Fairfax India new issue

[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 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

[Viking]

8 hours ago, rajpgokul said:

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. 

@rajpgokul Thanks for taking the time to share your thoughts. Very insightful.

[ICUMD]

@rajpgokul

Thank you for this insightful write-up.

 

One question I'm still unclear on is how they will generate the cash flow to enact share buybacks or purchase new businesses?

 

Aside from BIAL IPO and share issuance, or taking on more debt, i can't see any other options.

 

[gamma78]

someone (I think on this board) raised the prospect of potentially creating a sidecar fund where FIH is effectively the GP and attracts funds from LPs. But man, that would be a further complication on an already complicated structure between FFH and FIH. 

 

I hope they don't do that. Which however does leave us with the limited options of equity issuance, IPO of BIAL / sale of assets

 

 

[SafetyinNumbers]

37 minutes ago, gamma78 said:

someone (I think on this board) raised the prospect of potentially creating a sidecar fund where FIH is effectively the GP and attracts funds from LPs. But man, that would be a further complication on an already complicated structure between FFH and FIH. 

 

I hope they don't do that. Which however does leave us with the limited options of equity issuance, IPO of BIAL / sale of assets

 

 

I think it was me that raised that idea. Is your reason for not liking it because it’s complicated which in your opinion offsets the potential increase in intrinsic value? 
 

[ICUMD]

@SafetyinNumbers

The issue with a sidecar structure is that it values the management capabilities instead of a capital investment.  I don't know how to value what Fairfax India management actually brings to the table in such a case.

 

I would therefore value a sidecar structure at 0.

 

Open to hear other opinions.

[Haryana]

15 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 · 60 downloads

 

Taking this opportunity to also appreciate your original comment:

 

[SafetyinNumbers]

36 minutes ago, ICUMD said:

@SafetyinNumbers

The issue with a sidecar structure is that it values the management capabilities instead of a capital investment.  I don't know how to value what Fairfax India management actually brings to the table in such a case.

 

I would therefore value a sidecar structure at 0.

 

Open to hear other opinions.

My assumption is that FIH would earn management and performance fees from the LP investors which would be worth more than zero. It’s certainly considered a negative from investors that FIH has to pay them to FFH, so presumably if FFH is paying fees to FIH, that will be a positive.

 

I don’t have any idea if this is even being considered but I hope if they do it, it’s in a way that vastly reduces net fees that FIH pays. The exclusivity on investing outside of insurance in India for FFH is being valued negatively right now but if they do a deal like this, it would demonstrate its value.

[Haryana]

Neither IDBI

Nor HDFC

But IDFC:

(use auto-translate for English)

[gamma78]

5 hours ago, SafetyinNumbers said:

I think it was me that raised that idea. Is your reason for not liking it because it’s complicated which in your opinion offsets the potential increase in intrinsic value? 
 

 

tbh the structure can work. But would FIH be the GP or would it be FFH? And that question would merely be the tip of the iceberg. 

 

My point is there would be too many "cute" arrangements that would be potentially distortive or look really weird. The 2 / 20 structure is already enough (to my mind). 

 

It's not that it can't create value as a structure (it can) but the sidecar would lend itself to too many things I don't like. Devil of course is very much in the detail. 

 

[gamma78]

3 hours ago, SafetyinNumbers said:

My assumption is that FIH would earn management and performance fees from the LP investors which would be worth more than zero. It’s certainly considered a negative from investors that FIH has to pay them to FFH, so presumably if FFH is paying fees to FIH, that will be a positive.

 

I don’t have any idea if this is even being considered but I hope if they do it, it’s in a way that vastly reduces net fees that FIH pays. The exclusivity on investing outside of insurance in India for FFH is being valued negatively right now but if they do a deal like this, it would demonstrate its value.

 

Yes is FIH is receiving the fees that would be interesting. Can't argue the point in math. 

Personally I still think too cute. FIH receives fees from LPs and then pays management fees to FFH. 

[juniorr]

21 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 · 74 downloads

@rajpgokul nice write up...What are your top picks in India that trade on the US Stock exchange

[ranimo]

On 6/10/2024 at 9:44 PM, Viking said:

@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. 

@Viking you recently mentioned you were trying to take your exposure to FFH down to 33% or thereabout. Since FFH and FFI are both subject to some of the same risks (basically, the risk that Prem loses his touch and keeps making errors in judgment), how do you think about managing your exposure overall to Fairfax entities?

[Viking]

8 hours ago, ranimo said:

@Viking you recently mentioned you were trying to take your exposure to FFH down to 33% or thereabout. Since FFH and FFI are both subject to some of the same risks (basically, the risk that Prem loses his touch and keeps making errors in judgment), how do you think about managing your exposure overall to Fairfax entities?

@ranimo To answer your question I need a little more information. When you say “basically, the risk that Prem loses his touch and keeps making errors in judgment”, can you provide specific examples of what his past errors in judgement were?

[juniorr]

another good day to buy added some around $13.85

[dartmonkey]

1 hour ago, Viking said:

@ranimo To answer your question I need a little more information. When you say “basically, the risk that Prem loses his touch and keeps making errors in judgment”, can you provide specific examples of what his past errors in judgement were?

See Watsa’s mea culpa, p.11 of the annual letter. And he left out the terrible losses from the shorts. 

[ICUMD]

 Yahoo Finance: https://finance.yahoo.com/quote/GMRINFRA.NS.

 

Looking at GMR airports and it's performance as a public company is the best reason I can see to own Fairfax India at current prices.

 

I would expect BIAL would follow a similar trajectory with a significant pop on IPO. 

 

 

Edited June 13 by ICUMD

[dartmonkey]

2 hours ago, ICUMD said:

 Yahoo Finance: https://finance.yahoo.com/quote/GMRINFRA.NS.

 

Looking at GMR airports and it's performance as a public company is the best reason I can see to own Fairfax India at current prices.

 

I would expect BIAL would follow a similar trajectory with a significant pop on IPO. 

 

 

Your link needs a slash instead of a period, at the end: https://finance.yahoo.com/quote/GMRINFRA.NS/

 

It looks like they had an IPO in July 2021. I don't know how they have a price chart prior to 2021, but the price since July 2021 is up from about 29 to 92 in the 3 years since the IPO. If the value of the Bangalore airport, has followed anything like the same trajectory, we are sitting on dynamite.

[ranimo]

19 hours ago, dartmonkey said:

See Watsa’s mea culpa, p.11 of the annual letter. And he left out the terrible losses from the shorts. 

@Viking - that, but if Prem does ever fall into a pattern of repeated errors, it will probably be different than the previous errors - he's a very smart guy (which is my basic thesis for holding FFH in the first place).

So I'm not trying to predict anything, just to state that this is a risk. And my understanding is that this risk is common to Fairfax India as well. So to repeat my question - given that you stated that you'd like to reduce exposure to FFH, how do you think about managing your overall exposure to Fairfax entities?

[Xerxes]

22 hours ago, Viking said:

@ranimo To answer your question I need a little more information. When you say “basically, the risk that Prem loses his touch and keeps making errors in judgment”, can you provide specific examples of what his past errors in judgement were?

it was only error in judgment because it turned it to be wrong after the fact. 
 

There is an alternative past, where he could have been right for the wrong reasons on the hedges and we would have herald him as a genius who is very much in touch. 

[SafetyinNumbers]

28 minutes ago, Xerxes said:

it was only error in judgment because it turned it to be wrong after the fact. 
 

There is an alternative past, where he could have been right for the wrong reasons on the hedges and we would have herald him as a genius who is very much in touch. 

Besides the resulting Xerxes is pointing out, the line of thinking ranimo presents suggests “the errors” were considered errors when they were entered into. In reality, FFH investors cheered the hedges and gave FFH a much higher valuation than it has now. 

[ranimo]

1 hour ago, SafetyinNumbers said:

Besides the resulting Xerxes is pointing out, the line of thinking ranimo presents suggests “the errors” were considered errors when they were entered into. In reality, FFH investors cheered the hedges and gave FFH a much higher valuation than it has now. 

@SafetyinNumbers that is not what I'm suggesting at all. I'm saying that if one is super bullish on Fairfax (like Viking is) but still wants to limit exposure to it b/c bad things can always happen, then it's reasonable to include Fairfax India in said exposure. Hence, I was curious to understand Viking's point of view on the matter. This is not in any way criticism of the way Fairfax is managed... I'm a happy shareholder.