Fairfax India new issue

[This2ShallPass]

2 hours ago, ICUMD said:

Therefore my rationale to move on.

Wow..you have been one of the longest bulls here. But I hear you, I reduced by 30% as well. The relative underperformance (vs. how well India has done) is staggering. Also, some real headscratchers on strategy.

 

BIAL is a true crown jewel asset and I'm hoping for IPO soon (maybe more wishful thinking). I'll be fully out after the IPO.

 

2 hours ago, hardcorevalue said:

they already own so much I wonder if they will just a decent multiple of book value and take it out. 

Be careful what you wish for Minority investors have never done well (some may say screwed over) on Fairfax takeouts..

 

 

[dartmonkey]

1 hour ago, ICUMD said:

Fairfax always realises value based on their book value calculation.

 

Investors will possibly realize value based on speculative events. 

 

That makes this at best a speculative investment in my books. 

 

Therefore my rationale to move on.

 

It seemed like a good idea at the time.

 

But this bad trend can't last more than a year or two, can it*? Trading way beneath book value of its components seems like more of a reason to be a buyer than a seller. 

 

*That was supposed to be sarcasm. Here are the numbers, more than 5 years significantly beneath par:

 

[hobbit]

FIH is such a head scratcher--but I still think it will pay off barring a major macroeconomic shock to India

 

check where GIL/GMR infra is trading. the only pure play airport stock in India. Trading at more than 35 times operating profit with negative free cash flow and ton of management issues. this is the only comp that matters wrt BIAL. Based on this BIAL's conservative value is 5-6B.

 

https://www.screener.in/company/GMRINFRA/consolidated/

 

 

All the small companies that Fairfax India is buying is feeding into China +1 manufacturing play. Manufacturing is growing massively in India and Maxop, Jaynix and global aluminum are highly levered plays on China +1 strategy playing out . All potential 10 baggers in 10 years if you have the patience.

 

Sanmar's Egypt is stake is valued at zero in the Book value calculation whereas they converted some debt into equity at a 800M valuation recently. 

 

https://menafn.com/1108544117/Indian-TCI-Sanmar-plans-on-establishing-USD150-m-ethylene-station-in-Egypt

 

IIFL finance did a decent round couple of years ago for their housing finance subsidiary where ADIA put in some money. Bajaj housing finance IPO announced yesterday sent market into a frenzy which is probably why IIFL finance was also up 7% today .

 

https://www.business-standard.com/content/press-releases-ani/iifl-home-finance-becomes-india-s-leading-affordable-housing-finance-company-with-aum-crossing-rs-35-000-crores-and-pat-increasing-by-32-per-cent-yoy-124052300851_1.html

 

FIH intrinsic value at this point is $45+... they own crown Jewels like BIAL but rest of the portfolio is a highly levered play on manufacturing moving to India and financial industry being inherently levered to GDP growth. 

 

 

Edited September 13 by hobbit

[Crip1]

11 hours ago, ICUMD said:

Decided to entirely liquidate my large position in Fairfax India. While I think Bial is a great opportunity, their inability to execute an IPO over so many years suggests they are bogged down in burocracy.  I suspect they have a lot of competition for quality assets. 

 

Management execution has been poor.

Saw better opportunity elsewhere.

 

Among other things, this board is a lot more of "This is what I am doing, and here's why" vs. "You're an idiot if you don't do this or that". I'm still holding but if you find other investments which have better risk/reward profiles, more power to you.

 

That said, do you care to elaborate on the better opportunity?

 

-Crip

[ICUMD]

All are excellent points re valuation and really kept me invested in Fairfax India so long.  It was a large portion of my portfolio that was underwater over 8 yrs. and well, my patience suddenly ran out. In retrospect, I should have proportioned it far smaller.

 

Hopefully it will realize it's true market value. 

I think it's worth at least $25 today. I haven't ruled out buying back a few shares.  BIAL is a tremendous opportunity. 

 

My portfolio was under represented in US tech. I swallowed losses in Baba and Fairfax India to buy a large chunk of Google.  A company whose products I use daily and appears to be attractively valued.  

 

Of course, now that I've sold, I'm sure Fairfax India will hit the 20s in no time!   

[SafetyinNumbers]

48 minutes ago, ICUMD said:

All are excellent points re valuation and really kept me invested in Fairfax India so long.  It was a large portion of my portfolio that was underwater over 8 yrs. and well, my patience suddenly ran out. In retrospect, I should have proportioned it far smaller.

 

Hopefully it will realize it's true market value. 

I think it's worth at least $25 today. I haven't ruled out buying back a few shares.  BIAL is a tremendous opportunity. 

 

My portfolio was under represented in US tech. I swallowed losses in Baba and Fairfax India to buy a large chunk of Google.  A company whose products I use daily and appears to be attractively valued.  

 

Of course, now that I've sold, I'm sure Fairfax India will hit the 20s in no time!   

What % of the portfolio was it 8 years ago and what % was it when you sold it? 

[hardcorevalue]

7 hours ago, Haryana said:

7 hours ago, Haryana said:

The fees accrue for a maximum of 3 years and therefore is mostly paid off.

 

Within each 3-year period, those fees are already accounted in book value.

 

Actually, it is the book value that keeps on accruing and fee is already paid.

 

 

And more fees will accrue in the next 3 year period. What’s your point?

[Haryana]

Point is that value / margin of safety is more important than the fees just like higher income is more important than the taxes you have to pay on it. 

 

[This2ShallPass]

9 hours ago, hobbit said:

Manufacturing is growing massively in India and Maxop, Jaynix and global aluminum are highly levered plays on China +1 strategy playing out . All potential 10 baggers in 10 years if you have the patience.

Nice post. I didn't think about the China +1 angle. Can you elaborate more on the bull case for 10 bagger? 

 

9 hours ago, hobbit said:

FIH intrinsic value at this point is $45+

What assumptions get you here, is it the $5-6B BIAL valuation?

[ICUMD]

7 hours ago, SafetyinNumbers said:

What % of the portfolio was it 8 years ago and what % was it when you sold it? 

Initially around 75%, down to 10-12% at sale time.

[SafetyinNumbers]

3 hours ago, ICUMD said:

Initially around 75%, down to 10-12% at sale time.

 

Congrats on ~7x your portfolio despite the initial positioning. 

The world changed a lot in 8 years from a market structure perspective and FIH was on the wrong side of that. 8 years ago FIH traded at a premium to book value. Since then, institutions are much less likely to own stocks not in their benchmark and that don’t pass their quant screens. FIH fails on both. Passive investing has grown exponentially in the past 8 years as well. India ETFs get the nod for India exposure and FIH isn’t even in the conversation. 
 

Taking out the IPO costs which were one time in nature, the BV has compounded ~10% after fees. If marked at IV, it’s at least a few percentage points higher. That should be an acceptable rate of return but investors can’t sell intrinsic value. The company and the parent have at least bought shares  otherwise the discount might be even bigger (more supply after all). 
 

It’s a much different investment than it was eight years ago as it trades at a big discount to BV instead of a premium. IV has had time to grow even faster than BV so that gap has widened considerably from 8 years ago improving the margin of safety that much more.

 

FIH is a 4% position for me, not because I expect the discount to close, but because I expect BV growth to accelerate. Because of the big discount, a 33% increase in the BV on the IPO of BIAL, for example, may result in a 50% increase in the share price if the discount remains consistent but of course it might grow. If the discount grows, I expect buybacks will eventually help sop up the extra shares increasing long term returns. 
 

I was pretty excited about FIH post the AGM as it seems like they were confident once the Indian election was complete that BIAL had a better chance of approval. If it doesn’t happen in the next 12 months, the opportunity cost of holding FIH over FFH (or some other alternative) was probably too high. Based on the discount, most investors have already reached that conclusion. 

 

[ICUMD]

5 hours ago, SafetyinNumbers said:

investors can’t sell intrinsic value

That's the issue I struggled with.

 

It boils down to management and how they go about translating IV / BV to market value.

 

For the greater part of 8 yrs, they have not been able to execute while they collect their fees based on BV.  

 

Not supporting share price during this time with aggressive buybacks is not investor friendly. 

 

The other catalyst - the privatization of BIAL through Anchorage seems to be always just around the corner for the last 3-4 yrs

 

Even if the share price rises to $25 overnight, that would be a poor 8 yr return.  

 

Many other options in the investible universe with better management.

 

[73 Reds]

18 minutes ago, ICUMD said:

That's the issue I struggled with.

 

It boils down to management and how they go about translating IV / BV to market value.

 

For the greater part of 8 yrs, they have not been able to execute while they collect their fees based on BV.  

 

Not supporting share price during this time with aggressive buybacks is not investor friendly. 

 

The other catalyst - the privatization of BIAL through Anchorage seems to be always just around the corner for the last 3-4 yrs

 

Even if the share price rises to $25 overnight, that would be a poor 8 yr return.  

 

Many other options in the investible universe with better management.

 

This discussion demonstrates some of the issues involved with "value investing".  As prior posters have mentioned, proper sizing is important, along with properly discounting management that may have a history of not always acting in the best interests of minority shareholders and/or failing to unlock value.  Personally, I own shares of Fairfax India but  few enough shares that capital allocation by management or the timing of an IPO is not terribly important.  For me, there are times when parking money in these types of investments is superior to riskier investments where there is a significant opportunity for loss and capital impairment.  

[dartmonkey]

2 hours ago, ICUMD said:

Even if the share price rises to $25 overnight, that would be a poor 8 yr return.  

$25 would be 1.2x book, sounds like we are already there, for fair value, and that would be 12% p.a. If BIAL is worth anything like its peers, maybe $35, or 16% p.a.  

 

Hypothetical fair value doesn’t pay the mortgage, but since I can afford to wait, with catalysts just around the corner (famous last words), it seems like it would be a shame to fold my cards now. 

[SafetyinNumbers]

22 minutes ago, dartmonkey said:

$25 would be 1.2x book, sounds like we are already there, for fair value, and that would be 12% p.a. If BIAL is worth anything like its peers, maybe $35, or 16% p.a.  

 

Hypothetical fair value doesn’t pay the mortgage, but since I can afford to wait, with catalysts just around the corner (famous last words), it seems like it would be a shame to fold my cards now. 

8 years ago there was no margin of safety but now it’s incredibly high. Price is what you pay, value is what you get (WB).

[Viking]

3 hours ago, SafetyinNumbers said:

8 years ago there was no margin of safety but now it’s incredibly high. Price is what you pay, value is what you get (WB).

I think that might be the real lesson here. Buying Fairfax India at book value (or at a premium)g it appears there was little margin of safety. The emotional toll has also been significant for some long term holders. 
 

The stock today has a margin of safety. Importantly, a new investor also does not carry the emotional baggage of some long term investors. 
 

It really is an interesting case-study. Importantly, the most important chapters of the story are still being written (like BIAL) or have yet to be written.

Edited September 15 by Viking

[Txvestor]

I considered buying at the IPO and chose other opportunities at the time as I wanted to give the India story more time to play out. I initiated a 2% position last year and added a little to it this year. Averaging in at $13.3. I considered it a 67c dollar, with strong downside protection and a bet on continuing growth of the Indian economy. BIAL is clearly the crown jewel, but there are others. While I agree that management hasn't got it all right, there were also some hits from Covid to their travel and leisure(Thomas cook) as well as staffing companies(Quess) that were beyond management control. At any rate they are cheap, are positioned in potentially good growth assets, have a couple of potential catalysts to unlock value, and give me exposure to India which I lack elsewhere. I'd be OK with a 12-14% annual compounding return over the next 10yrs. I think if that happens and we get a closure on the BV to share price, we could have a 5x. I think there's a healthy chance that happens. I don't see that as likely in the Fairfax mothership. We'd be lucky to see 1/2 of that returns.
Granted I didn't wait through the agony so maybe I am lucky or naive. But that's why I am not ploughing these funds into Fairfax. 

[Haryana]

5 minutes ago, Txvestor said:

I considered buying at the IPO and chose other opportunities at the time as I wanted to give the India story more time to play out. I initiated a 2% position last year and added a little to it this year. Averaging in at $13.3. I considered it a 67c dollar, with strong downside protection and a bet on continuing growth of the Indian economy. BIAL is clearly the crown jewel, but there are others. While I agree that management hasn't got it all right, there were also some hits from Covid to their travel and leisure(Thomas cook) as well as staffing companies(Quess) that were beyond management control. At any rate they are cheap, are positioned in potentially good growth assets, have a couple of potential catalysts to unlock value, and give me exposure to India which I lack elsewhere. I'd be OK with a 12-14% annual compounding return over the next 10yrs. I think if that happens and we get a closure on the BV to share price, we could have a 5x. I think there's a healthy chance that happens. I don't see that as likely in the Fairfax mothership. We'd be lucky to see 1/2 of that returns.
Granted I didn't wait through the agony so maybe I am lucky or naive. But that's why I am not ploughing these funds into Fairfax. 

 

You may like to open their annual report once in a while so you will know they don't own any Quess or Thomas Cook in the Fairfax India. 

 

[Txvestor]

1 hour ago, Haryana said:

 

You may like to open their annual report once in a while so you will know they don't own any Quess or Thomas Cook in the Fairfax India. 

 

Thanks for pointing out. Clearly reading both the annual letters caused some confusion in my head. 
Anyway, my larger point remains, currently all but 1-2 of their companies seem to be doing well and I think the case for a good next 10yrs is a solid one. With Fairfax, which is a core position for me, what happens after the next 4yrs is more murky, 

[UK]

22 hours ago, Txvestor said:

I'd be OK with a 12-14% annual compounding return over the next 10yrs. I think if that happens and we get a closure on the BV to share price, we could have a 5x. I think there's a healthy chance that happens. I don't see that as likely in the Fairfax mothership. We'd be lucky to see 1/2 of that returns.

 

Interesting. So with some (or more than some) luck you expect 17+ percent CAGR for the next 10 years from FIH (btw what was the CAGR of BV of FIH over the last 10 years?), while only 8-9 percent from FFH, but you own 2 percent in FIH and, I assume, since it is core, much more in FFH? Do I get this right? 

 

Edited September 16 by UK

[Haryana]

21 hours ago, Txvestor said:

Thanks for pointing out. Clearly reading both the annual letters caused some confusion in my head. 
Anyway, my larger point remains, currently all but 1-2 of their companies seem to be doing well and I think the case for a good next 10yrs is a solid one. With Fairfax, which is a core position for me, what happens after the next 4yrs is more murky, 

 

Thank you for the conversation. 

 

I like your point that FIH has good high value positions like IIFL and CSB bank other than the main of BIAL. 

 

I see a parallel of IV accrual with Fairfax of four five years ago.

 

Just like they were showing discipline by keeping low duration despite the complains and cries, in FIH they are staying put with value positions without running after the hot sectors of the day. Their positions are out of favour at the moment but they have the patience to let them get fairly priced. Not running after acquiring any over priced companies is the most important thing they are doing at the moment. We tend to complain for lack of action because it is boring but good investing is boring, a virtue. 

 

One of their tiny ventures in those three manufacturing or engineering companies could become a Digit like superstar within the next few years. 

 

[Haryana]

On 9/14/2024 at 3:23 PM, SafetyinNumbers said:

8 years ago there was no margin of safety but now it’s incredibly high. Price is what you pay, value is what you get (WB).

 

At ipo time, there was extra optimism about them. A time of greed. 

Currently, there is extra pessimism about them. A time of fear. 

[Haryana]

On 9/8/2024 at 1:48 AM, This2ShallPass said:

...

What's their strategy? Are they going big or small? Do they want to be in industries that are seeing a boom in India or slow traditional ones?

 

 

Would it answer your question if I quote Warren Buffett quoting this:

 

Woody Allen once explained why eclecticism works: “The real advantage of being bisexual is that it doubles your chances for a date on Saturday night.” 

Over the years, we’ve been Woody-like in our thinking, ...

[SafetyinNumbers]

7 hours ago, Haryana said:

 

At ipo time, there was extra optimism about them. A time of greed. 

Currently, there is extra pessimism about them. A time of fear. 

Does that mean you think FIH gets to a premium to book again? If so, how long will it take?

[Haryana]

58 minutes ago, SafetyinNumbers said:

Does that mean you think FIH gets to a premium to book again? If so, how long will it take?

 

In terms of cycles, theoretically, we swing between greed and fear. The optimism may take upto ten years to come back. However, the entity lacks the full characteristics of an asset, it can go to zero before that happens. 

 

One possiible scenario is that Canada seizes all assets of those Canadians who are of Indian origin including the residents and citizens. This already happened to Japanese during WW2. All those of Japanese descent were trapped including the citizens born in Canada. They were moved to special concentration camps after all of their homes,  businesses and fishing boats were seized and then auctioned off. 

 

In response to such a similar scenario in WW3 where India might be on the side of Russia, Indian goverment may seize all the assets of Fairfax India.