Fairfax India new issue

[nwoodman]

59 minutes ago, StubbleJumper said:

 

this is an example of the company's ongoing governance issues.

 

 

SJ

Unfortunately I think this is the case.  Ben comes across as a pretty sharp cookie.  If he gets on the front foot and cements his place as a competent chair and an articulate advocate for the company then there could be upside to both FIH and FFH. I was probably a little naive in my thinking about India a few years back, it is a tough nut to crack and you have some seriously entrenched players….Adani I am looking at you.  
 

On the flip side, I wonder if Prem can sniff some upside post election, you would hardly put your son in a position to fail.

[Xerxes]

2 hours ago, juniorr said:

Isn't this a downgrade?

not at all. 
 

in the AGM, Prem sang his praises. 
I actually thought he was going to announce his retirement at the AGM 

[Xerxes]

Wouldn’t there be a conflict of interest between Ben’ own Marval business and FIH where he would be chair. 
 

Both outfit invest in India. 

[glider3834]

41 minutes ago, Xerxes said:

Wouldn’t there be a conflict of interest between Ben’ own Marval business and FIH where he would be chair. 
 

Both outfit invest in India. 

I think BW sets out in his tweet that they will be each fishing in different ponds but yes both in India. 

 

https://x.com/benwatsa/status/1797745797280170441

Edited June 4, 2024 by glider3834

[Haryana]

4 hours ago, juniorr said:

Isn't this a downgrade?

 

"Gopal will continue to report to Chandran"

 

[Haryana]

5 hours ago, dartmonkey said:

Well, in this case, Bangalore is 50% of book value, and that number might end up being a fair bit higher. Fairfax India pays Fairfax Holdings 20% of book gains over 5% a year, so if the Bangalore Airport ends up generating 20%/year returns, you would lose 3% of that to Fairfax (i.e. 3 out of 20), so you would only get 17%. I could live with a flattening like that.

 

Long and tedious addendum; skip to the last paragraph if this is TL;DR:

 

Here's the company's description of the benchmark:

 

You will recall that under the investment advisory agreement with Fairfax Financial, Fairfax Financial is entitled to a performance fee, calculated at the end of each three-year period, of 20% of any increase in Fairfax India’s BVPS (including distributions) above a non-compounded 5% increase each year from the BVPS at inception in 2015.

 

If book per share was $10 on January 30th, 2015 (see last year's annual report, p. 70), then the benchmark is presumably $10.50 after a year, $11.00 after 2 years, and $11.50 after 3 years, and so on, with the benchmark higher by 50c every year. This is, I think, what is meant by 'non-compounded' in the above quote.  I think this is borne out by my calculation for the fee paid after 3 years, when book value was $15.24 on Dec 31st, 2017, before fees. They probably adjusted for the fact that there were only 11 months in 2015, but roughly, we would expect them to have paid out 20% of book value growth beyond $11.50, which would be 0.2*(15.24-11.50)=0.2*$3.74=$0.75. $0.75 would represent 7.5% of those 52.4% in gains, meaning the gain after fees would be 52.4-7.5%=44.9%, and this corresponds quite closely with the $4.46 book value gain reported. FIH shareholders kept $4.46 out of the $5.24 in book value gains, or 85%. 

 

So I think this calculation is probably correct. But what it means is that, every year, the 5% benchmark means 5% of the original $10 per share book value, not a 5% return on the previous year's book value. This makes no difference in the first year, and only a tiny difference in the next few years, but presuming that FIH's book value continues increasing, it will eventually mean that the benchmark becomes a very small percentage of book. For instance, at 2023 year end, book value was $21.85 (after fees). At the end of 2024, if the book value has increased by 20% (let's be optimistic), it would be $26.22 before fees, a gain of $4.37. Fairfax Holdings would take its 20% fee on the gain minus the benchmark, i.e. $4.37-0.50 = $3.87, 20% of which is $0.77, leaving $4.37-$0.77 = $3.60 for shareholders like us. In other words, we would keep $3.60 our of the $4.37 in book value gains, i.e. 82% of gains, with Fairfax getting 18%.

 

Compare this to 2017, when we paid 15% of gains and paid . As the 50c annual benchmark becomes a smaller and smaller proportion of the book value per share, the performance fee will get closer and closer to 20%. For instance if book value grows by 15% a year over 20 years (it was 14.3% for the first 9 years), the book value per share would go from $164, a 15%  annual gain would $24.55, and we would be paying out 20% of $24.55-$0.50, i.e. essentially 20% of the whole book market gain, with the 50c benchmark, initially 5% of book value, now representing only 0.3% of book value.

 

TL;DR: The performance fee will get a bit worse, because compounding is making the non-compounded benchmark disappear. Eventually we will just pay 20% of all book value gains. It's not a deal-breaker for me, but it's a little worse than paying 20% of the annual gains beyond 5%.

 

Great observation!

 

Going forward, accordingly, we may pretty much assume the fee to be about 20% of the gains (Not 15%).

 

However, the current discount to BV is too wide.

Let us say the discount gets down to 10-15% after a few years of good performance.

Fee to be paid only on the BV gain while shareholder will have a higher market gain on narrowed discount.

 

[Crip1]

For those without a full position in FFI, looks like we're being given a buying opportunity today.

 

-Crip

[alpha]

On 5/31/2024 at 1:09 PM, ICUMD said:

Has anyone done this?  How does it work and what was the offer?  When I call to Fairfax India contact  number, I get a generic mailbox.

 

Curious if anyone has done this recently too?

[TwoCitiesCapital]

5 hours ago, Crip1 said:

For those without a full position in FFI, looks like we're being given a buying opportunity today.

 

-Crip

 

+1

 

Increased my position by ~6%. 

[Junior R]

any thoughts on if the new election results would impact the IPO

[whatstheofficerproblem]

11 minutes ago, juniorr said:

any thoughts on if the new election results would impact the IPO

 

It will all be back to normal in a few months, I doubt there will be any significant impact. Coalition governments have always been the ones to bring the biggest changes in India (Nuclear Test), the people who have formed an alliance with BJP to form the govt, regional parties (TDP etc) have vested interest in India moving forward as it would trickle down to their states. FWIW, we will now see an even more aggressive version of Modi.

[ICUMD]

Hopeful that Ben Watsa will be a catalyst for getting things going at Fairfax India.

 

Since he's young, and hopefully 'hungry' to make a name for himself outside his father's shadows, Fairfax India might be the vehicle for him.  It seems that Marvel has a market cap of about 300M.  

Much better prospect with Fairfax India at ~2 B.

 

Also, Fairfax India needs cash. 

So, now that elections are over, they better start aggressively looking to get an Anchorage listing or start selling some of their non core businesses.

 

Without cash, this company is dead in the water.

 

[gfp]

A bit of volatility in share prices -

Edited June 7, 2024 by gfp

[gfp]

Also saw this on reuters -

https://www.reuters.com/business/aerospace-defense/india-airport-industrys-pre-tax-profit-grow-35-fy25-capa-india-says-2024-06-07/

[ICUMD]

Reason for the volatility:

 

 

https://www.business-standard.com/finance/news/rbi-appointed-auditor-completes-the-special-audit-of-iifl-finance-124060601086_1.html

[gfp]

25 minutes ago, ICUMD said:

Reason for the volatility:

 

 

https://www.business-standard.com/finance/news/rbi-appointed-auditor-completes-the-special-audit-of-iifl-finance-124060601086_1.html

 

So news about an audit being completed at IIFL Finance results in a 20% move up in IIFL Securities?

[ICUMD]

Never said markets are rationale!

[dartmonkey]

26 minutes ago, gfp said:

So news about an audit being completed at IIFL Finance results in a 20% move up in IIFL Securities?

 

22 minutes ago, ICUMD said:

Never said markets are rationale!

 

Exactly, this does seem irrational. It makes sense that IIFL Finance (IIFL) should be up, but it is not clear how this has any bearing on IIFL Securities which, since the split of IIFL into 3 independent companies, all publicly traded: IIFL Finance (IIFL), IIFL Securities (IIFLSEC), and another company with the mysterious name 360 One Wam Limited (360ONE.NS) (a wealth management firm.) (A previous spinoff, 5Paisa, is also a small publicly traded FIH holding.)

 

Could it just be confusion between the 2 tickers with IIFL in them? And isn't it odd that the one that is seemingly NOT concerned by the news of the end of the government audit (IIFLSEC) is up 20%, while the one that IS concerned (IIFL) is up 14%?

 

Here's why it makes sense for IIFL Finance:

From April: BENGALURU, April 23 (Reuters) - IIFL Finance said a special audit directed by the Reserve Bank of India (RBI) started on Tuesday, about one-and-a half month after the country's central bank barred the non-bank finance company from disbursing gold loans.

In early March, the RBI ordered IIFL Finance to stop sanctioning, disbursing and selling gold loans, citing "material supervisory concerns" in its gold loan portfolio, raising liquidity concerns among its investors and lenders.

Gold loans accounted for nearly a third of the company's total loan assets as of 2023-end.

Since the order, IIFL has lost nearly 30% in market value.

The RBI said in March that the restrictions will be reviewed after completion of a special audit and the company's rectification of the audit findings.

"We are committed to extending full cooperation to the special audit team to ensure a comprehensive and thorough audit," IIFL said on Tuesday.

Meanwhile, the company has received liquidity support from its top shareholder Fairfax India and decided to raise funds to assuage some of the concerns.

 

This is actually quite good news for Fairfax India (at the end of a week of disappointing election news) - IIFL Finance represented about 7% of FIH's holdings on March 31st, worth $234m. It had lost $177 in Q1 on news of the 'supervisory concerns'. FIH stepped in with liquidity support. I don't know if the company announced what terms this support came with, all I can find is this from March 6: "Fairfax India has agreed to invest up to $200 million of liquidity support on terms to be mutually agreed and subject to applicable laws, including regulatory approvals (if any),” IIFL Finance said in a press release.

 

Given that IIFL Fiinance was trading at about 620 INR prior to the concerns, and dropped to about 380 before the FIH support was announced, and after a further dip have recovered INR56 today and are up to 470, shares have now recovered about 3/8 of the drop. Since shares were at 345 on March 31st when the quarter closed, half of the Q1 loss has now been reversed, for an unrealized gain of almost $100m. And FIH may make a little extra on whatever money they provided as support. I suppose we should wait to find WHAT the concluded audit found before we get too excited, but at least this Q1 problem looks like it is on its way to being resolved.

 

Meanwhile, IIFL Securities, 4% of FIH's holdings at the end of Q1, is up from 123 INR to 219, including today's (confused?) gain of 36. This part, I doubt we get to hold on to... 

 

 

[gfp]

RE: additional investments made in IIFL Finance after the RBI action - $23 million of stock purchased at 300 INR in a rights offering and $60 million of financing - probably short term on fair and friendly terms for all

 

[dartmonkey]

17 minutes ago, gfp said:

RE: additional investments made in IIFL Finance after the RBI action - $23 million of stock purchased at 300 INR in a rights offering and $60 million of financing - probably short term on fair and friendly terms for all

 

 

OK, thanks. 6.405m shares is exactly 1/9 of their previous holdings of 57.641m shares, so they took full advantage of the share offering, meaning there was no dilution for FIH shareholders. IIFL shares outstanding went up from 392.6m sh to 424.5m, so it looks like they issued 31.9m new shares altogether, FIH accounting for 20.1% of the new shares. FIH previously owned 14.7% of the shares, so given the fact that not all shareholders took advantage of the rights offer, FIH will have slightly increased their ownership from 14.7% to 15.1%. More important, they will have confirmed to the Indian investment community (including the government) that they are a reliable financial backer.

[Viking]

On 6/4/2024 at 7:16 AM, Crip1 said:

For those without a full position in FFI, looks like we're being given a buying opportunity today.

 

-Crip

@Crip1 Good idea. I have reestablished a starter position in Fairfax India at $13.80. The publicly traded holdings have increased nicely so far in Q2 so we should see a nice bump in book value when they report Q2. BIAL continues to execute well. It’s a little surprising to me that the stock continues to trade below $14. 

Edited June 10, 2024 by Viking

[rajpgokul]

Recently wrote-up a note on Fairfax India on SumZero. Sharing it here. Might have some additional information on the airport asset that might be useful. Thanks. 

Fairfax India - Gokul (1).pdf

[Viking]

3 hours ago, rajpgokul said:

Recently wrote-up a note on Fairfax India on SumZero. Sharing it here. Might have some additional information on the airport asset that might be useful. Thanks. 

Fairfax India - Gokul (1).pdf 247.41 kB · 12 downloads

@rajpgokul That was a very well done write-up of Fairfax India - one of the best that i have read. It was very rational, concise and hit on the key points. It is also great to get input from a local investor. Thank you for sharing. Please share anything else you have on Fairfax India/holdings or Fairfax/holdings.
 

Do you have any thoughts on a potential IDBI bank bid by Fairfax India/Fairfax? I am wondering what kind of asset IDBI Bank might be? Something with a lot of potential? Decent management team? Or something probably best avoided?
 

Is banking in general a good business in India? Is that industry well positioned to benefit/grow over the next decade (it looks like it from afar)?
 

Fairfax controls CSB Bank… with my limited understanding of that holding… it appears quality of management has been key to its successful turnaround. Banking certainly appears to fall within Fairfax India’s (and Fairfax’s) circle of competence with CSB Bank (and Eurobank). 

Edited June 11, 2024 by Viking

[rajpgokul]

42 minutes ago, Viking said:

@rajpgokul That was a very well done write-up of Fairfax India - one of the best that i have read. It was very rational and hit on the key points. It is also great to get input from a local investor. Thank you for sharing. Please share anything else you have on Fairfax India/holdings or Fairfax/holdings.
 

Do you have any thoughts on a potential IDBI bank bid by Fairfax India/Fairfax? I am wondering what kind of asset IDBI Bank might be? Something with a lot of potential? Decent management team? Or something probably best avoided?
 

Is banking in general a good business in India? Is that industry well positioned to benefit/grow over the next decade (it looks like it from afar)?
 

Fairfax controls CSB Bank… with my limited understanding of that holding… it appears quality of management has been key to its successful turnaround. Banking certainly appears to fall within Fairfax India’s (and Fairfax’s) circle of competence with CSB Bank (and Eurobank). 

Thanks @Viking for the kind words. Fairfax Financial has become our top position now (mostly accumulated between 2019-21). Your consistent updates on Fairfax Financial has been very useful and I don't think, I have any insight or analysis that is unique from what is already shared in this forum (both on the insurance underwriting and investment portfolio). 

 

IDBI Bank - Good asset, but not sure if it could be a good deal:

 

The reason IDBI is a good asset is because of its high quality deposit franchise. CASA deposits (non-term deposits/ float at very low cost) is the best indicator of a deposit franchise. IDBI bank has 17.5 billion USD of CASA (50.5% of overall liabilities) and is probably the highest in the industry. Only a mature branch network can have a large CASA deposit base and hence it is difficult for a new entrant to build it organically. In Indian banking, the public sector banks (government owned) always had the best deposit franchises and the private banks have the best lending franchises. The market is now mature where the large private sector banks (Top-3) are able to hold on to low cost deposits even during crisis. Since IDBI Bank is going to be the first government bank to be privatized, the value of this low cost deposit base will be hugely valuable in the hands of an efficient private operator who can lend responsibly. 

 

IDBI bank has an overall cost of funds of 4.3% (almost 280 bps below Indian GSec) for its 34 billion USD of liabilities. This itself would allow it to earn ROA's of 1.5% without taking any credit risk on their balance sheet. In a capital constrained country like India with numerous lending opportunities, this is a huge moat to have. For example, Fairfax operated CSB Bank which is a 104 year old bank with a strong presence in the Indian state of Kerala has a CASA ratio of 27% (950 million USD). For CSB Bank to grow 25%+ on a sustainable basis, the limiting factors is not on the lending side, but in raising deposits at a reasonable cost (as they are an unknown entity outside South India). IDBI Bank with its large scale and pan-India deposit franchise would thus be a very good asset to own. 

 

The reason I have doubts on it being a good deal is because of it being a rare asset that is going to be sold through an auction during a good cycle. All the 3 reported frontrunners - Kotak bank, Fairfax and Emirates will look at it from a 1-2 decade perspective and hence would be ready to have lower returns in the short term. Kotak has a strong incentive to bag the asset as they can immediately derive synergies and roll-out their lending franchise on top of IDBI's deposit franchise. Emirates has a strong balance sheet and this is the only way for them to enter Indian banking and hence they would be happy to earn a 10% CAGR over 15 years. Fairfax has no edge in this auction. 

 

Indian banking sector is attractive because credit demand will grow at 12-15% CAGR over the next decade and the well run Indian private banks will take market share from public sector to grow at 16-20% CAGR. Indian regulator does not give out deposit taking licenses or banking licenses easily (6 new licenses over the last 25 years) and hence the Indian banking license is very valuable. 

 

India went through a very bad corporate loan cycle from 2012-2021 and the turnaround has already happened. IDBI had the worst non-performing loan ratio and the management has completely provided for the same. The Indian stock markets have re-rated Indian public sector banks (almost up 3X since 2021) and IDBI bank now trades at par with private banks at 1.8X price to book value. Thus, this is not like CSB Bank when Fairfax bought during crisis and turned it around by appointing good management team. 

 

Thus, I believe that IDBI bank will be fully valued in an auction with the buyer happy to compound earnings/ book value rather than look for re-rating from the acquisition multiple. Thus, the deal would be dilutive to near term shareholder returns in my view as our hurdle would be higher than someone looking at it from a decadal perspective. The cheque size would be large at 5-7 billion USD and hence the bid could be through Fairfax India partnering with Fairfax Financial and other global investors. Let's see how it evolves and we can calibrate our investment accordingly. Thanks. 

[Gamma78]

@rajpgokul wow thanks so much for those comments on IDBI - that was a learning experience for me. 

 

This statement has my mind in a whirl:  "IDBI bank has an overall cost of funds of 4.3% (almost 280 bps below Indian GSec) for its 34 billion USD of liabilities. This itself would allow it to earn ROA's of 1.5% without taking any credit risk on their balance sheet."

 

Wild!

 

Just wondering - you mention that private sector banks will continue to take market share from public sector and grow 16-20% compounded. Who do you see being the biggest winner? HDFC again as in the last 30 years?

 

............asking for a friend