86M ), Fair Value in 2 years = 86M
the only bad investment FIH has made so far. It has a decent chance of turning out okay given the strong tailwinds on the back of agriculture reforms initiated by the govt last year. Since there is no clear timeline of when the turnaround might happen lets keep it at where FIH is marking it.
Saurashtra(33M) - Fair Value in 2 years = 33M
too small to move the needle right now. Has been an okay investment so far.
Cash = 100M after tender offer
FIH Fair value in 2 years = 4.2 B. Current value = 1.9B
Debt = 550M
Have to account for fees , taxes .
Now the question arises why is the share price languishing at 0.7*BV instead of trading at a premium if the outlook is so rosy -
1. Mgmt Credibility -
In the past 2 years I have spoken to 20+ fund managers and individual investors regarding Fairfax Financial as well as Fairfax India and almost none of them want to touch anything that has Prem Watsa et al incharge. No one cares about their long term track record given their horrendous performance over the past decade . Prem's ramblings on tech valuations and value investing in his annual letters has reenforced the view that he is living in denial and is incapable of admitting and learning from his mistakes. The Mgmt gets a solid C from the market right now. Imo Prem et al have earned it and deserve it .This is reflected in the valuations of Fairfax Financial , India and Africa. The sentiment is so heavily tilted against the current mgmt that it almost makes a case for being a good contrarian indicator. Fairfax India has borne the brunt of this negative sentiment despite having invested in some quite decent businesses.
A a couple of examples on why mgmt gets a C from me ( for now ) -
(a) Fairfax financial gets paid in shares of FIH based on the appreciation in BV regardless of whether the shareholders of FIH make money or not. This BV is dominated by private investments which FIH mgmt is marking . A better way of doing this should have been to take the minimum of ( BV, share price ) and charge fees based on that so that fees only get paid when shareholders are making money too.
(b) Transaction with Privi at 30% below market price with zero explanation to minority share holders
2. Lack of price discovery -
There is a lack of clarity whether FIH is a PFIC or not for US investors. This rules out most of investment from US. India is an emerging market which is a negative for a lot of Canadian Investors. Coupled with a small float and almost zero smart money looking at this, price discovery has been significantly hampered. If you look at the ownership structure of Fairfax India ; OMERS, FFH and host of mutual funds are biggest share holders. FIH is the biggest buyer at 25% of daily volume almost every day.
3. COVID - there is still a lot of uncertainty whether India will experience a third wave or not.
I have been invested for the past 3 years+ and post the crash in share price during COVID made it by far the biggest position in my portfolio.
