Fairfax India new issue

[LC]

Agreed. I bought more today. BIAL is a great asset.

[Madpawn]

Why are people on this forum not more hyped about Fairfax India? Imho it has even more upward growth room than Fairfax currently does. Am I missing something?

[nwoodman]

35 minutes ago, Madpawn said:

Why are people on this forum not more hyped about Fairfax India? Imho it has even more upward growth room than Fairfax currently does. Am I missing something?

Management fees that accrue to the parent company.  I am excited by the prospects but why not just own Fairfax, they have full control anyway.

[SafetyinNumbers]

3 minutes ago, nwoodman said:

Management fees that accrue to the parent company.  I am excited by the prospects but why not just own Fairfax, they have full control anyway.

Management fees really aren’t that high with the 5% hurdle rate. 

[ICUMD]

In the hopefully near term, it's an arbitrage opportunity for when BIAL goes public through a listing of Anchorage.

 

In the longer term, it's a demographic growth play.

 

Regardless, the value is there if you have the patience. Management is solid.  Lots of quality holdings.  Discount more than covers the fees.

 

A deep pocketed investor could mark this thing to book in short order.  

 

It's not a hype stock by any stretch.  More like 'watching paint dry' I'd say.

[nwoodman]

It’s also worthwhile looking at how minority shareholders of Fairfax subs have have faired historically.  Often the rug gets pulled just before the real value accretes.  Of course this time might be different.

[MMM20]

15 hours ago, nwoodman said:

Management fees that accrue to the parent company.  I am excited by the prospects but why not just own Fairfax, they have full control anyway.

+1. FFH is now trading at like 5x earnings and things have really seemed to line up for them.

 

With FFH you also get both the Fairfax India assets *and* others… the potential issue with FIH is that FFH can cherry pick the best assets — like Digit which is in FFH but not FIH b/c it’s an insurance company, I guess? And Digit was prob most squarely in FFH’s circle of competence and has worked out the best so far, right? So in FFH you have full alignment with Prem purely in terms of where his capital is invested *and* arguably his best India investments + the FIH holdings. 

 

That said, I would prob swap some FFH into FIH if the valuation discrepancy got wide enough and/or I got really bullish on India and less so on Atlas etc. 

 

Short answer = with FFH you get Fairfax’s pretty big as a % of NAV (~15%?) investment in FIH plus others (maybe their best) + full alignment with Prem + valuation much cheaper on cash flows  

 

Edited May 13, 2023 by MMM20

[gfp]

2 hours ago, MMM20 said:

like Digit which is in FFH but not FIH b/c it’s an insurance company, I guess?

 

Yes, this has been very explicit from the beginning - Fairfax India will not compete with Fairfax in the Insurance space.  Pure insurance companies would go to Fairfax parent company.

 

I own both securities but I will say the main reason to own Fairfax India and not just participate through Fairfax Financial is that FIH.U is tiny inside Fairfax's investment portfolio.  You aren't really getting much exposure to Fairfax India by owning Fairfax parent.  So if you like the assets and the prospects of the India operation, you can size it how you want by owning Fairfax India additionally.  And when you own both the fee structure won't bother you the same - or at least it doesn't bother me (but I own Biglari Holdings so obviously I have made peace with this type of incentive payment when it is based primarily on performance).  

[gfp]

2 hours ago, MMM20 said:

Short answer = with FFH you get Fairfax’s pretty big as a % of NAV (~15%?) investment in FIH plus others (maybe their best) + full alignment with Prem + valuation much cheaper on cash flows  

 

 

I don't understand what you are saying here.  You think Fairfax India represents 15% of the NAV of Fairfax Financial or Fairfax Financial's total investment portfolio?

 

*edit to point out that Fairfax's ownership in Fairfax India shares is something like $625 million inside a $57 Billion investment portfolio (1%) or a $16 Billion market cap company (3.9%).

Edited May 13, 2023 by gfp

[rohitc99]

I am of indian origin and have been investing directly in the Indian markets for last 25 years. However i still hold FIH as it gives access to opportunities like BIAL which i cannot get directly (lived in bangalore for 8+ yrs too)

 

There are some public investments like IIFL which are good investments on their own. This company is growing AUM @ 25% and could continue for a long time

[ICUMD]

FIH itself is currently a concentrated play on BIAL.

(This may change if they go elephant hunting for IDBI)

 

BIAL has a lot going for it with COVID behind:

• Demographics - accessing 30-50 million passengers per yr is a tremendous opportunity for monetization.
• Growing wealth effect
• FDI bringing tech to Bangalore like Foxconn
• Favorable regulated rates of return on aero and non regulated in non aero activities
• Land monetization etc.

The buildout of T2 shows how quickly they are progressing and management prowess. Land development is also moving at a good clip.

 

India is at least 20 yrs behind China, but favorable developments so far geopolitically and demographically.  Tech companies will be transformative in India.

 

I still think of FIH as a venture capital/ closed end fund planting seeds of investment in India.  BIAL I think is starting to bloom.  Just not yet fully appreciated.

 

 

[MMM20]

2 hours ago, gfp said:

 

I don't understand what you are saying here.  You think Fairfax India represents 15% of the NAV of Fairfax Financial or Fairfax Financial's total investment portfolio?

 

*edit to point out that Fairfax's ownership in Fairfax India shares is something like $625 million inside a $57 Billion investment portfolio (1%) or a $16 Billion market cap company (3.9%).

 

From latest FFH report — “Fairfax India cash, portfolio investments and associates (fair value $3,079.1; December 31, 2022 – $3,079.6; January 1, 2022 – $3,336.4)”

 

Seems like ~15% of FFH NAV. ~5% of the nearly $60B total investment portfolio including cash and the like… but effectively lots of (good float) leverage on their equity investments. It’s a meaningful allocation for FFH, economically like a ~15% exposure. Am I thinking about this wrong?

 

Edited May 13, 2023 by MMM20

[gfp]

1 hour ago, MMM20 said:

Am I thinking about this wrong?

 

Yeah.  They consolidate it so there is a lot of minority interest.  Think of it this way, the market value of all of Fairfax India currently is $1.76 Billion, and Fairfax India's market price is way below book value.

Edited May 13, 2023 by gfp

[MMM20]

1 hour ago, gfp said:

 

Yeah.  They consolidate it so there is a lot of minority interest.  Think of it this way, the market value of all of Fairfax India currently is $1.76 Billion, and Fairfax India's market price is way below book value.

Ah yeah makes sense — I must’ve seen the ~$2.4B ish and now ~$3B in the FFH accounts and just remembered that. I know ~$4B ish is the total FFH minority interest so should’ve figured that could be it. I haven’t looked much at FIH standalone so I wasn’t aware of the exact size of the overall pie. My bad!
 

Ok, so then my question is why FFH hasn’t yet bought more FIH, since FIH is trading at such a discount and FFH has flipped to generating lots of cash.
 

I believe Digit is economically a ~$3B fair value for FFH at this point if you believe the press reports about the potential IPO. Now I know that dwarfs FIH and yet Prem isn’t buying more FIH. I know FIH is buying its own stock so FFH’s % ownership is increasing.
 

Does it make sense to buy more FIH when Prem himself buys more? What am I missing this time?

 

Edited May 13, 2023 by MMM20

[ourkid8]

1 hour ago, MMM20 said:

Ok, so then my question is why FFH hasn’t yet bought more FIH, since FIH is trading at such a discount and FFH has flipped to generating lots of cash.

 

FFH did purchase 4.93% of FIH shares on Feb 16, 2022 from two exiting shareholder at USD$12.  If there is a large block sale at an attractive price which FIH cannot repurchase, FFH will most likely take it. 

[gfp]

25 minutes ago, ourkid8 said:

 

FFH did purchase 4.93% of FIH shares on Feb 16, 2022 from two exiting shareholder at USD$12.  If there is a large block sale at an attractive price which FIH cannot repurchase, FFH will most likely take it. 

 

That's right.  They also bought 58,185 shares at 10.85 on June 19th 2022, 1,532,864 shares on May 26th at $10.61.  They let Fairfax India have first dibs on repurchasing shares because they can do it under an automatic plan (x% of average daily volume plus "take blocks").  As an insider with nonpublic information, Fairfax is not able to buy FIH shares any time it wishes.  Plus there is a low public float as it is (OMERS owns a block - something like 20m shares).

 

Lots of purchases by Ben Watsa, Brian Bradstreet and other reporting insiders.  The biggest buyer is FIH itself under an automatic plan - including a $10.7 million block trade last week.

 

And every time Fairfax buys FIH or FIH buys shares in itself they are giving up fees they would otherwise be earning on those shares.

Edited May 13, 2023 by gfp

[MMM20]

On 5/13/2023 at 4:38 PM, gfp said:

And every time Fairfax buys FIH or FIH buys shares in itself they are giving up fees they would otherwise be earning on those shares.

 

Right. If I'm understanding correctly, this gets at the concerns around alignment of interests. While FIH have clearly made shareholder friendly decisions recently, it seems like in the longer run FFH's incentive skews toward FIH getting bigger even if maybe at the cost of higher per share returns. That's not the case in FFH where Prem has the vast majority of his wealth invested and would like to regain majority voting control and it's all about compounding on a per share basis. So even if FIH's underlying returns are good, that could be one reason why they're not as good as they could be and the discount to NAV stays wide. Is this characterization unfair? 

 

Edited May 15, 2023 by MMM20

[ICUMD]

1 hour ago, MMM20 said:

 

Right. If I'm understanding correctly, this gets at the concerns around alignment of interests. While FIH have clearly made shareholder friendly decisions recently, it seems like in the longer run FFH's incentive skews toward FIH getting bigger even if maybe at the cost of higher per share returns. That's not the case in FFH where Prem has the vast majority of his wealth invested and would like to regain majority voting control and it's all about compounding on a per share basis. So even if FIH's underlying returns are good, that could be one reason why they're not as good as they could be and the discount to NAV stays wide. Is this characterization unfair? 

 

Don't think Prem is purposely managing the Fairfax India investment in that sense.  I think he's really just doing what any value investor in his shoes would be doing- buying back shares since he sees it as undervalued.  

 

For example, BIAL is valued privately based on Fairfax's internal valuation model.  

 

Prospective shareholders of Fairfax India may choose to agree or disagree with that book value and price the shares accordingly.

 

Over 60% of it's holdings are private I believe. This makes valuation is somewhat arbitrary. So maybe the market thinks book value overvalues the company hence the discount?

[sfbm21]

1 minute ago, ICUMD said:

Don't think Prem is purposely managing the Fairfax India investment in that sense.  I think he's really just doing what any value investor in his shoes would be doing- buying back shares since he sees it as undervalued.  

 

For example, BIAL is valued privately based on Fairfax's internal valuation model.  

 

Prospective shareholders of Fairfax India may choose to agree or disagree with that book value and price the shares accordingly.

 

Over 60% of it's holdings are private I believe. This makes valuation is somewhat arbitrary. So maybe the market thinks book value overvalues the company hence the discount?

It is looking like that. In addition to that it is in EM and rupee depreciation with respect to dollar etc.Anchorage spin off would help i guess 

[ICUMD]

I'll add that this is a very thinly traded company. Not a lot of awareness and interest presently.  

 

Stock price is fairly meaningless in this sense. 

Lots of investors are tired of waiting for share price appreciation or are skeptical.  These are the traded shares that are determining stock price - at depressed levels.

 

Conversely, this allows Prem to be highly opportunistic at current levels.  Don't forget he bought back substantially during the Dutch auction at $14.90.  

 

Despite excellent progress in the company, it's share price today is $12-13, where he continues to buy.

Edited May 15, 2023 by ICUMD

[dartmonkey]

Just thought I would point out that Fairfax is damned if it does and damned if it doesn't.

 

Woodman mentioned that FIH shareholders may worry that Fairfax won't treat them fairly: "Often the rug gets pulled just before the real value accretes.  Of course this time might be different." And others wonder, if it's such a good deal, why doesn't Fairfax just buy them out, or at least purchase more shares?

 

As others have pointed out, Fairfax is buying some, but not all, directly and via FIH's own repurchases. But they set this thing up for outside shareholders to get involved, and to get some extra management fees, so it would be a bit rough to just buy them all out now. I guess they are trying to find a middle way, where they buy some but not all, which probably doesn't make anyone happy maybe but which seems to me like a reasonable compromise.

[LC]

Does it have anything to do with Indian regulatory environment? I thought non resident Indians had some additional hurdles to investing in India particularly if they want control ownership.

 

I am no expert by any means so may be totally off base here.

[ICUMD]

IDBI 

 

https://www.thehindubusinessline.com/money-and-banking/kotak-vs-watsa-the-battle-for-acquiring-idbi-bank-intensifies/article66850311.ece

 

Looks like Fairfax India is in a strong running position for IDBI bank, results anticipated for June.

 

Adding a bank of this size to the Fairfax India portfolio would be an incredible deal.  Well positioning the company in an important growth niche in coming years.  

 

Thoughts?

[Saluki]

2 hours ago, ICUMD said:

IDBI 

 

https://www.thehindubusinessline.com/money-and-banking/kotak-vs-watsa-the-battle-for-acquiring-idbi-bank-intensifies/article66850311.ece

 

Looks like Fairfax India is in a strong running position for IDBI bank, results anticipated for June.

 

Adding a bank of this size to the Fairfax India portfolio would be an incredible deal.  Well positioning the company in an important growth niche in coming years.  

 

Thoughts?

 

How often has the government waived the restriction on owning more than one bank?  It looks like they made an exception in 2020 (when it looked like the world was going to end), but do you know how likely it would be now? Given the turmoil in the US and Germany from some big bank failures, maybe they would be open to a well-run firm with a good balance sheet taking them over, which may prevent a problem before it happens. But other than the incidence cited in the article, is this common or only done rarely?  

 

I'm still bullish on FFXDF either way.  Other than the illiquidity (my broker makes me use two factor authentication and limit orders only for Fairfax India), I don't see how others don't see that this is undervalued.  It's trading for ~2/3 book and you are buying it below the tender offer price last year, even though things are going better with the world reopening, which should make their biggest asset, BIAL, more valuable. 

[ICUMD]

57 minutes ago, Saluki said:

 

How often has the government waived the restriction on owning more than one bank?  It looks like they made an exception in 2020 (when it looked like the world was going to end), but do you know how likely it would be now? Given the turmoil in the US and Germany from some big bank failures, maybe they would be open to a well-run firm with a good balance sheet taking them over, which may prevent a problem before it happens. But other than the incidence cited in the article, is this common or only done rarely?  

 

I'm still bullish on FFXDF either way.  Other than the illiquidity (my broker makes me use two factor authentication and limit orders only for Fairfax India), I don't see how others don't see that this is undervalued.  It's trading for ~2/3 book and you are buying it below the tender offer price last year, even though things are going better with the world reopening, which should make their biggest asset, BIAL, more valuable. 

Hard to fully anticipate, but I suspect iDBI is a prized asset.  Either Kotak or Fairfax will work with officials to discuss options to make the buyout possible, rather than walk away.   Maybe it does mean that Fairfax needs to join CSB with IDBI.  

 

Now just a hunch, but RBI could prefer the Fairfax India offer since Kotak is much larger than CSB. 2 large banks (Kotak + IDBI) combining would undermine competition vs a smaller bank (CSB) and larger (IDBI).  They may also wish to attract more foreign ownership in banking.