Fairfax India new issue

[nwoodman]

Not sure what to make of this but the market has whacked them again today.  Sounds like it has been ongoing  and the RBI has had enough.

 

 

 

[glider3834]

https://www.livemint.com/companies/news/fairfax-india-to-invest-up-to-200-million-liquidity-support-to-iifl-finance-11709705405055.html

[valueinvesting101]

https://www.bseindia.com/xml-data/corpfiling/AttachLive/1d915198-cd20-434b-a2f5-360169c0b09e.pdf

Fairfax India Agrees to Invest up to US$200 Million Liquidity Support to IIFL Finance
Not much details about the possible investment. It seems IIFL Finance is in damage control mode right now. May need bigger liquidity support than $200 Million
 

[Haryana]

Indian government is rooting out corruption with a vengeance.

 

Overall a positive for the investment environment in India even if IIFL goes to bankruptcy.

 

Not even a dent made in Fairfax India (FIH/FFXDF) as if they had already been priced at zero.

 

[ICUMD]

Interesting that Fairfax India is potentially becoming a lender to a lender, IIFL.

 

Hopefully they manage the risk appropriately.

[Haryana]

41 minutes ago, ICUMD said:

Interesting that Fairfax India is potentially becoming a lender to a lender, IIFL.

 

Hopefully they manage the risk appropriately.

 

They seem to just provide an assurance of liquidity for now instead of actual cash transfer.

 

[giulio]

3 hours ago, Haryana said:

IIFL goes to bankruptcy

Do you think that's a risk? Could you explain why?

Also, why are you mentioning corruption?

I thought this was a lack of control problem.

A couple of years ago rbi banned hdfc bank from issuing credit cards. The issue was resolved in 9 months.

I am trying to understand the extent of the issue here.

Worst case scenario, fih completely misjudged the founder profile which would be bad.

 

Thanks

G

[nwoodman]

No particular insight but this looks like a “public hanging” to me.  Not good, but I can’t see Fairfax stepping with a line of credit if this is more than regulatory violations.

[Viking]

1 hour ago, nwoodman said:

No particular insight but this looks like a “public hanging” to me.  Not good, but I can’t see Fairfax stepping with a line of credit if this is more than regulatory violations.

I would expect any help that comes from Fairfax India will be structured in a way that is very beneficial to Fairfax India.
 

Perhaps a similar playbook to how Fairfax helped out Thomas Cook India during Covid and John Keells during Sri Lanka’s economic crisis. A couple of years later, both of those incremental investments have worked out very well for Fairfax shareholders. It’s almost like a kind of vulture investing… except in a situation you understand exceptionally well.

 

Fairfax’s ownership in IIFL Finance has come down quite a bit over the past couple of years. Fairfax sold all of their direct ownership position. And in Q4 2023, Fairfax India sold a big chunk of their stake (i think it raised around $150 million). 
 

Fairfax also exited their direct holding in sister company IIFL Wealth. And i think Fairfax India has sold down their position quite a bit as well. 

Edited March 6, 2024 by Viking

[Haryana]

7 hours ago, giulio said:

Do you think that's a risk? Could you explain why?

Also, why are you mentioning corruption?

I thought this was a lack of control problem.

A couple of years ago rbi banned hdfc bank from issuing credit cards. The issue was resolved in 9 months.

I am trying to understand the extent of the issue here.

Worst case scenario, fih completely misjudged the founder profile which would be bad.

 

Thanks

G

 

Forum writings often tend to be easily misunderstood.

 

When it comes to negative news about India, colonial media brainwashed folks are expected to immediately get images of scams and corruption, therefore, I raise the spectre of bankruptcy to ease the concerns in wholesale by asserting that even if the worst of unlikely worst happens, there is nothing to worry about.

 

Actually, the Fairfax India stock is showing a fat sign of a large bottom without any down move on such a negative news.

 

[gfp]

Who's got the Fairfax India 2023 letter to upload?  I can't seem to access it

Edited March 8, 2024 by gfp

[Luke]

3 minutes ago, gfp said:

Who's got the Fairfax India 2023 letter to upload?  I can't seem to access it

Its uploaded in the Fairfax Letter 2023 thread! 

[gfp]

9 minutes ago, Luca said:

Its uploaded in the Fairfax Letter 2023 thread! 

I'm looking for India, not FFH

[gfp]

I finally got it.  Fairfax India is having some website issues.  This is the full AR not just the letter

FIH_-_Annual_Report_2023.pdf

[gfp]

https://www.reuters.com/business/finance/indias-iifl-finance-raise-242-mln-via-rights-basis-non-convertible-debentures-2024-03-13/

[valueinvesting101]

I was looking at management of IIFL Finance as listed here: https://www.iifl.com/finance/about-us/leaders. Rupal Jain who is leaving IIFL had 10 years of experience total professional experience after finishing her bachelor's education in 2013-2014.

Upcoming Chief compliance officer Mauli Agarwal also has less than 10 years of professional experience as she has finished her education in 2015. It might incorrect equate experience with capability but definitely make me circumspect about their ability to monitor complex operation effectively. I wouldn't be surprised if RBI's regulatory personnel looking down upon younger compliance manager in IIFL purely due to age or may be due to communication gaps. 

Definitely seems to have less experience than I would have expected for someone as head of compliance. 
Bio of some of the other leaders in the Gold loan business also seems like they have recently assumed responsibilities for larger operation. 
 

[Haryana]

RBI is on a fiery crusade against retail lending exuberance -

 

https://www.businesstoday.in/industry/banks/story/not-waiting-for-house-to-catch-fire-banks-doling-out-home-loan-top-ups-on-rbi-radar-421685-2024-03-15

 

"The RBI is also setting out regulatory expectations from the industry through its recent supervisory actions, which can act as a guidance for the entire sector," said Anil Gupta, senior vice president and co-group head of financial-sector ratings at ICRA.

The RBI has taken a string of measures over the past six months to rein in some retail lending by banks and non-bank financial firms, and publicly warned them against "all forms of exuberance".

 

[Haryana]

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

 

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

 

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

 

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

 

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

 

[ICUMD]

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

 

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

 

 

[ICUMD]

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

[This2ShallPass]

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

 

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

[ICUMD]

7 hours ago, This2ShallPass said:

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

 

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

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

 

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

Edited March 30, 2024 by ICUMD

[giulio]

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

 

interesting discussion on India, around min 50.

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

[giulio]

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

Small consolation.

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

[giulio]

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

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

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

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

 

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

 

G