Fairfax India new issue

[Viking]

Fairfax India’s initial IPO was done in Jan 2015 at $9.50 (net of taxes). They did a second large capital raise in Jan 2017 at $11.75. Shares are trading today at  $12.60. 

 

What has the company done over the past 7 years? They have assembled a wonderful collection of assets/companies. Each is well run, well positioned and growing nicely. Book value of Fairfax India today is about $20. Is book value accurate? Roughly speaking i think it is. 

————-

Investors buy companies HOPING management grows the business and builds value for shareholders over time. The interesting thing is investors are able to buy Fairfax India TODAY at a price not far off the IPO price of 7 years ago… and get 7 years of outstanding performance ALMOST FOR FREE. And, given the outstanding track record of current management, INVESTORS BUYING FAIRFAX INDIA TODAY WILL ALSO FULLY PARTICIPATE IN ALL FUTURE GROWTH. It really is a completely bizarre set up.

 

Put simply, the current valuation of Fairfax India ($12.60) is completely NUTS. It is worth much more than that today. And, given managements stellar track record, it will be worth much more in the future. THE ONLY QUESTION IS WHEN WILL MR MARKET FIGURE IT OUT? It is a question SOLELY of timing. For an investor with a long term focus (where timing does not matter) then Fairfax India priced at $12.60 is called wonderful opportunity. With shares priced at $12.60 investors are getting a very high margin of safety. 

Edited April 24, 2022 by Viking

[Viking]

7 years in, Fairfax India has started to more aggressively monetize some of its holdings. This does a couple of important things. 

1.) it provides investors with another scorecard for management. What was paid originally? What was the asset sold for? What did Fairfax India management do in the interim (if anything) to add value? And ultimately, what did the investment return for shareholders?

2.) it also provides investors with some clarity on just how accurate reported BV for Fairfax India actually is. Where positions sold at a valuation close to BV?

3.) it also provides Fairfax India with an influx of cash. 

—————

So what did we learn from sales announced over past 12 months? Proceeds will be about $530 million. Cost was about $240 million. Gain will be about $290 million. Financial return for investors is impressive. 

 

And what did management at Fairfax India do to unlock value? Lots.

1.) substantial work was done with Privii and Fairchem over the years culminating in the split of the two companies into their current form. And the returns for Fairfax shareholders so far have been spectacular.

2.) substantial work was done with IIFL over the years - most importantly, the split of IIFL into 4 separate companies, each of which are thriving. 
3.) substantial work has been done at BIAL over the years - BIAL has been developed into an incredible asset. Fairfax India has also created a new platform - Anchorage - to participate in what is looking like an infrastructure boom in India.

Bottom line, over the years management at Fairfax India has provided enormous value to the companies it has invested in (i would argue Fairfax India has a competency in this regard that is far superior to that of Fairfax - the mother company). 

 

Were the companies sold at valuations close to BV? Yes. (Prem provided a great deal of clarity as to the actual selling prices received during the Q&A at the Fairfax India annual meeting). Bottom line, BV is supported by actual sales.

 

What is Fairfax India doing with the cash? That will be the subject of a future post. More good news…

————-

Fairfax India sales the past 12 months

1.) April 2021: Privii: proceeds of $163 million

gain was $127 million; 27% compound annual return

2.) Sept 2021: Anchorage (10% of BIAL): proceeds of $129 million

- transaction values all of BIAL at $2.6 billion; Fairfax India’s cost was $1.2 billion (100% basis). Sale provides return of about 115% over cost.

3.) Nov 2021: Fairchem: sold 13.9% for $46 million

realized gain = $34 million

- Still own 52.8% with value of $155 million (Dec 31)

4.) March 2022 (to close Q3): 9.8% of IIFL Wealth: proceeds of $191 million

- locks in realized gain of $65 million = +20% per year from original purchase

- Still own 3.8% with value of $74 million

Edited April 24, 2022 by Viking

[hobbit]

$30 + stock if BIALand Sanmar are marked accurately. They are being too conservative which is probably the right thing to do but eventually this gap will close. 

[Xerxes]

8 hours ago, hobbit said:

$30 + stock if BIALand Sanmar are marked accurately. They are being too conservative which is probably the right thing to do but eventually this gap will close. 

a dash of optimism on a Monday morning 

[hobbit]

2 hours ago, Xerxes said:

a dash of optimism on a Monday morning 

haha yes!  if you take $9.50 as IPO (2015) price, a $30 book value today would be a 17-18% CAGR net of fees. I think if you are investing in India via any equity fund, venture , PE etc that is par for the course in terms of risk adjusted return. They have traded as high as 1.4 *BV so $30 seems reasonable to me.

 

Given the current investments and the outlook I would be extremely surprised if they do not do 18% CAGR net of fees.

Edited April 25, 2022 by hobbit

[Viking]

On 3/31/2022 at 11:24 AM, hobbit said:

BIAL is the fastest growing major airport in the world with a second terminal coming online at some point later this year. There is a clear path to 200M in EBITDA. I would not be surprised at all if there is a significant markup in the valuation of BIAL ( >80%) from the current 2.6B in near future barring another wave of COVID. 

@hobbit i was going over some old posts… What do you see as the trigger for Fairfax India to increase the valuation of the airport? Is it perhaps the sale of another sliver of Anchorage - at a higher price than OMERS paid? Would opening the second terminal later this year be sufficient? Or something else?

 

The airport really is the key building block to value Fairfax India as it is the largest asset by far. If we get further confirmation that the current valuation for BIAL is indeed accurate (or even low) then that would scream that the $20 BV is real and the shares are, indeed, wicked cheap at $12.20. Regardless i bought another big slug today. Looking forward to reading the earnings report tomorrow. 

[ICUMD]

3 hours ago, Viking said:

@hobbit i was going over some old posts… What do you see as the trigger for Fairfax India to increase the valuation of the airport? Is it perhaps the sale of another sliver of Anchorage - at a higher price than OMERS paid? Would opening the second terminal later this year be sufficient? Or something else?

 

The airport really is the key building block to value Fairfax India as it is the largest asset by far. If we get further confirmation that the current valuation for BIAL is indeed accurate (or even low) then that would scream that the $20 BV is real and the shares are, indeed, wicked cheap at $12.20. Regardless i bought another big slug today. Looking forward to reading the earnings report tomorrow. 

As per the AGM, I believe they are using a discounted cash flow method to value the airport.  It seems like a complex model due to various assumptions and sources of revenue.  I would think that once Anchorage listed publicly, there would be a mark to market.  It appears that this event may by yet 2 - 3 years away. 

 

It seems that their airport valuation models are very conservative, on top of the discount to BV.  So patient conaissors will see the deal.  

[hobbit]

On 4/27/2022 at 6:46 PM, Viking said:

@hobbit i was going over some old posts… What do you see as the trigger for Fairfax India to increase the valuation of the airport? Is it perhaps the sale of another sliver of Anchorage - at a higher price than OMERS paid? Would opening the second terminal later this year be sufficient? Or something else?

 

The airport really is the key building block to value Fairfax India as it is the largest asset by far. If we get further confirmation that the current valuation for BIAL is indeed accurate (or even low) then that would scream that the $20 BV is real and the shares are, indeed, wicked cheap at $12.20. Regardless i bought another big slug today. Looking forward to reading the earnings report tomorrow. 

I have absolutely no doubt that BIAL airport with 2 terminals and 70M annual passenger capacity, BIAL is worth more than 4B . Sydney airport was recently privatized at 4 times that. (17B equity and 25B enterprise ). Pre-covid Sydney airport was 3x more profitable than BIAL with much worse growth profile. As Indian economy grows and passengers spend more,  even a 4B valuation might look silly. I think discount arises from the perception that Indian Govt can do random stuff which could be detrimental to shareholders like they have done with the recent tariff order. India has always been a country with socialistic tendencies and only in the last 10-15 years has taken a turn towards capitalism. it will take time for the market to accept that there is no turning back from this change of stance. Modi getting reelected will certainly reinforce that. Until then BIAL is quietly building up its intrinsic value and no one knows when the gap between share price and BV will close. Omers deal is moot since omers has a 'special' relationship with fairfax which allowed them to negotiate a ratchet clause which makes it valuation questionable. But i am not worried about this at all since  as long as Indian govt stays does not interfere , the value of BIAL will be realized. Even an IPO might not close this gap since this is a perception problem about the entire country, airport being a public asset.

 

Also IIFL finance , CSB and chemplast are significantly undervalued here. Just take a look at the numbers IIFL finance posted a day ago and TCI egypt is marked at 250M on FIH books whereas its true value is closer to 1B

Edited April 30, 2022 by hobbit

[glider3834]

https://timesofindia.indiatimes.com/business/india-business/want-good-leadership-dont-care-about-sector/articleshow/91424333.cms

[nwoodman]

1 hour ago, glider3834 said:

https://timesofindia.indiatimes.com/business/india-business/want-good-leadership-dont-care-about-sector/articleshow/91424333.cms

Good to hear a date, October 2022, for T2

[glider3834]

39 minutes ago, nwoodman said:

Good to hear a date, October 2022, for T2

yes that was interesting - another interview here

 

I wonder if there would be any value in Fairfax India having a dual listing in India - has this ever been raised before?

 

https://www.moneycontrol.com/news/interview/india-will-be-the-place-to-come-put-money-fairfax-founder-prem-watsa-8473471.html

 

On Digit - looks like they have to wait 5 years before they can IPO - see below 

 

Will you be looking at raising more funds for Digit or will you prefer to go for an initial public offering (IPO)?

Kamesh Goyal: Since we recently raised $200 million, we do not foresee any need for capital in this financial year. In the long term, we want the company to be listed. But as per IRDAI’s regulations, promoters cannot sell stake before completion of five years. That period will be completed for us in the latter half of 2022. Then we will be prepared, we will be happy to list because that is really the long term objective.

[glider3834]

Hey guys , is anyone based in India who can help - I wanted to check details of a potential equity issue for Digit (see PAS-3 form) - lodgement with MCA but you need to pay with Indian bank issued credit card & the cost is 100Rps - I am happy to reimburse the $1.50 or so. I am not based in India so its tricky! Can anyone help?

 

Filings are below

 

[nwoodman]

7 minutes ago, glider3834 said:

Hey guys , is anyone based in India who can help - I wanted to check details of a potential equity issue for Digit (see PAS-3 form) - lodgement with MCA but you need to pay with Indian bank issued credit card & the cost is 100Rps - I am happy to reimburse the $1.50 or so. I am not based in India so its tricky! Can anyone help?

 

Filings are below

 

Paste the link and I will see what I can do

[glider3834]

15 minutes ago, nwoodman said:

Paste the link and I will see what I can do

thanks!

https://www.mca.gov.in/mcafoportal/vpdDocumentCategoryDetails.do

You will need to register to login if you haven't already created one

[glider3834]

BIAL 

https://timesofindia.indiatimes.com/business/india-business/domestic-air-travel-in-april-only-5-lower-than-pre-covid-international-traffic-for-indian-carriers-surpasses-pre-covid-levels/articleshow/91459972.cms

[changegonnacome]

Owned this for a while - then the convoluted ownership & fee structure began to annoy me.....and then I was reminded about the old Charlie Munger quote about walking away from an investment opportunity with 200-page prospectus attached. Fairfax India has always felt like that.

 

Seems to be alot of internal rejigging of assets to create portfolio marks such that FFH gets paid or the investment managers locally get paid.....everybody seems to be getting paid except the minority shareholder? I mean I get the attraction owning an infrastructure assets like BIAL in the "next China" ,its a shiny object that feels irresistible but all that glitters isnt gold and all that malarkey.

 

So just curious if this has materially changed or is it still convoluted with a number of hands in the cash register? 

Edited May 16, 2022 by changegonnacome

[Xerxes]

^^^^ could always be worse:  a plan to spin-off the asset manager (Hambla etc) to “unearth value”/“crystallize value” … all those good stuff I hate  

[Viking]

Is the current weakness in Fairfax India not primarily due to strength in US$, fall in value of Rupee (new historic low), and general aversion to all EM equities? We are in a bear market. Up until recently, Fairfax India was holding up pretty well.

- https://www.ndtv.com/business/rupee-falls-30-paise-to-hit-record-low-of-77-55-against-us-dollar-2968307

Edited May 16, 2022 by Viking

[ICUMD]

Certainly, some headwinds in these regards.  However, BIAL was hit hard by COVID, while all the while developing a slam dunk prize asset.   (T2, land, etc)

 

IMHO, it's like quitting the marathon that was delayed by bad weather just as the starting gun fires.  

 

I'm sticking it out for another 1 - 2 yrs, then will decide whether to pare down my FIH holdings or not. 

 

Not too worried by possible recession. This will simply present further buying opportunities.  

 

On the brighter side, lots of other assets have been hit much harder than FIH, particularly technology.  I don't feel like I've missed out on other major opportunities in this regard.  

 

I remain confident in the value of the underlying assets.

[glider3834]

I put this chart together - sourced data from Airports Authority of India 

 

BIAL passenger numbers continue to recover - running at 82% of 2019 level in April (versus 41% of 2019 level in January)

 

[glider3834]

9 minutes ago, glider3834 said:

I put this chart together - sourced data from Airports Authority of India 

 

BIAL passenger numbers continue to recover - running at 82% of 2019 level in April (versus 41% of 2019 level in January)

 

https://www.traveldailymedia.com/india-travel-business-back-to-2019-levels/

 

From booking.com

 

The portal’s India business is back at 2019 levels, and is already “moving in the right direction towards normalcy.

 

the company’s April 2022 bookings are already better than April 2019 levels, Commercial Director for APAC, China & Oceania, Ritu Mehrotra said.

 

According to Mehrotra, “India is already a percentage point higher”, with domestic travel picking up and international travel starting to pick up. Business travel, incidentally, is also “creeping back”.

[ICUMD]

10 minutes ago, glider3834 said:

I put this chart together - sourced data from Airports Authority of India 

 

BIAL passenger numbers continue to recover - running at 82% of 2019 level in April (versus 41% of 2019 level in January)

 

Thanks for posting this info.

Very reassuring that volumes are getting back on track. Maybe they will even overshoot.  Hopefully asset impairment is behind us.

[glider3834]

56 minutes ago, ICUMD said:

Thanks for posting this info.

Very reassuring that volumes are getting back on track. Maybe they will even overshoot.  Hopefully asset impairment is behind us.

 

icumd just on the question of passenger volumes, I am curious what BIAL's actual passenger numbers could look like. What I mean is that BIAL's designed capacity historically speaking has been exceeded by actual passenger numbers. Again I am not making a prediction whether this can happen in the future, but lets consider some historical data.

 

Existing Terminal 1 was designed to handle to around 20 mil passengers p.a, but using digital technology BIAL made improvements within the existing Terminal 1 to increase its capacity up to around 36 mil passengers p.a (for example they handled  32 mil PAX in 2018 & 34 mil PAX in 2019). 

 

Thanks to numerous technology measures adopted, the passenger handling capacity of Terminal 1 (T1) has zoomed. “It was initially built to handle 20 million passenger per annum (MPPA), and it is now capable of handling 36 MPPA and 90 air transport movements (ATMs) per hour. Credit goes to smart digital like Digi Yatra, Smart Security System and Contactless Self-Baggage Drop,” the spokesperson said. This would take care of growth in traffic for the next 12 months, she added. 

https://www.newindianexpress.com/cities/bengaluru/2022/apr/27/kia-terminal-2-will-open-byyear-end-bial-2446897.html#:~:text=March 2021 was pushed to,well as shortage of manpower.

 

On Terminal 2

 

1st phase expected to increase annual capacity by 25 mil (expected completion date October 2022?)

2nd phase expected to increase annual capacity by 20 mil (expected completion date fiscal year 2029)

 

'The combined capacity of the existing terminal and Terminal 2 will be approximately 73 million passengers per annum.' (Fairfax India 2021 AR)

 

This comment from Fairfax India's annual report implies that Terminal 1 has capacity of 28 mil, but in actual fact it can handle up to 36 mil ( see above).

 

Does this mean that Fairfax is planning to reduce services in Terminal 1 after they complete 1st phase of Terminal 2, to effectively reduce its capacity back to 28 mil?

 

Or is it possible that Fairfax's planned capacity number for the end of 2022 of around 53 mil (for Terminal 1 & Terminal 2 - 1st phase) will actually understate the actual passenger numbers they will be able to handle, perhaps using digital technology?

 

On this front, BIAL recently announced a joint undertaking with AWS to continue this digital tech push https://economictimes.indiatimes.com/tech/technology/bangalore-international-airport-aws-to-open-joint-innovation-center/articleshow/90684488.cms

 

Again not making predictions here, but historically speaking BIAL has been able to use digital tech to increase actual passenger traffic numbers beyond the terminal's designed capacity. 

 

So then the question is can BIAL exceed the planned airport capacity in future years? Any thoughts?

 

 

 

 

 

 

Edited May 29, 2022 by glider3834

[ICUMD]

4 minutes ago, glider3834 said:

 

icumd just on the question of passenger volumes, I am curious what BIAL's actual passenger numbers could look like. What I mean is that BIAL's designed capacity historically speaking has been exceeded by actual passenger numbers. Again I am not making a prediction whether this can happen in the future, but lets consider some historical data.

 

Existing Terminal 1 was designed to handle to around 20 mil passengers p.a, but using digital technology BIAL made improvements within the existing Terminal 1 to increase its capacity up to around 36 mil passengers p.a (for example they handled  32 mil PAX in 2018 & 34 mil PAX in 2019). 

 

Thanks to numerous technology measures adopted, the passenger handling capacity of Terminal 1 (T1) has zoomed. “It was initially built to handle 20 million passenger per annum (MPPA), and it is now capable of handling 36 MPPA and 90 air transport movements (ATMs) per hour. Credit goes to smart digital like Digi Yatra, Smart Security System and Contactless Self-Baggage Drop,” the spokesperson said. This would take care of growth in traffic for the next 12 months, she added. 

https://www.newindianexpress.com/cities/bengaluru/2022/apr/27/kia-terminal-2-will-open-byyear-end-bial-2446897.html#:~:text=March 2021 was pushed to,well as shortage of manpower.

 

On Terminal 2

 

1st phase expected to increase annual capacity by 25 mil (expected completion date October 2022?)

2nd phase expected to increase annual capacity by 20 mil (expected completion date fiscal year 2029)

 

'The combined capacity of the existing terminal and Terminal 2 will be approximately 73 million passengers per annum.' (Fairfax India 2021 AR)

 

This comment from Fairfax India's annual report implies that Terminal 1 has capacity of 28 mil, but in actual fact it can handle up to 36 mil ( see above).

 

Does this mean that Fairfax is planning to reduce services in Terminal 1 after they complete 1st phase of Terminal 2, to effectively reduce its capacity back to 28 mil.

 

Or is it possible that Fairfax's planned capacity number of around 53 mil (for Terminal 1 & Terminal 2 - 1st phase) will actually understate the actual passenger numbers they will be able to handle, perhaps using digital technology.

 

On this front, BIAL recently announced a joint undertaking with AWS https://economictimes.indiatimes.com/tech/technology/bangalore-international-airport-aws-to-open-joint-innovation-center/articleshow/90684488.cms

 

Again not making predictions here, but historically speaking BIAL has been able to use digital tech to enhance the designed capacity of their terminal & increase actual passenger traffic numbers beyond the terminal's designed capacity.

 

 

 

 

 

 

From my review of BIAL developments, they are extremely forward thinking with many partnerships with AWS, IBM and the like.  Having met Hari Marar, he seems like solid leader, wll spoken and with a good vision.  They are also developing the business park and aero city. 

 

The pandemic was a 2 yr setback, but I forsee a lot of pent up demand returning.

 

They will lever technology to maximize passenger volumes. While an aiport terminal may have a rated capacity, such ratings are meaningless in India.  (Have you seen their rickshaws, trains and buses? Haha) There are already plans for a terminal 3 and possibly opening up HAL.  

 

What will be most interesting is how they stream various revenues, esp non aero, from the travelling passenger volumes.  

 

On top of all this, they are supposed to recapture their 16% aero rate of return via user development fees.

 

Let's see what the coming months show in terms of passenger volumes and revenues.

Will not be surprised to see overshoot on both fronts.

 

 

 

 

[glider3834]

https://www.thehindubusinessline.com/money-and-banking/prem-watsas-fairfax-shows-interest-in-idbi-bank/article65496966.ece