Fairfax India new issue

[SafetyinNumbers]

3 hours ago, ICUMD said:

Initially around 75%, down to 10-12% at sale time.

 

Congrats on ~7x your portfolio despite the initial positioning. 

The world changed a lot in 8 years from a market structure perspective and FIH was on the wrong side of that. 8 years ago FIH traded at a premium to book value. Since then, institutions are much less likely to own stocks not in their benchmark and that don’t pass their quant screens. FIH fails on both. Passive investing has grown exponentially in the past 8 years as well. India ETFs get the nod for India exposure and FIH isn’t even in the conversation. 
 

Taking out the IPO costs which were one time in nature, the BV has compounded ~10% after fees. If marked at IV, it’s at least a few percentage points higher. That should be an acceptable rate of return but investors can’t sell intrinsic value. The company and the parent have at least bought shares  otherwise the discount might be even bigger (more supply after all). 
 

It’s a much different investment than it was eight years ago as it trades at a big discount to BV instead of a premium. IV has had time to grow even faster than BV so that gap has widened considerably from 8 years ago improving the margin of safety that much more.

 

FIH is a 4% position for me, not because I expect the discount to close, but because I expect BV growth to accelerate. Because of the big discount, a 33% increase in the BV on the IPO of BIAL, for example, may result in a 50% increase in the share price if the discount remains consistent but of course it might grow. If the discount grows, I expect buybacks will eventually help sop up the extra shares increasing long term returns. 
 

I was pretty excited about FIH post the AGM as it seems like they were confident once the Indian election was complete that BIAL had a better chance of approval. If it doesn’t happen in the next 12 months, the opportunity cost of holding FIH over FFH (or some other alternative) was probably too high. Based on the discount, most investors have already reached that conclusion. 

 

[ICUMD]

5 hours ago, SafetyinNumbers said:

investors can’t sell intrinsic value

That's the issue I struggled with.

 

It boils down to management and how they go about translating IV / BV to market value.

 

For the greater part of 8 yrs, they have not been able to execute while they collect their fees based on BV.  

 

Not supporting share price during this time with aggressive buybacks is not investor friendly. 

 

The other catalyst - the privatization of BIAL through Anchorage seems to be always just around the corner for the last 3-4 yrs

 

Even if the share price rises to $25 overnight, that would be a poor 8 yr return.  

 

Many other options in the investible universe with better management.

 

[73 Reds]

18 minutes ago, ICUMD said:

That's the issue I struggled with.

 

It boils down to management and how they go about translating IV / BV to market value.

 

For the greater part of 8 yrs, they have not been able to execute while they collect their fees based on BV.  

 

Not supporting share price during this time with aggressive buybacks is not investor friendly. 

 

The other catalyst - the privatization of BIAL through Anchorage seems to be always just around the corner for the last 3-4 yrs

 

Even if the share price rises to $25 overnight, that would be a poor 8 yr return.  

 

Many other options in the investible universe with better management.

 

This discussion demonstrates some of the issues involved with "value investing".  As prior posters have mentioned, proper sizing is important, along with properly discounting management that may have a history of not always acting in the best interests of minority shareholders and/or failing to unlock value.  Personally, I own shares of Fairfax India but  few enough shares that capital allocation by management or the timing of an IPO is not terribly important.  For me, there are times when parking money in these types of investments is superior to riskier investments where there is a significant opportunity for loss and capital impairment.  

[dartmonkey]

2 hours ago, ICUMD said:

Even if the share price rises to $25 overnight, that would be a poor 8 yr return.  

$25 would be 1.2x book, sounds like we are already there, for fair value, and that would be 12% p.a. If BIAL is worth anything like its peers, maybe $35, or 16% p.a.  

 

Hypothetical fair value doesn’t pay the mortgage, but since I can afford to wait, with catalysts just around the corner (famous last words), it seems like it would be a shame to fold my cards now. 

[SafetyinNumbers]

22 minutes ago, dartmonkey said:

$25 would be 1.2x book, sounds like we are already there, for fair value, and that would be 12% p.a. If BIAL is worth anything like its peers, maybe $35, or 16% p.a.  

 

Hypothetical fair value doesn’t pay the mortgage, but since I can afford to wait, with catalysts just around the corner (famous last words), it seems like it would be a shame to fold my cards now. 

8 years ago there was no margin of safety but now it’s incredibly high. Price is what you pay, value is what you get (WB).

[Viking]

3 hours ago, SafetyinNumbers said:

8 years ago there was no margin of safety but now it’s incredibly high. Price is what you pay, value is what you get (WB).

I think that might be the real lesson here. Buying Fairfax India at book value (or at a premium)g it appears there was little margin of safety. The emotional toll has also been significant for some long term holders. 
 

The stock today has a margin of safety. Importantly, a new investor also does not carry the emotional baggage of some long term investors. 
 

It really is an interesting case-study. Importantly, the most important chapters of the story are still being written (like BIAL) or have yet to be written.

Edited September 15, 2024 by Viking

[Txvestor]

I considered buying at the IPO and chose other opportunities at the time as I wanted to give the India story more time to play out. I initiated a 2% position last year and added a little to it this year. Averaging in at $13.3. I considered it a 67c dollar, with strong downside protection and a bet on continuing growth of the Indian economy. BIAL is clearly the crown jewel, but there are others. While I agree that management hasn't got it all right, there were also some hits from Covid to their travel and leisure(Thomas cook) as well as staffing companies(Quess) that were beyond management control. At any rate they are cheap, are positioned in potentially good growth assets, have a couple of potential catalysts to unlock value, and give me exposure to India which I lack elsewhere. I'd be OK with a 12-14% annual compounding return over the next 10yrs. I think if that happens and we get a closure on the BV to share price, we could have a 5x. I think there's a healthy chance that happens. I don't see that as likely in the Fairfax mothership. We'd be lucky to see 1/2 of that returns.
Granted I didn't wait through the agony so maybe I am lucky or naive. But that's why I am not ploughing these funds into Fairfax. 

[Haryana]

5 minutes ago, Txvestor said:

I considered buying at the IPO and chose other opportunities at the time as I wanted to give the India story more time to play out. I initiated a 2% position last year and added a little to it this year. Averaging in at $13.3. I considered it a 67c dollar, with strong downside protection and a bet on continuing growth of the Indian economy. BIAL is clearly the crown jewel, but there are others. While I agree that management hasn't got it all right, there were also some hits from Covid to their travel and leisure(Thomas cook) as well as staffing companies(Quess) that were beyond management control. At any rate they are cheap, are positioned in potentially good growth assets, have a couple of potential catalysts to unlock value, and give me exposure to India which I lack elsewhere. I'd be OK with a 12-14% annual compounding return over the next 10yrs. I think if that happens and we get a closure on the BV to share price, we could have a 5x. I think there's a healthy chance that happens. I don't see that as likely in the Fairfax mothership. We'd be lucky to see 1/2 of that returns.
Granted I didn't wait through the agony so maybe I am lucky or naive. But that's why I am not ploughing these funds into Fairfax. 

 

You may like to open their annual report once in a while so you will know they don't own any Quess or Thomas Cook in the Fairfax India. 

 

[Txvestor]

1 hour ago, Haryana said:

 

You may like to open their annual report once in a while so you will know they don't own any Quess or Thomas Cook in the Fairfax India. 

 

Thanks for pointing out. Clearly reading both the annual letters caused some confusion in my head. 
Anyway, my larger point remains, currently all but 1-2 of their companies seem to be doing well and I think the case for a good next 10yrs is a solid one. With Fairfax, which is a core position for me, what happens after the next 4yrs is more murky, 

[UK]

22 hours ago, Txvestor said:

I'd be OK with a 12-14% annual compounding return over the next 10yrs. I think if that happens and we get a closure on the BV to share price, we could have a 5x. I think there's a healthy chance that happens. I don't see that as likely in the Fairfax mothership. We'd be lucky to see 1/2 of that returns.

 

Interesting. So with some (or more than some) luck you expect 17+ percent CAGR for the next 10 years from FIH (btw what was the CAGR of BV of FIH over the last 10 years?), while only 8-9 percent from FFH, but you own 2 percent in FIH and, I assume, since it is core, much more in FFH? Do I get this right? 

 

Edited September 16, 2024 by UK

[Haryana]

21 hours ago, Txvestor said:

Thanks for pointing out. Clearly reading both the annual letters caused some confusion in my head. 
Anyway, my larger point remains, currently all but 1-2 of their companies seem to be doing well and I think the case for a good next 10yrs is a solid one. With Fairfax, which is a core position for me, what happens after the next 4yrs is more murky, 

 

Thank you for the conversation. 

 

I like your point that FIH has good high value positions like IIFL and CSB bank other than the main of BIAL. 

 

I see a parallel of IV accrual with Fairfax of four five years ago.

 

Just like they were showing discipline by keeping low duration despite the complains and cries, in FIH they are staying put with value positions without running after the hot sectors of the day. Their positions are out of favour at the moment but they have the patience to let them get fairly priced. Not running after acquiring any over priced companies is the most important thing they are doing at the moment. We tend to complain for lack of action because it is boring but good investing is boring, a virtue. 

 

One of their tiny ventures in those three manufacturing or engineering companies could become a Digit like superstar within the next few years. 

 

[Haryana]

On 9/14/2024 at 3:23 PM, SafetyinNumbers said:

8 years ago there was no margin of safety but now it’s incredibly high. Price is what you pay, value is what you get (WB).

 

At ipo time, there was extra optimism about them. A time of greed. 

Currently, there is extra pessimism about them. A time of fear. 

[Haryana]

On 9/8/2024 at 1:48 AM, This2ShallPass said:

...

What's their strategy? Are they going big or small? Do they want to be in industries that are seeing a boom in India or slow traditional ones?

 

 

Would it answer your question if I quote Warren Buffett quoting this:

 

Woody Allen once explained why eclecticism works: “The real advantage of being bisexual is that it doubles your chances for a date on Saturday night.” 

Over the years, we’ve been Woody-like in our thinking, ...

[SafetyinNumbers]

7 hours ago, Haryana said:

 

At ipo time, there was extra optimism about them. A time of greed. 

Currently, there is extra pessimism about them. A time of fear. 

Does that mean you think FIH gets to a premium to book again? If so, how long will it take?

[Haryana]

58 minutes ago, SafetyinNumbers said:

Does that mean you think FIH gets to a premium to book again? If so, how long will it take?

 

In terms of cycles, theoretically, we swing between greed and fear. The optimism may take upto ten years to come back. However, the entity lacks the full characteristics of an asset, it can go to zero before that happens. 

 

One possiible scenario is that Canada seizes all assets of those Canadians who are of Indian origin including the residents and citizens. This already happened to Japanese during WW2. All those of Japanese descent were trapped including the citizens born in Canada. They were moved to special concentration camps after all of their homes,  businesses and fishing boats were seized and then auctioned off. 

 

In response to such a similar scenario in WW3 where India might be on the side of Russia, Indian goverment may seize all the assets of Fairfax India. 

 

[dartmonkey]

10 hours ago, UK said:

So with some (or more than some) luck you expect 17+ percent CAGR for the next 10 years from FIH (btw what was the CAGR of BV of FIH over the last 10 years?), while only 8-9 percent from FFH, but you own 2 percent in FIH and, I assume, since it is core, much more in FFH? Do I get this right? 

 

 

From $14.97 today, share price might go quite rapidly, in much less than 10 years in any case, if shares are really worth $25 already (1.2x book; they currently trade at 0.67 book) or, with a BIAL IPO, $35. That would mean to get to 17% CAGR in, say, 5 years, we would need the price to be at $33 in 5 years, which may already be the fair value as soon as the IPO happens.

 

We can't say what the CAGR has been over 10 years, since FIH had its IP at the end of January 2015 and it wasn't until the middle of 2016 that it had invested most of its funds :

 

By the middle of 2016, Fairfax India made two more investment commitments and had essentially fully committed the entire $1billion that it had raised. Since it was continuing to see excellent new investment opportunities, in September2016 Fairfax India obtained a $225million two-year secured term loan from a syndicate of Canadian banks. By yearend it made two more investments and committed to a third one. In two years Fairfax India deployed or had commitments for its entire $1.2billion of investable funds. Given these circumstances, on January13, 2017 Fairfax India issued 42.6million shares at $11.75 per share in a public offering and a private placement to OMERS and Fairfax Financial, raising gross proceeds of $500million.

 

So if we take the end of 2016 as baseline, we had a share price of $11.55 and a book value of $10.25. So in 7 1/2 years, the share price is up 4% p.a. and book value per share is up 10% p.a. For the prospects of this investment going forward, it is much better that the share price is trailing so far behind the book value, as this just gets added to future prospects instead of past performance. It means that annual returns like 17% in the next 5 years, or a few points more, given accumulating earnings or share count reductions, and perhaps a few points more, presuming some value is added in the next 5 years...

Edited September 16, 2024 by dartmonkey
I initially posted using current share price of $16 from memory, but it is $14.97, so I adjusted the returns accordingly

[TwoCitiesCapital]

On 9/14/2024 at 1:32 PM, ICUMD said:

For the greater part of 8 yrs, they have not been able to execute while they collect their fees based on BV.  

 

Not supporting share price during this time with aggressive buybacks is not investor friendly. 

 

The other catalyst - the privatization of BIAL through Anchorage seems to be always just around the corner for the last 3-4 yrs

 

I think management's biggest responsibility is BV growth. They've done that. 

 

They've also executed ongoing buybacks for the last 4-years that have reduced share count by quite a bit (¬12% of shares outstanding) at significant discounts while still making new investments and moving to realize the value in the underlying portfolio. 

 

I don't think managing share price is a top management priority nor is it what I would want to be paying them for. The discount is an opportunity that capital markets are giving us - not something that the managements' priority is to eliminate. Just like management did nothing to earn/be responsible for the prior NAV premium. 

 

On 9/14/2024 at 1:32 PM, ICUMD said:

Even if the share price rises to $25 overnight, that would be a poor 8 yr return.  

 

Many other options in the investible universe with better management.

 

This is the problem with buying things at excessive premiums to NAV. I was very critical of the values of FIH post IPO and warned against paying too much of a premium. I didn't own it then. I own it in huge size today. I think my 8-year return is going to be quite satisfactory. 

 

On 9/14/2024 at 4:23 PM, SafetyinNumbers said:

8 years ago there was no margin of safety but now it’s incredibly high. Price is what you pay, value is what you get (WB).

 

+1

 

We don't get to blame management for the mistake of having paid too high a price for the shares.

 

But now the market is offering to low of one. We don't get to blame management for that either - but we can take advantage of it. 

Edited September 16, 2024 by TwoCitiesCapital

[Dinar]

2 hours ago, Haryana said:

 

In terms of cycles, theoretically, we swing between greed and fear. The optimism may take upto ten years to come back. However, the entity lacks the full characteristics of an asset, it can go to zero before that happens. 

 

One possiible scenario is that Canada seizes all assets of those Canadians who are of Indian origin including the residents and citizens. This already happened to Japanese during WW2. All those of Japanese descent were trapped including the citizens born in Canada. They were moved to special concentration camps after all of their homes,  businesses and fishing boats were seized and then auctioned off. 

 

In response to such a similar scenario in WW3 where India might be on the side of Russia, Indian goverment may seize all the assets of Fairfax India. 

 

Japanese were NOT moved to concentration camps, they were moved to interment camps.  There is a difference.  In concentration camps, the goal is wiping out the population, while internment camps do not have such a goal.  Japanese given the brutality shown by Japan towards Chinese, Koreans, as well as all POWs have no standing to complain against internment camps.  

Given the tendency of left-wingers globally, including Canada to seize assets of those who they disagree with, it is of course a possibility.  I think however that India is too damn smart to get involved in conflicts that have nothing do do with it.  

[Txvestor]

16 hours ago, UK said:

 

Interesting. So with some (or more than some) luck you expect 17+ percent CAGR for the next 10 years from FIH (btw what was the CAGR of BV of FIH over the last 10 years?), while only 8-9 percent from FFH, but you own 2 percent in FIH and, I assume, since it is core, much more in FFH? Do I get this right? 

 

Yes I think with their infrastructure finance and industrial holdings in a 7.5-8% growth economy is to high teens is attainable in India. Regarding the fairfax mothership, the next 4yrs is clearer than the following 6yrs. 
I see them growing BV 15% next 4yrs, as the locked bond portfolio, apparently well functioning insurance subs and associates can be expected to deliver $4B or more in a year. However unlike FIH-U.to which is 30% below BV, FFH.to is now 1.25x BV after the run up. Any reversion to mean of these will favor Fairfax India. So all considered I think on a 10yr hold Fairfax India is better here. 
that said I am more confident in Fairfax hence my position size is 12% v 3% in Fairfax India. 

[Txvestor]

15 hours ago, Haryana said:

 

Thank you for the conversation. 

 

I like your point that FIH has good high value positions like IIFL and CSB bank other than the main of BIAL. 

 

I see a parallel of IV accrual with Fairfax of four five years ago.

 

Just like they were showing discipline by keeping low duration despite the complains and cries, in FIH they are staying put with value positions without running after the hot sectors of the day. Their positions are out of favour at the moment but they have the patience to let them get fairly priced. Not running after acquiring any over priced companies is the most important thing they are doing at the moment. We tend to complain for lack of action because it is boring but good investing is boring, a virtue. 

 

One of their tiny ventures in those three manufacturing or engineering companies could become a Digit like superstar within the next few years. 

 

Precisely, we can't anchor to past performance and miss the fruit picking days. 2012-2017 were frustrating days see in Q after Q earnings wiped out by what seemed like a gamble. 2017-2021 were even more frustrating as there was some movement in the company but none in the share price then finally the last 2yrs was the catch up, which I still don't think is complete, as the next 4yrs plus the insurance performance/valuations and growth and earnings potential of some of their subs like Digit and Poseidon are not adequately rewarded. In almost any valuation metric FFH.to is cheap compared to peer group. 
However regarding FIH-U.to When I see someone like Brian Bradstreet pony up a quarter of a million $ to buy shares I think that's speaking to clear undervaluation. 

[Madpawn]

My portfolio is very concentrated in 3-4 stocks and Fairfax India being the smallest position there. Seeing people on this forum starting to give up gives me a gut feeling it’s time to buy more … 

[modiva]

29 minutes ago, Madpawn said:

My portfolio is very concentrated in 3-4 stocks and Fairfax India being the smallest position there. Seeing people on this forum starting to give up gives me a gut feeling it’s time to buy more … 

That’s what I just did. It didn’t work out yet for early investors…but the odds are in favor of recent investors.  It may take a few years for the upside to pan out but the downside is limited. 

[Haryana]

11 hours ago, Dinar said:

...

Japanese given the brutality shown by Japan towards Chinese, Koreans, as well as all POWs have no standing to complain against internment camps.  

 ...

What level of racism are you talking? 

Can they complain of nuked civilians?

 

"In concentration camps, the goal is wiping out the population, while internment camps do not have such a goal."

Japanese did get wiped out though, by the psychological brutality of the internment camps. They were a very significant minority in Vancouver and did well in fishing. Also, they had a highly successful baseball team by the name of Asahi which is now part of Hall of Fame. Now you will have to use a microscope to find Japanese in Canada. What was once Japantown in Vancouver is now the Chinatown. 

Actually, after the war or internment was over, they were all deported out of the province of British Columbia. 

[UK]

16 hours ago, dartmonkey said:

 

From $14.97 today, share price might go quite rapidly, in much less than 10 years in any case, if shares are really worth $25 already (1.2x book; they currently trade at 0.67 book) or, with a BIAL IPO, $35. That would mean to get to 17% CAGR in, say, 5 years, we would need the price to be at $33 in 5 years, which may already be the fair value as soon as the IPO happens.

 

We can't say what the CAGR has been over 10 years, since FIH had its IP at the end of January 2015 and it wasn't until the middle of 2016 that it had invested most of its funds :

 

By the middle of 2016, Fairfax India made two more investment commitments and had essentially fully committed the entire $1billion that it had raised. Since it was continuing to see excellent new investment opportunities, in September2016 Fairfax India obtained a $225million two-year secured term loan from a syndicate of Canadian banks. By yearend it made two more investments and committed to a third one. In two years Fairfax India deployed or had commitments for its entire $1.2billion of investable funds. Given these circumstances, on January13, 2017 Fairfax India issued 42.6million shares at $11.75 per share in a public offering and a private placement to OMERS and Fairfax Financial, raising gross proceeds of $500million.

 

So if we take the end of 2016 as baseline, we had a share price of $11.55 and a book value of $10.25. So in 7 1/2 years, the share price is up 4% p.a. and book value per share is up 10% p.a. For the prospects of this investment going forward, it is much better that the share price is trailing so far behind the book value, as this just gets added to future prospects instead of past performance. It means that annual returns like 17% in the next 5 years, or a few points more, given accumulating earnings or share count reductions, and perhaps a few points more, presuming some value is added in the next 5 years...

 

Thanks!

[UK]

10 hours ago, Txvestor said:

Yes I think with their infrastructure finance and industrial holdings in a 7.5-8% growth economy is to high teens is attainable in India. Regarding the fairfax mothership, the next 4yrs is clearer than the following 6yrs. 
I see them growing BV 15% next 4yrs, as the locked bond portfolio, apparently well functioning insurance subs and associates can be expected to deliver $4B or more in a year. However unlike FIH-U.to which is 30% below BV, FFH.to is now 1.25x BV after the run up. Any reversion to mean of these will favor Fairfax India. So all considered I think on a 10yr hold Fairfax India is better here. 
that said I am more confident in Fairfax hence my position size is 12% v 3% in Fairfax India. 

 

Thank you for answering!