Fairfax India new issue

[netcash1]

I believe they 49% but that does not include their CCPS which if allowed moves Fairfax to over 60% as I recall.

[Hoodlum]

The IDBI Bank divestment seems to be moving again.  New sealed bids are now being reviewed by the government with a possible decision in August.

 

https://www.ndtvprofit.com/markets/idbi-bank-shares-jump-over-3-percent-as-government-receives-revised-bids-for-stake-sale-11768041/amp/1

 

Shares of IDBI Bank rose as much as 4.08% to an intraday high of Rs 87.50 on Tuesday after the government received revised financial bids from two foreign bidders for its stake sale in the lender, according to official sources familiar with the matter.

 

Fairfax Holdings and Emirates NBD remain in the race to acquire the government's stake in IDBI Bank. Sources told NDTV Profit that Fairfax Holdings' revised bid is closer to the government's reserve price, with the Centre targeting around Rs 50,000 crore from the strategic disinvestment.

The winning bidder has not yet been finalised, with a decision likely over the next month, sources said.

 

According to Bloomberg, the government is close to accepting Fairfax Financial Holdings' offer after the Canadian insurer reportedly raised its bid by a few rupees per share following the rejection of its earlier offer, which was below the reserve price. The report added that the transaction will require approvals from the Union Cabinet and the Reserve Bank of India before it can be completed.

[yesman182]

Here is a story from the economist about Indian airports. Several references to BALI. India is adding a lot more airport capacity than I was aware of, but it sounds like they don't typically have good ground transportation. Isn't BALI working on having a train come to the terminal from the city center? 

 

https://archive.is/wQwsN

[Hoodlum]

It looks like Fairfax has upped their offer again.  We may be getting close to an official announcement.  

 

https://economictimes.indiatimes.com/industry/banking/finance/banking/fairfax-to-acquire-idbi-bank-stake-in-5-5-billion-deal-biggest-foreign-investment-in-indian-bank/articleshow/132400419.cms?from=mdr

 

The government has finalised Fairfax Holdings for the sale of its stake in IDBI Bank after the Canadian firm sweetened its offer, people aware of the development said.

The decision was made Tuesday after meetings at the finance ministry.
 

“Fairfax is now offering ₹81 per share, which is higher than their offer of ₹75 given last year,” one of the people said.

“After much discussion, the government and Fairfax have agreed to shake hands and the official announcement could be made anytime now,” the person said.

 

An empowered group of ministers that includes finance minister Nirmala Sitharaman has been apprised of the revised bids and subsequent developments, another person aware of the matter said. “A formal notification will come soon and post that a letter of intent will be issued, followed by signing of the share-purchase agreement.”

 

Edited 9 hours ago by Hoodlum

[Hoodlum]

12 hours ago, yesman182 said:

Here is a story from the economist about Indian airports. Several references to BALI. India is adding a lot more airport capacity than I was aware of, but it sounds like they don't typically have good ground transportation. Isn't BALI working on having a train come to the terminal from the city center? 

 

https://archive.is/wQwsN

The new Airport Metro station is expected to be completed in the next 12 months. 
 

https://www.thehindu.com/news/national/karnataka/bangalore-international-airport-limited-confidentthat-bengaluru-airport-will-be-secondlargest-in-india/article71222027.ece/amp/

 

 

Edited 9 hours ago by Hoodlum

[TwoCitiesCapital]

3 hours ago, Hoodlum said:

It looks like Fairfax has upped their offer again.  We may be getting close to an official announcement.  

 

https://economictimes.indiatimes.com/industry/banking/finance/banking/fairfax-to-acquire-idbi-bank-stake-in-5-5-billion-deal-biggest-foreign-investment-in-indian-bank/articleshow/132400419.cms?from=mdr

 

The government has finalised Fairfax Holdings for the sale of its stake in IDBI Bank after the Canadian firm sweetened its offer, people aware of the development said.

The decision was made Tuesday after meetings at the finance ministry.
 

“Fairfax is now offering ₹81 per share, which is higher than their offer of ₹75 given last year,” one of the people said.

“After much discussion, the government and Fairfax have agreed to shake hands and the official announcement could be made anytime now,” the person said.

 

An empowered group of ministers that includes finance minister Nirmala Sitharaman has been apprised of the revised bids and subsequent developments, another person aware of the matter said. “A formal notification will come soon and post that a letter of intent will be issued, followed by signing of the share-purchase agreement.”

 

 

 

Nice! Now we await the details! Huge! 

[EgonKuhn]

When I look at the raw USD figures for IDBI Bank on TIKR, I find it a bit hard to understand the enthusiasm surrounding a potential takeover. Even if one generously overlooks the fact that the bank had some serious issues a few years ago due to non performing loans (after having the same problems in 2001-2003, so it seems recurring), its book value per share has shrunk to a third of what it was twenty years ago. Earnings per share are currently around half of what they were two decades ago. There is not even growth to speak of, adjusted for inflation the volume of loans currently being issued is barely higher than it was twenty years ago.

If we assume for a moment that the Indian stock market were open to foreign investors, IDBI would not be an obvious buy for me personally, neither in terms of operational performance nor current valuation levels.

 

What am I missing here?

[SafetyinNumbers]

1 hour ago, EgonKuhn said:

What am I missing here?

I assume the thought is that Fairfax will run it more efficiently and grow it faster than the government. Higher growth, ROE and multiple will follow accordingly. 

[EgonKuhn]

13 minutes ago, SafetyinNumbers said:

I assume the thought is that Fairfax will run it more efficiently and grow it faster than the government. Higher growth, ROE and multiple will follow accordingly. 

So essentially the same strategy as in the early days, taking over (let’s put it diplomatically ) "insurers with room for improvement" in order to get them on track? Just adapted for banks in this case? They really don't like low hurdles. Were they able to get at least a brief look at the current loan book before submitting their offer? To be honest, I am a bit concerned that they are repeating the non-performing loan episodes of the past here.

[Haryana]

https://www.screener.in/company/IDBI/consolidated/

"Company has delivered good profit growth of 43.5% CAGR over last 5 years" ?

(Could be wrong, good if right.)

[SafetyinNumbers]

12 minutes ago, EgonKuhn said:

So essentially the same strategy as in the early days, taking over (let’s put it diplomatically ) "insurers with room for improvement" in order to get them on track? Just adapted for banks in this case? They really don't like low hurdles. Were they able to get at least a brief look at the current loan book before submitting their offer? To be honest, I am a bit concerned that they are repeating the non-performing loan episodes of the past here.

I don’t think the bank is doing badly now at a ~13% ROE. Analysis based on 20 years ago doesn’t make a lot of sense. If you don’t think they are good investors, you probably shouldn’t invest with them. That doesn’t mean they won’t make mistakes. 

[nwoodman]

1 hour ago, SafetyinNumbers said:

I assume the thought is that Fairfax will run it more efficiently and grow it faster than the government. Higher growth, ROE and multiple will follow accordingly. 

I also think it’s a national banking platform that’s ready to go. CSB was always a good plan, but it remains predominantly a southern/regional franchise. IDBI potentially gives Fairfax a national platform overnight. At ₹81 it looks like a reasonable deal rather than the deal of the century, but with a meaningful right tail if they can leverage it across their broader Indian financial ecosystem.

To your point, I suspect they’ve learnt a tremendous amount from both Eurobank and, importantly, the Bank of Cyprus. Those weren’t just banking investments, they were lessons in what a well-capitalised, well-managed banking platform can become. Bringing Hafize Gaye Erkan into the group also makes me wonder whether Fairfax’s ambitions extend well beyond simply lifting IDBI’s ROE. I’m not suggesting this automatically signals a banking roll-up, but it does feel like they’re assembling the people and platforms for something larger over the long term.

 

Finally, if this gets over the line, it says a lot about Fairfax’s reputation and credibility in India that they were trusted with such a strategically important asset.  No doubt the market will but it’s a sensible move (at the right price) and arguably a move that only Fairfax can make at this point in time.

Edited 1 hour ago by nwoodman

[Haryana]

https://www.screener.in/company/IDBI/consolidated/

Click on PE Ratio on their chart, it shows that PE has fallen from 25 to 10 while EPS has grown from 2 to 8.5 over last 5 years. 

Edited 1 hour ago by Haryana
Uploaded Image

[backtothebeach]

22 hours ago, Hoodlum said:

with the Centre targeting around Rs 50,000 crore from the strategic disinvestment.

 

Crore is confusing the hell out of me, I'm probably not the only one. So I just looked it up (again):

 

1 Crore is 10 million.

1 USD is currently 96 INR.

 

So 50,000 crore is:
50,000 x 10 million. Then divided by 96 = $ 5.2B.

 

Fairly soon 1 USD will probably be 100 Rupees. Then 10,000 crore will be $ 1B.

[rajpgokul]

1 hour ago, EgonKuhn said:

When I look at the raw USD figures for IDBI Bank on TIKR, I find it a bit hard to understand the enthusiasm surrounding a potential takeover. Even if one generously overlooks the fact that the bank had some serious issues a few years ago due to non performing loans (after having the same problems in 2001-2003, so it seems recurring), its book value per share has shrunk to a third of what it was twenty years ago. Earnings per share are currently around half of what they were two decades ago. There is not even growth to speak of, adjusted for inflation the volume of loans currently being issued is barely higher than it was twenty years ago.

If we assume for a moment that the Indian stock market were open to foreign investors, IDBI would not be an obvious buy for me personally, neither in terms of operational performance nor current valuation levels.

 

What am I missing here?

 

A very valid question and you are right to be skeptical.

 

Background:

I live and invest in India - I would rate 'IDBI Bank' as an 'above-average' investment opportunity which doesn't clear my local hurdle rate, but I still believe this is a great deal for Fairfax Financial. To provide better background - Fairfax Financial is 17% of the global fund I manage, IIFL Finance is 10% of fund (we own 1.7% of the firm), Fairfax India is 2% and IIFL Capital is 2% of the fund. All these have been long term holdings for us 5+ years and IIFL group has been in my personal portfolio for 15 years now. 

 

Why winning IDBI is great for Fairfax:

 

1.) IDBI is not a standalone deal, but it would boost all Indian financial investments of Fairfax 

 

My guess is that - Fairfax will form a bank holding firm which will hold IDBI Bank, IIFL Finance, IIFL Capital and Go Digit as their subsidiaries in 1 integrated group framework. In Indian context, a bank is the central core around which the highly valued capital light businesses can be built and scaled. In most verticals like asset management, insurance, institutional brokerage etc - the banking subsidiaries own the largest market share as they have the brand, balance sheet, customer relationship and distribution network. 

 

IIFL Group and Go Digit have been able to build large scale businesses despite not having a core banking shareholder. WIth a bank backing them and providing them with all its advantages, they can move to the next level in terms of growth and profitability. For example, the cost of funding for a bank backed firm will be 100+ bps lower (higher credit ratings) and can directly mean a 5% ROE improvement. Similarly, valuation multiple can go up 50% by being aligned with a bank for all these entities. The group will have good cross-sell synergies across - banking, broking, wealth management, asset management, life insurance, general insurance, reinsurance, investment banking and asset financing. I would expect a 1 billion USD uplift in valuation across their Indian financial investments with IDBI in the loop. 

 

Fairfax increasing its position in IIFL Capital to 51%, IIFL Finance moving a shareholder resolution to raise 1.3 billion USD of equity (July 24th vote) and taking a direct stake in Digit ealier this year are points to be noted. Indian central bank (RBI) has also been pushing banks to move their insurance (regulated by IRDAI), NBFC or asset management (regulated by SEBI) arms into seperately listed firms. Hence, my guess. 

2.) IDBI is an A+ asset that has been run badly

IDBI like several other public sector banks is mismanaged and not run to its true potential. IDBI has a phenomenal deposit franchise that is very difficult to replicate. The issues that you mention are all due to their lending ability that used to be mired in corruption and bad culture that comes along with having Government as your ultimate owner. They asset side has been cleaned up over the last several years and Fairfax gets a clean slate on the asset side that they can build upon.

 

IDBI's cost of funds is like 4.7% (250 bps below G-Secs) with a 45% CASA ratio. Almost a 18 billion USD CASA book that is sticky and hasn't left them even in tough situtations. This is very valuable. In CSB bank turnaround, Fairfax quickly fixed the lending side and has been able to grow their asset book at 25% type CAGR, but they haven't been able to build their deposit book. That experience should have reinforced into them as to how valuable this sticky deposit franchise is. I would say, with the current bank licensing conditions, it would take 15 years for any small bank and new licensee to build a CASA or deposit book of this size. 

 

IIFL Finance is a co-lending partner of IDBI even now. This along with running CSB for 5+ years should give Fairfax the necessary knowledge to build up the asset side without taking excessive credit risks. IDBI bank currently earns 13% ROE purely from the deposit side advantages. Fairfax should be able to build a good credit book and move it to 16-18% ROE along with all the low hanging fruits that comes with an ownership and culture change. The large CASA base will allow them to build prime retail and corporate loans that compound value with minimal volatility. 

 

3.) Large ticket size compounding for the next 20 years

 

At a 5.7 billion USD cheque size, there are few opportunities of this scale for Fairfax. I (similar to the folks at Fairfax) believe that India is a secular growth story for the next 20 years and has the potential to be a 20+ trillion USD economy in that time frame. India currently has 4 large private banks and 3 large public sector banks. I believe that 5 of these large banks will continue to be the Top-5 even then. 

 

Indian large private sector banks have a 10 year average valuation of 3X book value. Fairfax is buying IDBI at 1.15X closing book value. If the turnaround doesn't materialize, they will still be able to exit the business at 1X book value on a conservative basis. On the upside, they can compound earnings at 16-18% CAGR for the next 10+ years and the valuation can double in that time-frame. The INR has gone through a large depreciation cycle over the last 2 years and well placed for lower hit in the coming decade. The absolute dollar returns/ money multiple from this deal can be super attractive even with decent execution. 

 

The overall set-up looks asymmetric to me with a juicy Risk-Reward for that ticket size.

[SafetyinNumbers]

30 minutes ago, rajpgokul said:

 

A very valid question and you are right to be skeptical.

 

Background:

I live and invest in India - I would rate 'IDBI Bank' as an 'above-average' investment opportunity which doesn't clear my local hurdle rate, but I still believe this is a great deal for Fairfax Financial. To provide better background - Fairfax Financial is 17% of the global fund I manage, IIFL Finance is 10% of fund (we own 1.7% of the firm), Fairfax India is 2% and IIFL Capital is 2% of the fund. All these have been long term holdings for us 5+ years and IIFL group has been in my personal portfolio for 15 years now. 

 

Why winning IDBI is great for Fairfax:

 

1.) IDBI is not a standalone deal, but it would boost all Indian financial investments of Fairfax 

 

My guess is that - Fairfax will form a bank holding firm which will hold IDBI Bank, IIFL Finance, IIFL Capital and Go Digit as their subsidiaries in 1 integrated group framework. In Indian context, a bank is the central core around which the highly valued capital light businesses can be built and scaled. In most verticals like asset management, insurance, institutional brokerage etc - the banking subsidiaries own the largest market share as they have the brand, balance sheet, customer relationship and distribution network. 

 

IIFL Group and Go Digit have been able to build large scale businesses despite not having a core banking shareholder. WIth a bank backing them and providing them with all its advantages, they can move to the next level in terms of growth and profitability. For example, the cost of funding for a bank backed firm will be 100+ bps lower (higher credit ratings) and can directly mean a 5% ROE improvement. Similarly, valuation multiple can go up 50% by being aligned with a bank for all these entities. The group will have good cross-sell synergies across - banking, broking, wealth management, asset management, life insurance, general insurance, reinsurance, investment banking and asset financing. I would expect a 1 billion USD uplift in valuation across their Indian financial investments with IDBI in the loop. 

 

Fairfax increasing its position in IIFL Capital to 51%, IIFL Finance moving a shareholder resolution to raise 1.3 billion USD of equity (July 24th vote) and taking a direct stake in Digit ealier this year are points to be noted. Indian central bank (RBI) has also been pushing banks to move their insurance (regulated by IRDAI), NBFC or asset management (regulated by SEBI) arms into seperately listed firms. Hence, my guess. 

2.) IDBI is an A+ asset that has been run badly

IDBI like several other public sector banks is mismanaged and not run to its true potential. IDBI has a phenomenal deposit franchise that is very difficult to replicate. The issues that you mention are all due to their lending ability that used to be mired in corruption and bad culture that comes along with having Government as your ultimate owner. They asset side has been cleaned up over the last several years and Fairfax gets a clean slate on the asset side that they can build upon.

 

IDBI's cost of funds is like 4.7% (250 bps below G-Secs) with a 45% CASA ratio. Almost a 18 billion USD CASA book that is sticky and hasn't left them even in tough situtations. This is very valuable. In CSB bank turnaround, Fairfax quickly fixed the lending side and has been able to grow their asset book at 25% type CAGR, but they haven't been able to build their deposit book. That experience should have reinforced into them as to how valuable this sticky deposit franchise is. I would say, with the current bank licensing conditions, it would take 15 years for any small bank and new licensee to build a CASA or deposit book of this size. 

 

IIFL Finance is a co-lending partner of IDBI even now. This along with running CSB for 5+ years should give Fairfax the necessary knowledge to build up the asset side without taking excessive credit risks. IDBI bank currently earns 13% ROE purely from the deposit side advantages. Fairfax should be able to build a good credit book and move it to 16-18% ROE along with all the low hanging fruits that comes with an ownership and culture change. The large CASA base will allow them to build prime retail and corporate loans that compound value with minimal volatility. 

 

3.) Large ticket size compounding for the next 20 years

 

At a 5.7 billion USD cheque size, there are few opportunities of this scale for Fairfax. I (similar to the folks at Fairfax) believe that India is a secular growth story for the next 20 years and has the potential to be a 20+ trillion USD economy in that time frame. India currently has 4 large private banks and 3 large public sector banks. I believe that 5 of these large banks will continue to be the Top-5 even then. 

 

Indian large private sector banks have a 10 year average valuation of 3X book value. Fairfax is buying IDBI at 1.15X closing book value. If the turnaround doesn't materialize, they will still be able to exit the business at 1X book value on a conservative basis. On the upside, they can compound earnings at 16-18% CAGR for the next 10+ years and the valuation can double in that time-frame. The INR has gone through a large depreciation cycle over the last 2 years and well placed for lower hit in the coming decade. The absolute dollar returns/ money multiple from this deal can be super attractive even with decent execution. 

 

The overall set-up looks asymmetric to me with a juicy Risk-Reward for that ticket size.

This is great colour. Thanks for sharing. How do you expect FIH to fund the deal? Would IDBI issue stock to consolidate IIFL Capital and Digit? Do they leave publicly traded stubs for those holdings?

[EgonKuhn]

Thank you very much @rajpgokul ! My *main* concern after looking at the raw numbers since 1999 is the quality of their current loan book. Good to hear that they cleaned it up. They are a bit overcapitalized now, debt level, deposit to loan ratio, current NPL trends and efficiency ratio all look well. So not much concerns here.