Fairfax India new issue

[Haryana]

Not much exclusive about action against IIFL, it looks like part of a recent series that is currently ongoing -

 

https://indianexpress.com/article/explained/explained-economics/rbi-paytm-causes-effects-9137548/

 

https://www.businesstoday.in/industry/banks/story/after-iifl-rbi-bars-jm-financial-from-doing-any-new-financing-serious-deficiencies-in-loans-for-ipo-financing-420212-2024-03-05

 

https://www.ibtimes.co.in/rbi-slaps-fines-bank-india-bandhan-bank-breach-rules-866741

 

https://www.fortuneindia.com/investing/federal-bank-south-indian-bank-shares-plunge-up-to-5-on-rbi-action/116146

 

[ICUMD]

All of this is excellent imo.  RBI oversight and review will help improve the quality and transparency of these businesses over the long run. This is necessary to attract FDI.

 

Through the vetting process, the value of underlying businesses increases.

 

 

[ICUMD]

https://www.business-standard.com/companies/news/canada-based-firm-fairfax-offers-all-cash-deal-to-acquire-idbi-bank-124031800325_1.html

[This2ShallPass]

"Because of the significant underachievement of passenger traffic in the last year of the second control period and the intended completion of capital projects during the third control period (from April 2021 to March 2026), UDFs were expected to increase significantly in the third control period.With the higher UDFs and the ultimate return of passenger volumes to pre-pandemic growth levels, aero revenue was expected to return to normal levels at some point during the fiscal year ending March 2024. Based on current traffic volumes, this looks likely to happen."

 

From annual letter. We are 3 years into the third control period, when they say UDFs are expected to increase, do they not know yet or am I reading too much into it? I wouldn't be surprised given India's lumbering bureaucracy..

[ICUMD]

7 hours ago, This2ShallPass said:

"Because of the significant underachievement of passenger traffic in the last year of the second control period and the intended completion of capital projects during the third control period (from April 2021 to March 2026), UDFs were expected to increase significantly in the third control period.With the higher UDFs and the ultimate return of passenger volumes to pre-pandemic growth levels, aero revenue was expected to return to normal levels at some point during the fiscal year ending March 2024. Based on current traffic volumes, this looks likely to happen."

 

From annual letter. We are 3 years into the third control period, when they say UDFs are expected to increase, do they not know yet or am I reading too much into it? I wouldn't be surprised given India's lumbering bureaucracy..

I've also not been able to get clarity on whether or not the UDFs were being recalculated in each control period as per the contractual agreement.  

 

In their reports, there is never any confirmation the UDF was paid as per the agreement.  Only vague statements. Recalculation was especially important during the pandemic.

Edited March 30 by ICUMD

[giulio]

https://www.joincolossus.com/episodes/83022007/hansen-the-long-short-of-investing

 

interesting discussion on India, around min 50.

It shows the advantages FIH has by being on the ground.

[giulio]

https://www.business-standard.com/markets/capital-market-news/iifl-finance-spurts-17-in-five-days-to-acquire-minority-stake-in-nse-124040500746_1.html

Small consolation.

I still have mixed feelings about FIH selling their NSE stake. I hope they can put the money to work in even better opportunities.

[giulio]

Here are my notes on the 2024 FIH agm that just finished:

• Something worth keeping in mind -> in 2023 they bought back 2.9M shares, the share price was up 24%; yet, $14.9 is exactly the same price at which they completed a SIB back in 2021. A lot has happened in 3 years...
• slide 28 is a nice summary of the impact of fees on returns
• BIAL will see "explosive" growth in the next years
  • huge number of aircraft ordered by indian airlines (1200?)
  • number of operating airports expected to roughly 2x to. 250 (?)
  • Air India established its 2nd HUB in BIAL -> increase in international flights (EU/US) + other flights from other parts of India
• Watsa said that there are lots of structure that you can set up to raise money for big opportunities; seemed very confident that money will not be a problem for FIH
• Sold NSE because valuation was too high and they saw downside risk given that NSE makes a lot of profit from options trading
• IIFL gold loans issues -> founder said there were minor "lapses", IIFL was used to set an example for others. He said they addressed all the issues raised by RBI and hope that RBI audit will confirm this (April 12th start)
  • no fraud, no money laundering 
• Lots of emphasis on the financial sector opportunity -> 7% real growth, 12% nominal, financials should grow at 1.5-2x the nominal = 18%
• I am not sure I got this correctly but Watsa said something like "we are targeting 20% rate of return, not 10-15%, need to offset some fx risk"
• Sanmar had a terrible year with PVC prices down 30-60%
  • improved efficiency in Egypt 
  • focus on specialty PVC
  • growth ahead -> China has similar population to India and uses 20M tonnes per year vs India's 4M tonnes per year
• Maxop and Jaynix -> "unlimited growth", their only constraint is capacity and they are expanding, huge demand
• Anchorage still stuck in regulatory approval, nothing will move before the election (I would expect nothing before 2025)
• Privatization opportunities will unlock after the election 

all in all, great enthusiasm as always. focused on integrity.

Deepak Parekh (founder of HDFC) is their consultant for everything and this is a HUGE plus in my view. 

 

Curious if any of the guys who attended in person were able to gain other insights.

 

G

[MMM20]

6 minutes ago, giulio said:

I am not sure I got this correctly but Watsa said something like "we are targeting 20% rate of return, not 10-15%, need to offset some fx risk"

 

Makes sense purely on inflation differentials if you're a long-term investor thinking/reporting in USD.

 

Edited April 10 by MMM20

[UK]

21 minutes ago, giulio said:

Here are my notes on the 2024 FIH agm that just finished:

• Something worth keeping in mind -> in 2023 they bought back 2.9M shares, the share price was up 24%; yet, $14.9 is exactly the same price at which they completed a SIB back in 2021. A lot has happened in 3 years...
• slide 28 is a nice summary of the impact of fees on returns
• BIAL will see "explosive" growth in the next years
  • huge number of aircraft ordered by indian airlines (1200?)
  • number of operating airports expected to roughly 2x to. 250 (?)
  • Air India established its 2nd HUB in BIAL -> increase in international flights (EU/US) + other flights from other parts of India
• Watsa said that there are lots of structure that you can set up to raise money for big opportunities; seemed very confident that money will not be a problem for FIH
• Sold NSE because valuation was too high and they saw downside risk given that NSE makes a lot of profit from options trading
• IIFL gold loans issues -> founder said there were minor "lapses", IIFL was used to set an example for others. He said they addressed all the issues raised by RBI and hope that RBI audit will confirm this (April 12th start)
  • no fraud, no money laundering 
• Lots of emphasis on the financial sector opportunity -> 7% real growth, 12% nominal, financials should grow at 1.5-2x the nominal = 18%
• I am not sure I got this correctly but Watsa said something like "we are targeting 20% rate of return, not 10-15%, need to offset some fx risk"
• Sanmar had a terrible year with PVC prices down 30-60%
  • improved efficiency in Egypt 
  • focus on specialty PVC
  • growth ahead -> China has similar population to India and uses 20M tonnes per year vs India's 4M tonnes per year
• Maxop and Jaynix -> "unlimited growth", their only constraint is capacity and they are expanding, huge demand
• Anchorage still stuck in regulatory approval, nothing will move before the election (I would expect nothing before 2025)
• Privatization opportunities will unlock after the election 

all in all, great enthusiasm as always. focused on integrity.

Deepak Parekh (founder of HDFC) is their consultant for everything and this is a HUGE plus in my view. 

 

Curious if any of the guys who attended in person were able to gain other insights.

 

G

 

Thanks!

[ICUMD]

@giulio  thanks for the excellent summary.

 

My main thoughts attending the meeting online were

 

1. Air India making BIAL a secondary hub is a game changer.  All of a sudden you are guaranteed international connectivity and incr passenger volumes. This will translate into huge revenue streams, esp for their non aero businesses.  International passengers have much deeper pockets than domestic, on average.

 

2. Financial services can grow faster than infrastructure developments.  IDBI, if they can cinch the deal under Fairfax India, would be the next game changer.  Hopefully announcement on this will happen after Indian elections close in June.

 

3. Anchorage 

Doesn't seem to be a huge priority, though I could be mistaken.

 

4. SIB

Doesn't seem to be in the works.

They are apparently happy picking up shares on the market.

 

 

[Xerxes]

I ll add a comment on BIAL, both because it was (to my great pleasure) mentioned on the call by the CEO of the airport, and as well in previous non-Fairfax related links that I posted in the past on potential wide-body overcapacity glut in the future. 
 

India’ underinvestment in airport capacity in the 90s was a huge tailwind for the Gulf super-connectors (I.e Emirates, Qatar and the failing Etihad). It helped them grow.
 

India can claw back that passenger-traffic that is rightly theirs and take share from other destinations. 
 

This would be zero sum game for the Emirates of the world. As over the next decades both Saudi Arabia and India take up the mantle and build super-connectors. And not to mention their domestic markets. 
 

A secondly effect of that would be a glut at global level for wide-bodies. But that is not our problem. 

[giulio]

I got the same impression wrt Anchorage which is strange because 1) they said that Anchorage will own the entire bial stake eventually, 2) if they are going to bid when other infrastructure assets get privatized they should have a structure in place.

Iirc they should list bial by September 25, but given their partner in Anchorage I guess they can renegotiate that.

 

On the sib. Watsa said "we are buying shares in the market" numerous time. Truth is they haven't bought any in 2024 (while ffh has been more active). Last purchase was in November.

They are preserving cash, maybe something good will happen in H2.

[value_hunter]

They bough some in Mar.

https://ceo.ca/api/sedi/?symbol=fih&amount=&transaction=&insider=

[nwoodman]

Interesting Article in Mint on the future plans for Airport Privitisation in india.  Apologies for the lack of a link but the app is a bit of a pain

 

Airport privatization 3.0: Here are the 13 candidates

An increasing number of airports in India will sport private-sector owners, as the country's state-owned airport operator prepares a plan to privatize 13 more airports in the coming months, and also sell its residual stake in the bigger airports of Bengaluru and Hyderabad, according to two senior officials aware of the matter.

Airports Authority of India (AAI) plans to kick off the third phase of airport privatization after the general elections, beginning with offloading its remaining 13% stake in Bangalore International Airport Ltd (BIAL) this year, the officials said on condition of anonymity.

 

A track record cannot be understated

[nwoodman]

Bengaluru, April 16, 2024: During FY 2023-2024, Kempegowda International Airport Bengaluru (KIAB / BLR Airport) witnessed the highest-ever annual passenger traffic and cargo numbers, with a total of 37.53 million passengers traversing through its terminals and 439,524 metric tonnes (MT) of cargo passing through the BLR Airport. BLR Airport catered to 32.86 million domestic passengers and 4.67 million international passengers during this period.

 

"As we reflect on the past financial year, it's been a landmark period with the highest passenger and cargo figures ever recorded in our airport's history. We've also seen an increase in the number of airlines as well as destinations we connect to. Our position as the No.1 Airport for processing perishable cargo for the third consecutive year highlights our steadfast commitment to advancing cargo development facilities. With the successful launch of Terminal 2 (T2) and partnerships with leading airlines and cargo operators, we are poised to solidify our position as the premier gateway to South and Central India." said Satyaki Raghunath, Chief Operating Officer at Bangalore International Airport Limited.

 

 

https://www.bengaluruairport.com/corporate/media/news-press-releases/blr-airport-records-the-highest-ever-passenger-traffic-with------million-travellers-in-fy----

[Haryana]

Notwithstanding the incredulity and creditworthlessness of AI -

 

https://www.theglobeandmail.com/investing/markets/stocks/FIH-U-T/pressreleases/25623367/25623367/

Fairfax India Holdings: Top 10 Undervalued Mid Cap Stocks on TSX (FIH-U)

Globe Investor - AI-generated - The Globe and Mail - Sat Apr 20, 7:24PM CDT

 

Fairfax India Holdings is now ranked among the top 10 mid cap stocks on the Toronto Stock Exchange.

• A stock is considered undervalued if it trades at a discount to its valuation – a calculation used to determine the intrinsic (true) worth of a company

[Gamma78]

Interesting article this morning. Wonder if they will start to get concessions after all....

 

https://www.thehindubusinessline.com/economy/logistics/adani-gmr-and-fairfax-in-pre-bid-process-to-develop-puri-airport/article68110793.ece

[gfp]

Press release for Fairfax India

https://www.globenewswire.com/news-release/2024/05/02/2874791/0/en/Fairfax-India-Holdings-Corporation-First-Quarter-Financial-Results.html

 

This PDF is better:

https://www.fairfaxindia.ca/wp-content/uploads/2024_05_May_02-PRFIH-Q1-2024-Press-Release-Final.pdf

Edited May 2 by gfp

[This2ShallPass]

On 5/2/2024 at 2:23 PM, gfp said:

Press release for Fairfax India

https://www.globenewswire.com/news-release/2024/05/02/2874791/0/en/Fairfax-India-Holdings-Corporation-First-Quarter-Financial-Results.html

 

This PDF is better:

https://www.fairfaxindia.ca/wp-content/uploads/2024_05_May_02-PRFIH-Q1-2024-Press-Release-Final.pdf

Terrible quarter - public equities down 25% and private investments down 6% when Sensex was up 2%. Silver lining, discount is closing. Not exactly the way you want it to happen by BV going down 10% Also, their private investment valuations seem pretty conservative, so less risk of a downside surprise there.

 

IIFL finance involved in something fraud related. they're of course downplaying it but getting banned by the regulator is a clear sign. Not sure why Fairfax doubled down by providing line of credit.

 

Bottom 6 positions all worth only 10% of pf ($270M total, equal to Sanmar). They're all slow growers / bad industries - discount rate ranging from 13 to 28% and growth rates 1.5-5%. Investment thesis on these unclear, just distraction for management.

 

I reduced my position by 30% early this year. BIAL setup is great, I'm waiting for Anchorage IPO to move out of Fairfax India fully. 

 

[Viking]

50 minutes ago, This2ShallPass said:

Terrible quarter - public equities down 25% and private investments down 6% when Sensex was up 2%. Silver lining, discount is closing. Not exactly the way you want it to happen by BV going down 10% Also, their private investment valuations seem pretty conservative, so less risk of a downside surprise there.

 

IIFL finance involved in something fraud related. they're of course downplaying it but getting banned by the regulator is a clear sign. Not sure why Fairfax doubled down by providing line of credit.

 

Bottom 6 positions all worth only 10% of pf ($270M total, equal to Sanmar). They're all slow growers / bad industries - discount rate ranging from 13 to 28% and growth rates 1.5-5%. Investment thesis on these unclear, just distraction for management.

 

I reduced my position by 30% early this year. BIAL setup is great, I'm waiting for Anchorage IPO to move out of Fairfax India fully. 

I do not follow Fairfax India as closely as i follow Fairfax. The big near term issue that i see is IIFL Finance - but this has been out there for months now so it should not have come as a surprise when Fairfax India reported results. 
 

What did surprise me is the explanation of the current issues the founder of IIFL, Nirmal Jain, gave at the Fairfax India AGM (see quote below). The answer he gave might come across as funny to an audience in India. I don’t think it’s the right kind of humour to use when explaining a serious problem to an audience in North America. Hopefully Fairfax uses this as an example internally of probably what not to do in the future.

—————-

“So RBI does (our) audit, and they've been doing it for the last 16 years of our company's existence. And this year, they found a few lapses. And based on that, we're a bit surprised because the order came, which was a complete embargo on our gold loan business. And of course, there were lapses. So I can't say that it's something which is -- we are doing everything which was in full compliance of their master circular.

“But many of these things that we are doing were also industry practice. So maybe I can give analogy. I mean I don't know many of you would have traveled to India there, the traffic rules are hardly followed. The people obviously. Now -- but if you are in Canada, U.S. everywhere, then you see that even if the other side is empty and there's a 3-mile traffic jam, people still won't break the lane because somewhere -- some point in time, regulators enforce the regulations very strictly.

“So what happens that in traffic police officer catch hold of somebody and sort of make him an example. And if we have a view, then I don't think that we can really crib about it, but I'll just talk about it that what happened and how we are going to overcome.”

[nwoodman]

Finally found some time to run some summaries for FIH

 

 

Overview

 

Here are the key points from Fairfax India's Q1 2024 interim report:

Financial Performance:
- Net loss of $293.2 million in Q1 2024 compared to net loss of $51.6 million in Q1 2023. The increase in net loss was primarily due to higher unrealized losses on investments. 
- Book value per share decreased by 10.1% from $21.85 at December 31, 2023 to $19.65 at March 31, 2024.

Investment Activity: 
- During Q1 2024, the company completed the sale of 70.1% of its equity interest in NSE for proceeds of $132.3 million, resulting in realized gains of $117.1 million. The remaining NSE shares were sold in April 2024.
- Net change in unrealized losses on investments of $410.9 million, driven mainly by market price declines of Public Indian Investments. 

 

2. Key Events:
- On March 4, 2024, IIFL Finance was ordered by the RBI to cease gold loan origination due to supervisory concerns, resulting in a 43% decline in IIFL Finance's share price in Q1.  
- Subsequent to quarter-end, Fairfax India agreed to participate in IIFL Finance's rights issue and provide liquidity support along with Fairfax if needed.

 

3.Valuation Impact:
- The fair values of Fairfax India's Private Indian Investments were negatively impacted in Q1, including a decrease in the fair value of Sanmar mainly due to a decline in the share price of its publicly listed subsidiary.
- The fair value of BIAL was relatively unchanged, supported by a transaction in 2023 where Fairfax India acquired an additional 10% equity interest in BIAL at an implied $2.5 billion valuation for the whole company.

 

4.Liquidity:
- Fairfax India's cash and investments provide adequate liquidity to meet its obligations. Cash decreased to $29.4 million at March 31, 2024 mainly due to settlement of the performance fee payable.
- Proceeds from the NSE share sale in Q1 and Q2 2024 provide additional liquidity.

 

In summary, Fairfax India experienced a challenging Q1 with significant unrealized investment losses, though its key holdings like BIAL remain resilient. The company maintains adequate liquidity supported by investment sales.

 

The airport 

 

Based on the information provided in Fairfax India's Q1 2024 interim report, the following key insights can be gleaned about Bangalore International Airport Limited (BIAL):

 

1. Valuation Insight:
The fair value of Fairfax India's investment in BIAL remained relatively unchanged at approximately $1.6 billion as of March 31, 2024 compared to December 31, 2023. This valuation was supported by a transaction in 2023 where Fairfax India acquired an additional 10% equity interest in BIAL from Siemens. The transaction implied a fair value for 100% of BIAL of approximately $2.5 billion.

 

2. Ownership:
As of March 31, 2024, Fairfax India held a 64.0% equity interest in BIAL. A portion of this interest (43.6%) is held through Anchorage, a consolidated subsidiary. This results in Fairfax India having an effective 59.0% fully-diluted equity interest in BIAL.

 

3. Financial Commentary:
The interim report provides some high-level financial information for BIAL for the nine months ended December 31, 2023:

- Revenues increased to $243.0 million from $167.3 million in the prior year period, reflecting higher aeronautical revenues from increased tariffs and passenger traffic.

- EBITDA increased to $158.7 million from $104.9 million, driven by the higher revenues, partially offset by increased expenses related to the new Terminal 2.

- BIAL reported a net loss of $9.0 million compared to net earnings of $5.8 million in the prior period, mainly due to higher depreciation and interest expenses from the operationalization of Terminal 2 during 2023.

 

So in summary, while BIAL's valuation remained steady, supported by a recent transaction, its financial results reflected a mix of positive revenue growth offset by higher costs and financing expenses related to its major expansion with the launch of Terminal 2. The management commentary indicates BIAL expects to see continued growth in passenger traffic.

 

 

[Junior R]

When does everyone think Anchorage Infrastructure will IPO?

[ICUMD]

40 minutes ago, juniorr said:

When does everyone think Anchorage Infrastructure will IPO?

Not seeing this event being on the near term horizon based on inference from the Annual Meeting.  Could be a few years out still.

[SafetyinNumbers]

1 hour ago, ICUMD said:

Not seeing this event being on the near term horizon based on inference from the Annual Meeting.  Could be a few years out still.

I had the exact opposite take. My guess is odds are better than 50% it happens in the next 12 months. Perhaps a few other things too as the election seems to be a catalyst. The below is from the AGM transcript.