Fairfax India new issue

[TwoCitiesCapital]

8 hours ago, This2ShallPass said:

@TwoCitiesCapital aren't first two the same, i.e. buybacks increase BV/share only if you buy at a discount? Overall, I agree with what you're saying. 

 

@ICUMD

 

 

They're not the same. One is the appreciation of the existing (and future) investments. 

 

The other is increasing your ownership on them without incremental capital of your own. You're correct in that NAV only increases when done at a discount (which is where we're at), but ALL buybacks, even those above NAV, increase your ownership in the underlying business. 

 

This is in part why US stocks had such a good decade despite lackluster revenue and profit growth - massive amounts of shares were retired. Most of which were purchased well above book value. 

[Spekulatius]

On 7/20/2022 at 2:35 PM, rohitc99 said:

India has a history of weakening the rupee over time. you may want to model 3-4% annual depreciation against the dollar.

My framework for foreign currency devaluation relative to the USD is to look at the inflation differential over time which means country X (in this case India inflation rate) - US inflation rate over longer timeframes (couple of years).

 

Generally, Countries with high inflation rates have more currency depreciation.

 

The underlying thinking is that buying power relative to each other remains the same.

Right now, inflation seems to be lower India than the US (~7% in India vs 8.5% in the US) which suggest a short term dis location based on Fed tightening and flight to safety perhaps. the USD has been extremely strong recently despite high inflation causing buying power erosion.

 

So from that perspective, it might be a good contrarian bet to invest in in Rupee based assets right now.

 

[modiva]

Thanks, that's a good framework. 

[rohitc99]

On 8/27/2022 at 11:25 AM, Spekulatius said:

My framework for foreign currency devaluation relative to the USD is to look at the inflation differential over time which means country X (in this case India inflation rate) - US inflation rate over longer timeframes (couple of years).

 

Generally, Countries with high inflation rates have more currency depreciation.

 

The underlying thinking is that buying power relative to each other remains the same.

Right now, inflation seems to be lower India than the US (~7% in India vs 8.5% in the US) which suggest a short term dis location based on Fed tightening and flight to safety perhaps. the USD has been extremely strong recently despite high inflation causing buying power erosion.

 

So from that perspective, it might be a good contrarian bet to invest in in Rupee based assets right now.

 

The inflation in India for the last 20+ years has usually been 3-5% higher than the US. Now that reverse in the future, but India has usually had high inflation due to supply side issues and govt interventions. If that changes, then you are right

[treasurehunt]

On 8/27/2022 at 9:25 AM, Spekulatius said:

My framework for foreign currency devaluation relative to the USD is to look at the inflation differential over time which means country X (in this case India inflation rate) - US inflation rate over longer timeframes (couple of years).

 

I took a look at how the rupee has depreciated versus the dollar over the last 20 years and compared this to the relative inflation rates in the two countries.

 

From the beginning of 2002 till the end of 2021, the cumulative inflation rate in India was about 241%. The cumulative inflation rate in the US was about 53%. So a 2002 rupee was worth about Rs 3.41 at the end of 2021; a 2002 dollar was worth about $1.53.

 

One USD was worth Rs 48 or so back in January 2002. It was worth about Rs 76 in December 2021. But based on the relative inflation rates, you would expect one dollar to be worth 48 * 3.41 /  1.53 = 107 rupees at the end of 2021.

 

There is a significant difference between 76 and 107, so just looking at relative inflation rates misses other important factors. Maybe relative economic performance is another factor to consider?

 

 

[rohitc99]

3 hours ago, treasurehunt said:

I took a look at how the rupee has depreciated versus the dollar over the last 20 years and compared this to the relative inflation rates in the two countries.

 

From the beginning of 2002 till the end of 2021, the cumulative inflation rate in India was about 241%. The cumulative inflation rate in the US was about 53%. So a 2002 rupee was worth about Rs 3.41 at the end of 2021; a 2002 dollar was worth about $1.53.

 

One USD was worth Rs 48 or so back in January 2002. It was worth about Rs 76 in December 2021. But based on the relative inflation rates, you would expect one dollar to be worth 48 * 3.41 /  1.53 = 107 rupees at the end of 2021.

 

There is a significant difference between 76 and 107, so just looking at relative inflation rates misses other important factors. Maybe relative economic performance is another factor to consider?

 

 

Also keep in mind, that rupee is not a full convertible currency. Its managed to a certain extent by the central bank. ofcourse i have no idea if its undervalued or overvalued ...just pointing out one more factor to consider

 

and the Indian central bank and govt prefers to weaken the rupee against the dollar to boost exports. they buy and sell the currency so that this depreciation is orderly

[petec]

4 hours ago, treasurehunt said:

There is a significant difference between 76 and 107, so just looking at relative inflation rates misses other important factors. Maybe relative economic performance is another factor to consider?

Inflation is the only thing that drives currency diversion over the long term. So the only factors that might cause divergence are a) mismeasurement of inflation or b) cyclicality. 
 

What I mean by the latter is that currencies can diverge from their “correct” inflation adjusted value for long periods of time depending on economic performance, perceived risk, etc. These divergences can last decades. 

 

Looking at where a currency sits relative to its long term inflation adjusted average is a good way of assessing whether it is cheap. 

[Spekulatius]

23 hours ago, treasurehunt said:

I took a look at how the rupee has depreciated versus the dollar over the last 20 years and compared this to the relative inflation rates in the two countries.

 

From the beginning of 2002 till the end of 2021, the cumulative inflation rate in India was about 241%. The cumulative inflation rate in the US was about 53%. So a 2002 rupee was worth about Rs 3.41 at the end of 2021; a 2002 dollar was worth about $1.53.

 

One USD was worth Rs 48 or so back in January 2002. It was worth about Rs 76 in December 2021. But based on the relative inflation rates, you would expect one dollar to be worth 48 * 3.41 /  1.53 = 107 rupees at the end of 2021.

 

There is a significant difference between 76 and 107, so just looking at relative inflation rates misses other important factors. Maybe relative economic performance is another factor to consider?

 

 

thanks for going through the exercise. The relation ship with inflation is the main factor driving the relative exchange rates, but not the only one. For example, the Euro and the USD have similar inflation rates (euro tends to be a little lower actually) , but at times, the USD/EUR exchange rate has shown large divergencies. I remember that from 1980 (Carter) to 1985 (Reagan) the USD almost doubled relative to the Deutsche Mark.

 

When the Euro was born, the Euro/USD was close to parity and at some point the Euro was worth 1.46 USD and now we are back to parity basically. So, yes other forces are driving Exchange rate as well, but over the long run, I think relative buying power changes (which are driven by inflation) are the major driver.

Edited August 30, 2022 by Spekulatius

[Madpawn]

I want to jump into the FIH ship but its fees structure makes me lean towards buying more of FFH. Thoughts?

[TwoCitiesCapital]

3 hours ago, Madpawn said:

I want to jump into the FIH ship but its fees structure makes me lean towards buying more of FFH. Thoughts?

 

I think the discount to NAV is like getting the fees for free for the next decade plus at this point. 

[SafetyinNumbers]

It also seems like some free optionality on more share buybacks and potentially a going private by FFH. 

 

[ICUMD]

13 hours ago, SafetyinNumbers said:

It also seems like some free optionality on more share buybacks and potentially a going private by FFH. 

 

I'm curious to know how much Fairfax would offer in a privatization scenario.  I suspect it would be less than BV.  Maybe $16/share?

[hardcorevalue]

1 hour ago, ICUMD said:

I'm curious to know how much Fairfax would offer in a privatization scenario.  I suspect it would be less than BV.  Maybe $16/share?

 

if it’s anything less than NAV you will see a riot on this forum 

[Viking]

I think the most likely scenario is Fairfax India continues to buy back shares. When the ICICI Wealth sale happens they will be flush with cash. Fairfax owns a little over 40%. Is there a limit to how high Fairfax’s ownership can go before they are forced/required to take out all the shares of Fairfax India? 
—————

i was adding to my small position in Fairfax India on Friday at under $10. If Fairfax decided they wanted to take Fairfax India private at $15 i would do a happy dance. I would be happy to take a 35-40% gain (on my average cost) and roll the proceeds into Fairfax (my holding is in a tax free account). 
—————

Fairfax India is an exceptionally well run business. And it is a broken stock. This happens. The problem for Fairfax India is how does it scale? The rational thing to do today is buy back all the shares they can… the problem is this is shrinking the company. And lack of liquidity is probably one of the biggest reasons the stock is so cheap; buying back stock makes this problem worse. But how does Fairfax India get another $1 or 2 billion to scale? The management team there deserves to have more $ to manage - based on their track record.
—————

We KNOW Prem wants to invest significant $ in India in the coming years (i think he said something like $5 billion). Now this will likely include partners (OMERS, CCIB ETC). The question is how does this investment happen? 
—————

Fairfax India reminds me of Brookfield Property Partners. Brookfield eventually did the obvious - took it private at a big discount. 

[TwoCitiesCapital]

3 hours ago, Viking said:

I think the most likely scenario is Fairfax India continues to buy back shares. When the ICICI Wealth sale happens they will be flush with cash. Fairfax owns a little over 40%. Is there a limit to how high Fairfax’s ownership can go before they are forced/required to take out all the shares of Fairfax India? 
—————

i was adding to my small position in Fairfax India on Friday at under $10. If Fairfax decided they wanted to take Fairfax India private at $15 i would do a happy dance. I would be happy to take a 35-40% gain (on my average cost) and roll the proceeds into Fairfax (my holding is in a tax free account). 
—————

Fairfax India is an exceptionally well run business. And it is a broken stock. This happens. The problem for Fairfax India is how does it scale? The rational thing to do today is buy back all the shares they can… the problem is this is shrinking the company. And lack of liquidity is probably one of the biggest reasons the stock is so cheap; buying back stock makes this problem worse. But how does Fairfax India get another $1 or 2 billion to scale? The management team there deserves to have more $ to manage - based on their track record.
—————

We KNOW Prem wants to invest significant $ in India in the coming years (i think he said something like $5 billion). Now this will likely include partners (OMERS, CCIB ETC). The question is how does this investment happen? 
—————

Fairfax India reminds me of Brookfield Property Partners. Brookfield eventually did the obvious - took it private at a big discount. 

 

I dunno. I quite like it as a public vehicle. Take out shares at a discount. Crush the market with NAV compounding. And issue new shares at NAV when institutional partners want to get in for that performance in size OR when sentiment shifts back to being positive as it was when this IPOd. 

[Xerxes]

Viking,

 

During the 2018 AGM, Prem specifically said that FIH and FAH were built as independent vehicle and FFH wants them as far as away from us (FFH). I suscinctly recall, he contrasting them with the "explorer ships", so that if they go down they dont take mothership.

 

I dont know how much 'salesmanship' was in those statement, and how that perceived risk and/or regulatory landscape changed, but this is very different than Brookfield Properties where it was created purely to have a currency, just like Brookfield is doing it again now with the "Manager" of BAM.

 

For FFH, the creation of FIH was primiarlly for risk-management tool (and as currency tool as secondary objective) whereas for Brookfield it was primiarlly to have it as a M&A currency (which in turn made total sense to buy it back since that currency undervalues the NAV and was no longer doing its prime objective).

 

Naturally the question would be, if with the deep discount that FIH is trading at, is that 'perceived' risk less so for FFH. And I think that is a fair question. 

Edited September 19, 2022 by Xerxes

[glider3834]

5 hours ago, Viking said:

When the ICICI Wealth sale happens they will be flush with cash.

unconfirmed at this stage but there are press reports suggesting Fairchem stake is being shopped

https://www.livemint.com/companies/news/fairfax-india-to-exit-fairchem-organics-11663267206298.html

[nwoodman]

46 minutes ago, glider3834 said:

unconfirmed at this stage but there are press reports suggesting Fairchem stake is being shopped

https://www.livemint.com/companies/news/fairfax-india-to-exit-fairchem-organics-11663267206298.html

 Interesting that the article claims a premium on the sale?  Control premium?

 

Current market cap 29.15 INR => USD365m @52.8% = USD192m.  So if the premium applies this could net around USD250m ex tax.  Not too shabby considering the entirety of Fairfax India is quoted at USD1.37B

 

https://www.google.com/finance/quote/543252:BOM?sa=X&ved=2ahUKEwjG8der96H6AhW0_DgGHTnrC1kQ3ecFegQIIxAg&window=MAX

[Viking]

Fairfax India finished Q2 with about $200 million in cash. IIFL Wealth, when it closes, will bring in a little less than $200 million. If sold Fairchem Organics could bring in another +$200 million. $600 million in cash… that is a lot! What to do? Buy something big that will meaningfully grow future BV? Or do a Stelco sized dutch auction (30 million shares) at $13 (crazy low price si it is very accretive)?

[nwoodman]

Fair chance they are raising cash for a crack at IDBI bank.  41m Cr => USD5.15Bn.  This would give them short-term indigestion but perhaps side agreements with the other consortium members to buy them out over, say, five years.  Certainly fits with the  FFH  spiel of investing roughly that amount in the foreseeable future.    

 

Govt taps TPG, Carlyle, Fairfax for IDBI Bank stake sale - The Economic Times Video | ET Now

CSB Bank stock is a good buy for portfolio investors - The Sunday Guardian Live

 

If this comes to pass, then they could make a "lotta money".  Not without its risks, of course, but damn, there have been fortunes made picking up these types of government assets.

 

 

Edited September 20, 2022 by nwoodman

[ICUMD]

So Omers is very much participating in Fairfax India.  

 

Wondering what their game plan is for extracting value from this company?  At some point, they will need a market valuation and liquidity or buyout to realize gains.  

 

Are they sitting with a preferred position relative to retail shareholders?  Is there anything I'm missing?

[ICUMD]

NCIB 2022-23 Question

 

https://ca.finance.yahoo.com/news/fairfax-india-announces-intention-normal-115000053.html

 

Appears that Fairfax India is buying back up to 5.8 million shares. Or about 10% of the float over the next year.  They are allowed to purchase up to 7000 shares per day, which represents about 25% of the average prior trading volume.  

 

If we multiply 260 trading days x 7000 = 1.8 million shares buyback.

 

How do they intend to purchase the additional 4 million shares on the open market?  Does that imply a Dutch auction?  

[StubbleJumper]

3 minutes ago, ICUMD said:

How do they intend to purchase the additional 4 million shares on the open market?  Does that imply a Dutch auction?  

 

They probably have no intention to buy back that many shares.  The NCIB filing is just an annual formality, and at the end of most years, it bears no resemblance to reality (last year's filing gave them the ability to buy back 3.5 million shares).  It's a little like the annual shelf prospectus that FFH files.  It gives the company the flexibility to rapidly respond to changing market conditions, but we shouldn't really expect those filings to be used to their maximum potential.

 

But yes, if FIH does actually want to undertake meaningful repurchases, a SIB will have to be the tool.  As you've quite rightly pointed out, the limit of 7k shares per day from the NCIB would mean it would take an eternity to spend US$20m.

 

 

SJ

[Crip1]

Ummm...up 10% today on seemingly normal volume with no news that I can see. What did I miss?

 

-Crip

[netcash1]

Fairfax India up and Fairfax Hold Co sharply lower...Go figure