Fairfax India new issue

[Viking]

1 hour ago, hobbit said:

Unless something goes horribly wrong with COVID in India in terms of a third wave which lasts for a few months. This is a 25+ stock in 1-2 years.

It certainly looks cheap at $13 ($12.60 yesterday). What has surprised me about India and the covid spike of recent months is how well Indian stocks are doing; most of Fairfax Indian stocks are up nicely. And Fairfax India’s publicly traded stocks are also trading up. So why is Fairfax India trading $5 below BV? I think the issue is sentiment; confidence in the parent Fairfax (not Fairfax India). If this does not change i hope Fairfax buys Fairfax India (pull a move out of BAM’s playbook). Perhaps getting more aggressive on the share buybacks (increasing Fairfax’s % ownership) is a step in this direction.  

Edited June 16, 2021 by Viking

[Xerxes]

BYP did (IIRC) do a tender offer prior the formal offer from BAM some months later. Though that would be robbing FIH individual holders of its potential and should only be of last resort, after all the levers to close the spread has been pulled. In any case, I believe FFH structured its India entities for a specific reason the way it is now.

 

Bottom-line, for me, i have no intention of selling FIH anytime soon. Those who bought in all the fanfare of 2014-16, if they overpaid, than that sets their ROI for the long term. At the end of the day, emerging market is emerging market, if one is unwilling to stay course, why did one got in in the first place.

[Xerxes]

It is unclear to me if the tender offer will be include FFH tendering its own shares in proportion of its ownership, in which case the 1/3 FFH - 2/3 (rest) ratio does not change.  

 

EDIT:  Fairfax Financial Holdings Limited, the ultimate parent of the Company, has advised the Company that it will not tender any Shares pursuant to the Offer

 

looks like i missed that

Edited June 16, 2021 by Xerxes

[Xerxes]

As a reference point, this 2 hours+ video posted on FIH website, had 719 views (less than a 1,000) since Oct 2020.

 

That shows the level of interest in that part of the world from the investment community. Western corporation may be investing in India, but the investment community had better bargains at home since March 2020 per unit of risk.

 

(1) Canada-India Business Council: Invest India 2020 - YouTube

Edited June 16, 2021 by Xerxes

[obtuse_investor]

3 hours ago, hobbit said:

Unless something goes horribly wrong with COVID in India in terms of a third wave which lasts for a few months. This is a 25+ stock in 1-2 years.

I could see the book value rising at a reasonable clip, like it has. Can’t predict if it would be at 25. 
 

What do think has to be true for it to trade close to book value per share?
 

Multiple compression has been the biggest detractor of return for security holders since 2015, while book has grown at about 10% per annum. 
 

[glider3834]

5 hours ago, obtuse_investor said:

I could see the book value rising at a reasonable clip, like it has. Can’t predict if it would be at 25. 
 

What do think has to be true for it to trade close to book value per share?
 

Multiple compression has been the biggest detractor of return for security holders since 2015, while book has grown at about 10% per annum. 
 

If we expect they can continue compounding BV at 10% (which they have achieved to end of 31 Mar-21) & thats your minimum expected return as an investor going forward, you would expect fair market value to be closer to book value. In this context, the Fairfax substantial issuer bid makes sense to me.

[obtuse_investor]

2 hours ago, glider3834 said:

If we expect they can continue compounding BV at 10% (which they have achieved to end of 31 Mar-21) & thats your minimum expected return as an investor going forward, you would expect fair market value to be closer to book value. In this context, the Fairfax substantial issuer bid makes sense to me.

 

Agreed. I put the back of the napkin aside and did some real math on the BVPS annual return since very first filing. The return has been 11.3%. Note that this return is after fees to FFH.

 

For comparison, stock has returned about 3% over that same period. Buyer from 2015 IPO (with cost of $11) lost about 8% each year on multiple compression.

 

Full disclosure, I am not planning to tender my shares. And no, I fortunately didn't buy at IPO.

[ICUMD]

The dutch auction is a piece of unexpected news.  I was awaiting announcements regarding the formation of Anchorage and mark to market of their private holdings such as the airport and seven seas shipping.

 

So, for me, that begs the question, is Fairfax being opportunistic (at the expense of shareholders) in buying back before the Anchorage IPO, or are they genuinely trying to generate value for impatient shareholders?

[petec]

54 minutes ago, ICUMD said:

The dutch auction is a piece of unexpected news.  I was awaiting announcements regarding the formation of Anchorage and mark to market of their private holdings such as the airport and seven seas shipping.

 

So, for me, that begs the question, is Fairfax being opportunistic (at the expense of shareholders) in buying back before the Anchorage IPO, or are they genuinely trying to generate value for impatient shareholders?

I seem to remember when they bought in the Odyssey stub, they did it when the CDS had started to work but that wasn’t public info. So they basically got it cheaper than people realized. Given how much is going on in the underlying holdings at FIH, I wonder if they are doing the same here. Is there something they know that we don’t?

[Pedro]

14 hours ago, obtuse_investor said:

 

Agreed. I put the back of the napkin aside and did some real math on the BVPS annual return since very first filing. The return has been 11.3%. Note that this return is after fees to FFH.

 

For comparison, stock has returned about 3% over that same period. Buyer from 2015 IPO (with cost of $11) lost about 8% each year on multiple compression.

 

Full disclosure, I am not planning to tender my shares. And no, I fortunately didn't buy at IPO.

I appreciate all the discusion on this.  It helps a novice investor looking for differing opinions. 

 

I'm one of those IPO buyers who bought on the opimistic business case thinking it would be at least a 2 bagger by now. I  dont want to miss a  good time to cash out with this tender  specially if  something happens in India again and this thing craters to sub $10 again after the tender expires. 

 

I think its the first time meaingful shareholder friendly action has been taken in 6 years & for whatever reason the stock doesnt' keep pace with BV increase so I'm leaning towards just tendering at $15 and moving on. 
 

 

 

 

[hobbit]

On 6/17/2021 at 12:17 AM, obtuse_investor said:

 

Agreed. I put the back of the napkin aside and did some real math on the BVPS annual return since very first filing. The return has been 11.3%. Note that this return is after fees to FFH.

 

For comparison, stock has returned about 3% over that same period. Buyer from 2015 IPO (with cost of $11) lost about 8% each year on multiple compression.

 

Full disclosure, I am not planning to tender my shares. And no, I fortunately didn't buy at IPO.

My 2 cents on this 

 

1.Public investments -

(a) IIFL ( finance(327M) + wealth Mgmt.(202) + Securities(54) +5paisa(23)  ) + CSB (230M )  = 834M ( 31 mar 2021). Conservative Fair Value in 2 years = 1.3*834 = 1.1 B

India's NBFC sector has gone through a tumultuous time in the past 3 years. First with ILFS crisis and then with two waves of COVID. This is possibly the harshest stress test any NBFC can go through and the fact that IIFL finance has come out of it unscathed tells you a lot about strength of their loan book. The loan book is heavily focused on retail and gold loans and a very small part is corporate . A well run NBFC in India should easily give you a 20%+ CAGR in earnings and coupled with a growing economy could be one of the best ways to play India story. IIFL finance is trading at an earnings multiple of 10 and I do not see it staying there as Indian economy starts opening up. 

 

Only 3.7% of Indians invest in stocks vs 50%+ in US. India will mint new millionaires every year. These two factors alone are significant tailwinds for IIFL securities and IIFL wealth mgmt business . IIFL securities was trading at 4*earnings( net of 100M property that it owns in Mumbai) at the end of last quarter and is up by 80% since. 

 

CSB is already a phenomenal turnaround story which is reflected in its financials and share performance. Its not too hard to imagine what a good CEO can do with a bank in a growing economy like India. It is extremely hard for a foreign operator to get a banking license in India . 

 

5 Paisa recently raised equity worth 33M at a 70% premium to the share price and the stock has doubled since then . 

 

(b) Fairchem + Privi = 64 + 163 = 227M. Conservative Fair value in 2 years = 163M + 64*2 = 291M

Privi has been liquidated for 163M already. The day the announcement was made FIH stake in privi was worth 233M. This deal puts Fairfax mgmt in rarified circles of investing community since its extremely rare(never) to sell your stake for a 30% discount to a promoter . Especially when there is no pressing need for cash.  A self goal by the Fairfax team.

Fairchem is doing well and has a huge room for growth. The share price has doubled since the last quarter .

(c) Other public Equities  = 160M .Conservative  Fair value in 2 years  = 160*1.2 = 192M

With the recent run up in India market . I imagine they are doing okay here.

 

2. Private investments -

Anchorage/Bangalore Airport - ( 1.4B ). Base case Fair value = 1.4B

PreCovid

A new runway at the current terminal has been operationalized which will help BIAL to overtake Mumbai in terms of domestic traffic. Second terminal on track for mid 2022.   (It looks amazing btw.)    A cybercity under construction on 400acres around the airport. A clear path to 70M+ passengers from the current 35M in 5 years.

 

 Adani trying to list their airport assets for 4B+ .The other public airports around the world trading at 1.5-2 times the multiple of Bangalore airport. 

BIAL has a claw back provision for Aero revenue which guarantees them a fixed 15% return on equity in any given control period. This should help them recover a significant amount of lost revenue over the next 2-3 years.

PostCovid -

I think based on the factors above FIH should not find it hard to list BIAL( via anchorage ) for 2.8B+ . Without COVID, the valuation could have easily been 4B+. Mgmt indicated in the annual report that despite covid, 2.8B valuation for BIAL is fairly low and they expect better pricing in public markets given the marketability of an asset like BIAL.

 

Sanmar - ( 338M ) . Base case Fair value in 2 years = 700M

This is a hidden gem in the portfolio which could be worth 3-4x from current prices ( 80%)  or go to zero ( 20%) . PVC pricing is at all time high but sanmar is facing a  liquidity crunch which has forced their hand to go for an IPO an year sooner than what they would have liked. If you read the IPO circular ,  it becomes clear how undervalued Sanmar is at 1B valuation. FIH is flush with cash even post tender offer and  will not let their equity get affected and might provide a short term loan if needed. Sanmar merged their India businesses earlier this year and is going to aim for a combined valuation of 2B+ for their India business when they ipo this year. Then you have the Egypt business which could be worth another 500M easily. all this is dependent on whether they can tide over their current liquidity situation ( I think they will ). Post the equity raise there is a clear path to 200M in EBITDA within 2- 3 years for just their India business, which as per the valuation of their peers ( 20X multiple to earnings) should put just india business at 3-4B valuation. Sanmar is paying interest rates as high as 18% on their debt and will significantly bolster their cash flow if the IPO is successful since most of the IPO proceeds will be used to pare down debt.

 

Seven Islands - (104M ), Base case Fair Value post IPO = 200M

This business has been growing EBITDA at a 30% CAGR for the past 10 years. Past year revenue and earnings grew by 57% and 87% respectively . Promoter owned and operated . Should easily list at 20x earnings giving it a valuation of 400M+. FIH is marking it at 105M

NSE - ( 72M ) , Base case Fair Value in 2 years = 150M

Based on the transactions in pvt market earlier this year , FIH stake is easily worth north of 100M today and will be worth 200M+ when NSE IPO happens. FIH will keep marking it conservatively until the IPO. Covid volatility has given a tremendous boost to another already growing and monopolistic business. Here are the numbers

NCML - ( 86M ), Fair Value in 2 years = 86M

 the only bad investment FIH has made so far. It has a decent chance of turning out okay given the strong tailwinds on the back of agriculture reforms initiated by the govt last year. Since there is no clear timeline of when the turnaround might happen lets keep it at where FIH is marking it.

Saurashtra(33M) - Fair Value in 2 years = 33M

 too small to move the needle right now. Has been an okay investment so far. 

Cash = 100M after tender offer

 

FIH Fair value in 2 years = 4.2 B. Current value = 1.9B

Debt = 550M

Have to account for fees , taxes .

 

 

Now the question arises why is the share price languishing at 0.7*BV instead of trading at a premium if the outlook is so rosy -

1. Mgmt Credibility - 

In the past 2 years I have spoken to 20+ fund managers and individual investors regarding Fairfax Financial as well as Fairfax India and almost none of them want to touch anything that has Prem Watsa et al incharge. No one cares about their long term track record given their horrendous performance over the past decade . Prem's ramblings on tech valuations and value investing in his annual letters has reenforced the view that he is living in denial and is incapable of admitting and learning from his mistakes. The Mgmt gets a solid C from the market right now. Imo Prem et al have earned it and deserve it .This is reflected in the valuations of Fairfax Financial , India and Africa. The sentiment is so heavily tilted against the current mgmt that it almost makes a case for being a good contrarian indicator. Fairfax India has borne the brunt of this negative sentiment despite having invested in some quite decent businesses.

A a couple of examples on why mgmt gets a C from me ( for now ) - 

(a) Fairfax financial gets paid in shares of FIH based on the appreciation in BV regardless of whether the shareholders of FIH make money or not. This BV is dominated by private investments which FIH mgmt is marking . A better way of doing this should have been to take the minimum of ( BV, share price ) and charge fees based on that so that fees only get paid when shareholders are making money too.

(b) Transaction with Privi at 30% below market price with zero explanation to minority share holders

2. Lack of price discovery - 

There is a lack of clarity whether FIH is a PFIC or not for US investors. This rules out most of investment from US. India is an emerging market which is a negative for a lot of Canadian Investors. Coupled with a small float and almost zero smart money looking at this, price discovery has been significantly hampered. If you look at the ownership structure of Fairfax India ; OMERS, FFH and host of mutual funds are biggest share holders. FIH is the biggest buyer at 25% of daily volume almost every day.

3. COVID - there is still a lot of uncertainty whether India will experience a third wave or not. 

 

I have been invested for the past 3 years+ and post the crash in share price during COVID made it by far the biggest position in my portfolio.

 

Edited August 9, 2021 by hobbit

[ICUMD]

1 hour ago, hobbit said:

My 2 cents on this 

 

1.Public investments -

(a) IIFL ( finance(327M) + wealth Mgmt.(202) + Securities(54) +5paisa(23)  ) + CSB (230M )  = 834M ( 31 mar 2021). Conservative Fair Value in 2 years = 1.3*834 = 1.1 B

India's NBFC sector has gone through a tumultuous time in the past 3 years. First with ILFS crisis and then with two waves of COVID. This is possibly the harshest stress test any NBFC can go through and the fact that IIFL finance has come out of it untouched tells you a lot about strength of their loan book. The loan book is heavily retail and gold loans oriented and a very small part is corporate focused. A well run NBFC in India should easily give you a 20%+ CAGR in earnings and coupled with a growing economy could be one of the best ways to play India story. IIFL finance is trading at an earnings multiple of 10 and I do not see it staying there as Indian economy starts opening up. 

Only 3.7% of Indians invest in stocks vs 50%+ in US. India will mint new millionaires every year. These two factors alone are significant tailwinds for IIFL securities and IIFL wealth mgmt business . IIFL securities was trading at 4*earnings( net of 100M property that it owns in Mumbai) at the end of last quarter and is up by 80% since. 

CSB is already a phenomenal turnaround story which is reflected in its financials and share performance. Its not too hard to imagine what a good CEO can do with a bank in a growing economy like India. It is extremely hard for a foreign operator to get a banking license in India . 

5 Paisa recently raised equity worth 33M at a 70% premium to the share price and the stock has doubled since then . 

(b) Fairchem + Privi = 64 + 163 = 227M. Conservative Fair value in 2 years = 163M + 64*2 = 291M

Privi has been liquidated for 163M already. The day the announcement was made FIH stake in privi was worth 233M. This deal puts Fairfax mgmt in rarified circles of investing community since its extremely rare(never) to sell your stake for a 30% discount to a promoter . Especially when there is no pressing need for cash.  A self goal by the Fairfax team.

Fairchem is doing well and has a huge room for growth. The share price has doubled since the last quarter .

(c) Other public Equities  = 160M .Conservative  Fair value in 2 years  = 160*1.2 = 192M

With the recent run up in India market . I imagine they are doing okay here.

2. Private investments -

Anchorage/Bangalore Airport - ( 1.4B ). Base case Fair value = 1.4B

PreCovid

A new runway at the current terminal has been operationalized which will help BIAL to overtake Mumbai in terms of domestic traffic. Second terminal on track for mid 2022. (It looks amazing btw.) A cybercity under construction on 400acres around the airport. A clear path to 70M+ passengers from the current 35M in 5 years.

 Adani trying to list their airport assets for 4B+ .The other public airports around the world trading at 1.5-2 times the multiple of Bangalore airport. 

BIAL has a claw back provision for Aero revenue which guarantees them a fixed 15% return on equity in any given control period. This should help them recover a significant amount of lost revenue over the next 2-3 years.

PostCovid -

I think based on the factors above FIH should not find it hard to list BIAL( via anchorage ) for 2.8B+ . Without COVID, the valuation could have easily been 4B+. Mgmt indicated in the annual report that despite covid 2.8B valuation for BIAL is fairly low and they expect better pricing in public markets given the marketability of an asset like BIAL.

 

Sanmar - ( 338M ) . Base case Fair value in 2 years = 700M

This is a hidden gem in the portfolio which could be worth 3-4x from current prices ( 80%)  or go to zero ( 20%) . PVC pricing is at all time high but sanmar is facing a  liquidity crunch which has forced their hand to go for an IPO an year sooner than what they would have liked. If you read the IPO circular ,  it becomes clear how undervalued Sanmar is at 1B valuation. FIH is flush with cash even post tender offer and  will not let their equity get affected and might provide a short term loan if needed. Sanmar merged their India businesses earlier this year and is going to aim for a combined valuation of 2B+ for their India business when they ipo this year. Then you have the Egypt business which could be worth another 500M easily. all this is dependent on whether they can tide over their current liquidity situation ( I think they will ). Post the equity raise there is a clear path to 200M in EBITDA within 2- 3 years for just their India business, which as per the valuation of their peers ( 20X multiple to earnings) should put just india business at 3-4B valuation. Sanmar is paying interest rates as high as 18% on their debt and will significantly bolster their cash flow if the IPO is successful since most of the IPO proceeds will be used to pare down debt.

 

Seven Islands - (104M ), Base case Fair Value post IPO = 200M

This business has been growing EBITDA at a 30% CAGR for the past 10 years. Past year revenue and earnings grew by 57% and 87% respectively . Promoter owned and operated . Should easily list at 20x earnings giving it a valuation of 400M+. FIH is marking it at 200M

NSE - ( 72M ) , Base case Fair Value in 2 years = 150M

Based on the transactions in pvt market earlier this year , FIH stake is easily worth north of 100M today and will be worth 200M+ when NSE IPO happens. FIH will keep marking it conservatively until the IPO. Covid volatility has given a tremendous boost to another already growing and monopolistic business. Here are the numbers

NCML - ( 86M ), Fair Value in 2 years = 86M

 the only bad investment FIH has made so far. It has a decent chance of turning out okay given the strong tailwinds on the back of agriculture reforms initiated by the govt last year. Since there is no clear timeline of when the turnaround might happen lets keep it at where FIH is marking it.

Saurashtra(33M) - Fair Value in 2 years = 33M

 too small to move the needle right now. Has been an okay investment so far. 

Cash = 100M after tender offer

 

FIH Fair value in 2 years = 4.2 B. 

Debt = 550M

Have to account for fees , taxes .

 

 

Now the question arises why is the share price languishing at 0.7*BV instead of trading at a premium if the outlook is so rosy -

1. Mgmt Credibility - 

In the past 2 years I have spoken to 20+ fund managers and individual investors regarding Fairfax Financial as well as Fairfax India and almost none of them want to touch anything that has Prem Watsa et al incharge. No one cares about their long term track record given their horrendous performance over the past decade . Prem's ramblings on tech valuations and value investing in his annual letters has reenforced the view that he is living in denial and is incapable of admitting and learning from his mistakes. The Mgmt gets a solid C from the market right now. Imo Prem et al have earned it and deserve it .This is reflected in the valuations of Fairfax Financial , India and Africa. The sentiment is so heavily tilted against the current mgmt that it almost makes a case for being a good contrarian indicator. Fairfax India has born the brunt of this negative sentiment despite having invested in some quite decent businesses.

A a couple of examples on why mgmt gets a C from me ( for now ) - 

(a) Fairfax financial gets paid in shares of FIH based on the appreciation in BV regardless of whether the shareholders of FIH make money or not. This BV is dominated by private investments which FIH mgmt is marking . A better way of doing this should have been to take the minimum of ( BV, share price ) and charge fees based on that so that fees only get paid when shareholders are making money too.

(b) Transaction with Privi at 30% below market price with zero explanation to minority share holders

2. Lack of price discovery - 

There is a lack of clarity whether FIH is a PFIC or not for US investors. This rules out most of investment from US. India is an emerging market which is a negative for a lot of Canadian Investors. Coupled with a small float and almost zero smart money looking at this has contributed significantly hampered price discovery. If you look at the ownership structure of Fairfax India ,OMERS, FIH and host of mutual funds are biggest share holders. FIH is the biggest buyer at 25% of daily volume almost every day.

3. COVID - there is still a lot of uncertainty whether India will experience a third wave or not. 

 

I have been invested for the past 3 years+ and post the crash in share price during COVID made it by far the biggest position in my portfolio.

 

Hobbit, thanks for this excellent analysis.  I agree as I think many do that FIH is undervalued.  Seeing how it is a large position for you (and for me), you must be optimistic that's it will achieve parity with it's book value. What will it take for this to happen and when?  Obviously despite the institutional holders, there are a lot of weak hands selling.  I personally know some previously staunch holders who sold at $8. 

[hobbit]

36 minutes ago, ICUMD said:

Hobbit, thanks for this excellent analysis.  I agree as I think many do that FIH is undervalued.  Seeing how it is a large position for you (and for me), you must be optimistic that's it will achieve parity with it's book value. What will it take for this to happen and when?  Obviously despite the institutional holders, there are a lot of weak hands selling.  I personally know some previously staunch holders who sold at $8. 

It all depends on the time line for the IPOs. I think Seven islands and Sanmar happen this year . Anchorage and NSE next year.

[Viking]

Hobbit, that is a very good summary. Thank you for taking the time to post it. So you are confident that the valuation of BIAL is roughly accurate at $1.4 billion? If so, Fairfax India is dirt cheap. 
 

The question then becomes when will sentiment change and drive the share price closer to BV? 
 

What are your thoughts on the share buyback/dutch auction? Is it a marketing exercise by Fairfax India to get the story out (how undervalued the company is)? Or is it to buy out the weak hands (shareholders who are frustrated with multi-year underperformance)? Or the first step to increase Fairfax’s ownership stake - leading to Fairfax buying Fairfax India back down the road? 
 

I especially liked your very candid explanation of why the share price is trading so far below BV. I agree with everything you said. I am not sure if time alone will fix this. I hope Fairfax India keeps aggressively buying back stock (and does another big buyback if share continue to trade so far below BV when the dutch auction is completed). Large stock buybacks appear to me the best way to reward current shareholders. 

[bluedevil]

To FFH's credit, they have been very clear that the believe Fairfax India is undervalued, so if they are able to unlock value down the road, i think hard to say shareholders have not been warned.  For example, Prem has been pretty clear that he thinks BIAL is worth significantly more than what they have it marked for and that it will be reflected when it IPOs. 

 

I do not think a FFH takeover is in the cards any time soon, even if they wanted to do it.  Fairfax India was started for a simple reason -- FFH is limited in how much equity it can put to work in India by regulators and rating agencies, so this was a way to leverage the large opportunity set they saw -- part ownership, and earn fees from rest. 

 

One question I have.  The entire premise of FFH's step up in investment in India was Modi, who they believed would have a long tenure.  But the COVID delta outbreak seems to have really hurt him.  If he is not re-elected or his party is diminished, not sure where that leaves the global thesis.

[Xerxes]

There are two different things: (1) What is Prem pitching as a global thesis/story for FIH and (2) the reality.

 

The Modi debacle did hurt the (1) argument, however thankfully the reality matter more than an investment thesis/story pitched to investors on conference calls. Modi' ascension some years ago had, I believe, put India on a different trajectory. i.e. there is no going back to the way things were even without Modi in charge. So I think we are safe on that specific front.

 

Perhaps someone from the region can comment.

[Xerxes]

5 hours ago, hobbit said:

a) Fairfax financial gets paid in shares of FIH based on the appreciation in BV regardless of whether the shareholders of FIH make money or not. This BV is dominated by private investments which FIH mgmt is marking . A better way of doing this should have been to take the minimum of ( BV, share price ) and charge fees based on that so that fees only get paid when shareholders are making money too.

 

Thanks for the in-depth review Hobbit. You are a credit to the Shire; i admit i focused on the bit about the airport mostly.

On the incentives shown above, agree that the fees being structured on BVs (and not what the market ascribes) creates all kind of wrong incentives. That being said, as those fees are collected over time, there is an end line where FFH does well out of that paper investment based on what it can do with its marketable value rather than its accounting value. 

 

[rohitc99]

1 hour ago, Xerxes said:

There are two different things: (1) What is Prem pitching as a global thesis/story for FIH and (2) the reality.

 

The Modi debacle did hurt the (1) argument, however thankfully the reality matter more than an investment thesis/story pitched to investors on conference calls. Modi' ascension some years ago had, I believe, put India on a different trajectory. i.e. there is no going back to the way things were even without Modi in charge. So I think we are safe on that specific front.

 

Perhaps someone from the region can comment.

Honestly its a mixed bag and not very different from the past. There have some bold decisions but a lot of questionable decisions too like the demonitization episode. Overall i think the investments made by FIH are not as dependent on the modi or the current govt to do well. There are a lot of tailwinds and long term growth opportunities. The best any govt can do is not screw it up

 

ps: i am from the region

[rohitc99]

1 minute ago, rohitc99 said:

Honestly its a mixed bag and not very different from the past. There have some bold decisions but a lot of questionable decisions too like the demonitization episode. Overall i think the investments made by FIH are not as dependent on the modi or the current govt to do well. There are a lot of tailwinds and long term growth opportunities. The best any govt can do is not screw it up

 

ps: i am from the region

I am baised to the airport opportunity too. Lived in bangalore for a long time and worked there too. still have an apartment in the city.  Its difficult to see how traffic will not grow over time. also the land around the airport is very big optionality and the way the city is growing will accrue value. Covid has delayed the whole thing by 2 years but not impaired the opportunity. question is how soon we get to see the value

[ICUMD]

9 hours ago, hobbit said:

 

Regardless of Prems missteps in the past, each and every holding of Fairfax India seems like an uncut gem to my eye.  In the sea of overvalued equities, this one still stands out.  I will hold my shares and not tender at the offered price.  I agree that Modi politics has very little to do with the FIH companies prospects.

[petec]

Prem talked a lot about Modi, but if the case rested on Modi alone he wouldn’t have set this up as a permanent capital vehicle. He’s sometimes wrong but I don’t think he’s stupid.

[hobbit]

On 6/18/2021 at 1:52 PM, Viking said:

Hobbit, that is a very good summary. Thank you for taking the time to post it. So you are confident that the valuation of BIAL is roughly accurate at $1.4 billion? If so, Fairfax India is dirt cheap. 
 

The question then becomes when will sentiment change and drive the share price closer to BV? 
 

What are your thoughts on the share buyback/dutch auction? Is it a marketing exercise by Fairfax India to get the story out (how undervalued the company is)? Or is it to buy out the weak hands (shareholders who are frustrated with multi-year underperformance)? Or the first step to increase Fairfax’s ownership stake - leading to Fairfax buying Fairfax India back down the road? 
 

I especially liked your very candid explanation of why the share price is trading so far below BV. I agree with everything you said. I am not sure if time alone will fix this. I hope Fairfax India keeps aggressively buying back stock (and does another big buyback if share continue to trade so far below BV when the dutch auction is completed). Large stock buybacks appear to me the best way to reward current shareholders. 

Airport Valuation - 

If Anchorage was public PreCovid , there is little doubt that its share price would have corrected anywhere between 30-50% post Covid crash in mar 2020. I was/am of the opinion that FIH should have marked down their investment even if it was a temporary markdown. FIH not marking down its investment in BIAL reflects the tremendous confidence they have that BIAL is optimally/conservatively marked .This confidence stems mainly from 2 things - the second terminal coming online next year and ability to claw back revenue in the next control period. FIH's enthusiasm from BIAL is not shared by the market including their partner OMERS who added a ratchet clause to protect themselves from any downward revision in valuation.This is again a classic case of whether you trust the mgmt or not. I for one do not think that mgmt will deliberately mark up the investment just to earn fees. Fairfax mgmt might be completely out of sync with market dynamics but I do not think that they are blatantly dishonest. 5 years down the line as the second terminal has fully ramped up , we are hitting 70M in annual passengers and Indians have more money to spend , BIAL will be conservatively worth 5B+ 

 

Shanghai airport has been one of Li Lu's best investments and the similarities here are striking. I believe munger also owns the stock or has owned it in the past.

 

One of the things we got into [in China] was the Shanghai airport, the main airport in China, with no debt net,” Munger said. “How can you lose owning the main airport in China?”

 

Dutch Auction - 

 

I think it's the best way to reward existing shareholders and also an important indicator of mgmt's conviction in the portfolio companies. Returning cash at this point in time also implies none of the companies are under significant financial stress and have no need for external cash for the foreseeable future. The only drawback that comes to mind is that this might shift the timeline for the IPOs until August as the mgmt would want to buy the shares at the lowest price possible. ( unless investors tender shares right away ). It could also be that OMERS or some other big shareholder wanted to liquidate their holding and approached FIH.

 

Modi-

 

I think Modi has done a decent job given what he inherited when he became PM. India is still deeply socialist due to the close ties India had with Soviet for more than 40 years post independence. It is not easy to reform the country and give it a capitalistic structure. It will take time. The fact that India has not had a big corruption scandal at the federal level since modi took over is a huge plus. I definitely feel the country is headed in the right direction. Polarization in the society along religious lines is the biggest disappointment so far in imo and hopefully things get better on that front. Regarding re-election there is very little chance that he does not serve at least another 2 terms.

Edited June 21, 2021 by hobbit

[glider3834]

On 6/19/2021 at 12:58 AM, hobbit said:

My 2 cents on this 

 

1.Public investments -

(a) IIFL ( finance(327M) + wealth Mgmt.(202) + Securities(54) +5paisa(23)  ) + CSB (230M )  = 834M ( 31 mar 2021). Conservative Fair Value in 2 years = 1.3*834 = 1.1 B

India's NBFC sector has gone through a tumultuous time in the past 3 years. First with ILFS crisis and then with two waves of COVID. This is possibly the harshest stress test any NBFC can go through and the fact that IIFL finance has come out of it unscathed tells you a lot about strength of their loan book. The loan book is heavily focused on retail and gold loans and a very small part is corporate . A well run NBFC in India should easily give you a 20%+ CAGR in earnings and coupled with a growing economy could be one of the best ways to play India story. IIFL finance is trading at an earnings multiple of 10 and I do not see it staying there as Indian economy starts opening up. 

 

Only 3.7% of Indians invest in stocks vs 50%+ in US. India will mint new millionaires every year. These two factors alone are significant tailwinds for IIFL securities and IIFL wealth mgmt business . IIFL securities was trading at 4*earnings( net of 100M property that it owns in Mumbai) at the end of last quarter and is up by 80% since. 

 

CSB is already a phenomenal turnaround story which is reflected in its financials and share performance. Its not too hard to imagine what a good CEO can do with a bank in a growing economy like India. It is extremely hard for a foreign operator to get a banking license in India . 

 

5 Paisa recently raised equity worth 33M at a 70% premium to the share price and the stock has doubled since then . 

 

(b) Fairchem + Privi = 64 + 163 = 227M. Conservative Fair value in 2 years = 163M + 64*2 = 291M

Privi has been liquidated for 163M already. The day the announcement was made FIH stake in privi was worth 233M. This deal puts Fairfax mgmt in rarified circles of investing community since its extremely rare(never) to sell your stake for a 30% discount to a promoter . Especially when there is no pressing need for cash.  A self goal by the Fairfax team.

Fairchem is doing well and has a huge room for growth. The share price has doubled since the last quarter .

(c) Other public Equities  = 160M .Conservative  Fair value in 2 years  = 160*1.2 = 192M

With the recent run up in India market . I imagine they are doing okay here.

 

2. Private investments -

Anchorage/Bangalore Airport - ( 1.4B ). Base case Fair value = 1.4B

PreCovid

A new runway at the current terminal has been operationalized which will help BIAL to overtake Mumbai in terms of domestic traffic. Second terminal on track for mid 2022.   (It looks amazing btw.)    A cybercity under construction on 400acres around the airport. A clear path to 70M+ passengers from the current 35M in 5 years.

 

 Adani trying to list their airport assets for 4B+ .The other public airports around the world trading at 1.5-2 times the multiple of Bangalore airport. 

BIAL has a claw back provision for Aero revenue which guarantees them a fixed 15% return on equity in any given control period. This should help them recover a significant amount of lost revenue over the next 2-3 years.

PostCovid -

I think based on the factors above FIH should not find it hard to list BIAL( via anchorage ) for 2.8B+ . Without COVID, the valuation could have easily been 4B+. Mgmt indicated in the annual report that despite covid, 2.8B valuation for BIAL is fairly low and they expect better pricing in public markets given the marketability of an asset like BIAL.

 

Sanmar - ( 338M ) . Base case Fair value in 2 years = 700M

This is a hidden gem in the portfolio which could be worth 3-4x from current prices ( 80%)  or go to zero ( 20%) . PVC pricing is at all time high but sanmar is facing a  liquidity crunch which has forced their hand to go for an IPO an year sooner than what they would have liked. If you read the IPO circular ,  it becomes clear how undervalued Sanmar is at 1B valuation. FIH is flush with cash even post tender offer and  will not let their equity get affected and might provide a short term loan if needed. Sanmar merged their India businesses earlier this year and is going to aim for a combined valuation of 2B+ for their India business when they ipo this year. Then you have the Egypt business which could be worth another 500M easily. all this is dependent on whether they can tide over their current liquidity situation ( I think they will ). Post the equity raise there is a clear path to 200M in EBITDA within 2- 3 years for just their India business, which as per the valuation of their peers ( 20X multiple to earnings) should put just india business at 3-4B valuation. Sanmar is paying interest rates as high as 18% on their debt and will significantly bolster their cash flow if the IPO is successful since most of the IPO proceeds will be used to pare down debt.

 

Seven Islands - (104M ), Base case Fair Value post IPO = 200M

This business has been growing EBITDA at a 30% CAGR for the past 10 years. Past year revenue and earnings grew by 57% and 87% respectively . Promoter owned and operated . Should easily list at 20x earnings giving it a valuation of 400M+. FIH is marking it at 200M

NSE - ( 72M ) , Base case Fair Value in 2 years = 150M

Based on the transactions in pvt market earlier this year , FIH stake is easily worth north of 100M today and will be worth 200M+ when NSE IPO happens. FIH will keep marking it conservatively until the IPO. Covid volatility has given a tremendous boost to another already growing and monopolistic business. Here are the numbers

NCML - ( 86M ), Fair Value in 2 years = 86M

 the only bad investment FIH has made so far. It has a decent chance of turning out okay given the strong tailwinds on the back of agriculture reforms initiated by the govt last year. Since there is no clear timeline of when the turnaround might happen lets keep it at where FIH is marking it.

Saurashtra(33M) - Fair Value in 2 years = 33M

 too small to move the needle right now. Has been an okay investment so far. 

Cash = 100M after tender offer

 

FIH Fair value in 2 years = 4.2 B. Current value = 1.9B

Debt = 550M

Have to account for fees , taxes .

 

 

Now the question arises why is the share price languishing at 0.7*BV instead of trading at a premium if the outlook is so rosy -

1. Mgmt Credibility - 

In the past 2 years I have spoken to 20+ fund managers and individual investors regarding Fairfax Financial as well as Fairfax India and almost none of them want to touch anything that has Prem Watsa et al incharge. No one cares about their long term track record given their horrendous performance over the past decade . Prem's ramblings on tech valuations and value investing in his annual letters has reenforced the view that he is living in denial and is incapable of admitting and learning from his mistakes. The Mgmt gets a solid C from the market right now. Imo Prem et al have earned it and deserve it .This is reflected in the valuations of Fairfax Financial , India and Africa. The sentiment is so heavily tilted against the current mgmt that it almost makes a case for being a good contrarian indicator. Fairfax India has borne the brunt of this negative sentiment despite having invested in some quite decent businesses.

A a couple of examples on why mgmt gets a C from me ( for now ) - 

(a) Fairfax financial gets paid in shares of FIH based on the appreciation in BV regardless of whether the shareholders of FIH make money or not. This BV is dominated by private investments which FIH mgmt is marking . A better way of doing this should have been to take the minimum of ( BV, share price ) and charge fees based on that so that fees only get paid when shareholders are making money too.

(b) Transaction with Privi at 30% below market price with zero explanation to minority share holders

2. Lack of price discovery - 

There is a lack of clarity whether FIH is a PFIC or not for US investors. This rules out most of investment from US. India is an emerging market which is a negative for a lot of Canadian Investors. Coupled with a small float and almost zero smart money looking at this price discovery has been significantly hampered. If you look at the ownership structure of Fairfax India ,OMERS, FIH and host of mutual funds are biggest share holders. FIH is the biggest buyer at 25% of daily volume almost every day.

3. COVID - there is still a lot of uncertainty whether India will experience a third wave or not. 

 

I have been invested for the past 3 years+ and post the crash in share price during COVID made it by far the biggest position in my portfolio.

 

re BIAL/Anchorage - an example today of pension/infrastructure funds' appetite for airport assets - takeover offer announced for Sydney airport

https://www.smh.com.au/business/companies/super-giants-bid-22b-for-sydney-airport-20210705-p586ui.html

[alpha]

 

Has anyone checked on the tax implications of the Dutch Auction? My broker sent out a note stating they believe it would be taxed as a dividend but to confirm with accountant/CRA first.

[StubbleJumper]

52 minutes ago, alpha said:

 

Has anyone checked on the tax implications of the Dutch Auction? My broker sent out a note stating they believe it would be taxed as a dividend but to confirm with accountant/CRA first.

 

It's covered in the Issuer Bid Circular which can be downloaded off of SEDAR.  The Paid-up Capital is US$11.55/sh and the buyout should exceed US$12.50, so you should expect a deemed dividend ranging somewhere between US$0.95 and US$3.45/sh.

 

 

SJ

 

 

*EDIT* BTW, this might also be an opportunity to pick up a bit of beer money for any Canadian taxfiler who has a bit of free space in a RRSP or TFSA and who doesn't already own some Fairfax India.  The tender will probably settle close to the higher end of the price range, and it has an odd-lot privilege, meaning you can buy up to 99 shares and be guaranteed to not be pro-rated.

Edited July 12, 2021 by StubbleJumper