Digit

[nwoodman]

21 minutes ago, SafetyinNumbers said:

Thanks for sharing. My impression of the call is that Indian analysts are definitely more engaged on Digit than NA analysts are on Fairfax! 

Definitely more engagement than in the largest shareholder go figure.

 

Just putting it out there but can you imagine the multiples for a US based company that grew 36% in a sector growing at 14%. 

 

https://www.gicouncil.in/media/4403/flash-report-may-2024.pdf

 

Edited June 14 by nwoodman

[SafetyinNumbers]

56 minutes ago, nwoodman said:

Definitely more engagement than in the largest shareholder go figure.

 

Just putting it out there but can you imagine the multiples for a US based company that grew 36% in a sector growing at 14%. 

 

https://www.gicouncil.in/media/4403/flash-report-may-2024.pdf

 

Is there any analyst coverage yet? Maybe that will bring the quants in

[dartmonkey]

On 6/14/2024 at 9:46 AM, nwoodman said:

 

 

Muddy Waters in February said Digit would not go public and was worth $1.5b, not the implied $3.5b value as per the carrying value of Fairfax’s stake.

 

But the IPO did happen, in May, with about 6% new shares issued at 286 INR (market cap $3.1b). With shares at 363 today, the market cap is grazing $4.b.

 

This was the holding that MW thought FFH had overmarked the most, but if FFH carried it at market value, at today’s price they would actually have to mark it up by about 15%…

[Haryana]

 

https://www.instagram.com/virat.kohli/p/C80EI7NNDFK/ (over 21 million likes, Asian record)

 

 

https://www.screener.in/company/GODIGIT/

[nwoodman]

FWIW

 

Citi On Go Digit General Insurance

Initiates Buy Call, Target Rs 425

Valuing Company At 8x, FY26 Book On RoE Rising To 15-16% In FY26-27 From Nearly 7% In FY24

Expect Stable 13% Decadal CAGR In Ex-crop Non-life Premiums, Aided By Health & B2B-Oriented Biz

 

If anyone has the note available, please post or PM me.  Thanks in advance

[A_Hamilton]

10 hours ago, nwoodman said:

FWIW

 

Citi On Go Digit General Insurance

Initiates Buy Call, Target Rs 425

Valuing Company At 8x, FY26 Book On RoE Rising To 15-16% In FY26-27 From Nearly 7% In FY24

Expect Stable 13% Decadal CAGR In Ex-crop Non-life Premiums, Aided By Health & B2B-Oriented Biz

 

If anyone has the note available, please post or PM me.  Thanks in advance

LIke what is FFH's play here? You are trading at 8x book, do they just exit this thing? But then the runway is so long and it is so difficult to take material stakes in financial services in India. Just a wild situation. Also I realize they likely have a lockup given the recent IPO. What a great situation.

Edited July 19 by A_Hamilton

[TwoCitiesCapital]

16 minutes ago, A_Hamilton said:

LIke what is FFH's play here? You are trading at 8x book, do they just exit this thing? But then the runway is so long and it is so difficult to take material stakes in financial services in India. Just a wild situation. Also I realize they likely have a lockup given the recent IPO. What a great situation.

 

Best play would probably be to pull a Tesla. 

 

Issue stock, convertible bonds, etc as much as the market will bear. Turn that into capital that provides a floor to the valuation and invest it in growth, acquisitions, or pay a portion back out as dividends. 

 

Fairfax may not capture 8x BV this way, but they can absolutely lock in some of the benefit while maintaining control and long term exposure. 

[SafetyinNumbers]

2 hours ago, TwoCitiesCapital said:

 

Best play would probably be to pull a Tesla. 

 

Issue stock, convertible bonds, etc as much as the market will bear. Turn that into capital that provides a floor to the valuation and invest it in growth, acquisitions, or pay a portion back out as dividends. 

 

Fairfax may not capture 8x BV this way, but they can absolutely lock in some of the benefit while maintaining control and long term exposure. 

Selling quality with high growth rates ahead usually leads to regret for me. I hope they hold on and enjoy the ride. 

[nwoodman]

3 hours ago, A_Hamilton said:

LIke what is FFH's play here? You are trading at 8x book, do they just exit this thing? But then the runway is so long and it is so difficult to take material stakes in financial services in India. Just a wild situation. Also I realize they likely have a lockup given the recent IPO. What a great situation.

Yes it all seems quite frothy but not when the industry you are playing in is growing at high single digits. Their ability to grow premiums has varied but I would say it is closer to 20% CAGR off the current base say 2-3 x’s the industry.  We also haven’t seen what they can do on the investing side.  
 

Do I think it will be trading at 8x’s book in 10 years absolutely not. Can I see it at 2x’s book and multiples of its current size, absolutely. Based on Fairfax’s history, are they likely to use their shares as cheap currency, if the price is really ahead of itself, probably. 
 

A great situation indeed

[SafetyinNumbers]

1 hour ago, nwoodman said:

Yes it all seems quite frothy but not when the industry you are playing in is growing at high single digits. Their ability to grow premiums has varied but I would say it is closer to 20% CAGR off the current base say 2-3 x’s the industry.  We also haven’t seen what they can do on the investing side.  
 

Do I think it will be trading at 8x’s book in 10 years absolutely not. Can I see it at 2x’s book and multiples of its current size, absolutely. Based on Fairfax’s history, are they likely to use their shares as cheap currency, if the price is really ahead of itself, probably. 
 

A great situation indeed

Issue 10% of shares at 8x BV and increase BV by ~63%. That’s decent growth!

[nwoodman]

7 hours ago, SafetyinNumbers said:

Issue 10% of shares at 8x BV and increase BV by ~63%. That’s decent growth!

+1, that works

[Dinar]

Q1 FY 2025 results are out.  Look fine to me, although it would be nice to see combined ratio to decline further below 105 closer to 100. 

[dartmonkey]

Go Digit General Insurance (GODIGIT.NS; "Digit Insurance" in Fairfax's reports) just closed at a new high, 373.9, putting the insurance company's market cap back over $4b ($4.01b). The IPO price was 286.

 

It's a complicated calculation to see how much of this belongs to Fairfax. Here is my understanding, but I would appreciate it if someone could correct/complete this analysis.

 

Fairfax owns 49% of the shares of Go Digit Infoworks Services Private Limited ("Digit"), and in the Q2 report, they gave this a fair value of $485.5m and a carrying value of $268.7m. 

 

Go Digit Infoworks owns 73.6% of the insurance company, which they call "Digit Insurance". So I would think that would mean that Fairfax owns .49*.736 = 36.06% ; that would mean that Fairfax's stake in the insurance company was worth .3606*$3.7b = $1.33b on June 30 and .3606*$4.01b = $1.45b now.

 

Fairfax also owns some compulsory convertible preferred shares in Digit, and a proportion of whatever else Go Digit Infoworks owns, apart from Digit Insurance. I presume the preferred shares come with some arrangement for purchasing additional shares of Go Digit Infoworks, although as far as I know, the details of this arrangement have not been reported.

 

Anyways, it doesn't seem to add up. $485.5m fair value as reported in Q2 seems way below the $1.33b that the insurance company alone was worth on June 30. I understand that the carrying value could be way below the fair value, but isn't the fair value now based on the share price? They state this explicitly for the value of the convertibles, but wouldn't it also be true of the shares?

 

the company's investment in Digit compulsory convertible preferred shares ("CCPS") was transferred from preferred stocks classified as Level 3 in the fair value hierarchy to Level 2 as the fair value of the CCPS is now principally determined through the traded market price of Digit's general insurance subsidiary, Digit Insurance, whereas the fair value was previously principally determined through an industry accepted discounted cash flow model.

 

Can anyone explain what appears to be a discrepancy here?

 

[gfp]

Google equity method accounting

[dartmonkey]

5 minutes ago, gfp said:

Google equity method accounting

Clearly they need to use equity method accounting, but I thought that was the 'carrying value' number, not the 'fair value' number. 

 

I found this on the intertubes:

 

Using the equity method, a company reports the carrying value of its investment independent of any fair value change in the market. With a significant influence over another company’s operating and financial policies, the investor is basing their investment value on changes in the value of that company’s net assets from operating and financial activities and the resulting performances, including earnings and losses. https://www.investopedia.com/terms/e/equitymethod.asp

 

Since Fairfax owns more than 20% but less than 50% of Digit, they would need to present carrying value based on their historical cost, adjusted by dividends received for instance. But when they present 'fair value', isn't that just their best estimate of the real value, based on objective inputs?

[MMM20]

Interview with Sumeet Nagar of Malabar Investments  https://economictimes.indiatimes.com/markets/expert-view/go-digit-to-be-a-great-compounding-story-for-next-10-15-years-sumeet-nagar/articleshow/112674261.cms?from=mdr

 

Q: Let us talk about Go Digit. Now it is a manufacturer. It is manufacturing insurance. I am just bringing it for our viewers, but it is selling that product digitally, that is the difference. But insurance is a brutally competitive space. And if I look at, let us say, the general insurance space, I understand a bit, there are about 20 players and only top five players are making money. How can a small player, which is only selling insurance online can actually make money?

 

A: So, the Go Digit name may be somewhat misleading. So, while they are using technology very well and their internal backbone is all on new tech, it is very-very digital. The selling of insurance in India, if you want to be mainstream, has to be done through agents. But again, technology can allow you to do that a lot more effectively. So, from that perspective, they are like any other traditional player, but just technology is allowing them to do everything far more effectively. So, their ability to come up with new policies, new designs, that is better than everybody else because of the technology benefit, their ability to provide flexibility to agents on pricing, for example, is far better than other insurance companies and because the company was built during this new tech stack, it is far more efficient compared to the others and that is why despite the size, they have been profitable for quite some time. And I think there, the important thing is to look at the IFRS accounting because the GAAP accounting actually does not do a good justice to insurance companies where you are investing or getting customers for many years, but you expense that upfront. So, it sort of depresses your profitability. They have been the fastest growing insurance company. Insurance is a business that is still very under-penetrated in India, has a long runway for growth. It has a huge TAM and within that, you have one of the fastest growing players. So, we think this is a great compounding story for the next 5, 10, 15 years and that is the reason why I had invested while the company was private. We added more into the IPO and then post that.

 

Edited August 28 by MMM20

[Luke]

5 minutes ago, MMM20 said:

Interview with Sumeet Nagar of Malabar Investments  https://economictimes.indiatimes.com/markets/expert-view/go-digit-to-be-a-great-compounding-story-for-next-10-15-years-sumeet-nagar/articleshow/112674261.cms?from=mdr

 

Q: Let us talk about Go Digit. Now it is a manufacturer. It is manufacturing insurance. I am just bringing it for our viewers, but it is selling that product digitally, that is the difference. But insurance is a brutally competitive space. And if I look at, let us say, the general insurance space, I understand a bit, there are about 20 players and only top five players are making money. How can a small player, which is only selling insurance online can actually make money?

Sumeet Nagar: So, the Go Digit name may be somewhat misleading. So, while they are using technology very well and their internal backbone is all on new tech, it is very-very digital.

 

A: The selling of insurance in India, if you want to be mainstream, has to be done through agents. But again, technology can allow you to do that a lot more effectively. So, from that perspective, they are like any other traditional player, but just technology is allowing them to do everything far more effectively. So, their ability to come up with new policies, new designs, that is better than everybody else because of the technology benefit, their ability to provide flexibility to agents on pricing, for example, is far better than other insurance companies and because the company was built during this new tech stack, it is far more efficient compared to the others and that is why despite the size, they have been profitable for quite some time. And I think there, the important thing is to look at the IFRS accounting because the gap accounting actually does not do a good justice to insurance companies where you are investing or getting customers for many years, but you expense that upfront. So, it sort of depresses your profitability. They have been the fastest growing insurance company. Insurance is a business that is still very under-penetrated in India, has a long runway for growth. It has a huge TAM and within that, you have one of the fastest growing players. So, we think this is a great compounding story for the next 5, 10, 15 years and that is the reason why I had invested while the company was private. We added more into the IPO and then post that.

Very exciting stuff...!

[gfp]

6 minutes ago, dartmonkey said:

Clearly they need to use equity method accounting, but I thought that was the 'carrying value' number, not the 'fair value' number. 

 

I found this on the intertubes:

 

Using the equity method, a company reports the carrying value of its investment independent of any fair value change in the market. With a significant influence over another company’s operating and financial policies, the investor is basing their investment value on changes in the value of that company’s net assets from operating and financial activities and the resulting performances, including earnings and losses. https://www.investopedia.com/terms/e/equitymethod.asp

 

Since Fairfax owns more than 20% but less than 50% of Digit, they would need to present carrying value based on their historical cost, adjusted by dividends received for instance. But when they present 'fair value', isn't that just their best estimate of the real value, based on objective inputs?

 

Sorry, I misunderstood your question.  I think it probably relates to Fairfax's 49% ownership being of that intermediate company and that intermediate company consolidating its ownership of publicly traded Digit.  At this point, only the converts get marked to market but we can pencil in Fair Value for ourselves

[Viking]

Go Digit General Insurance completed their IPO on May 23, 2024 at a price of INR 272/share. This valued the company at about US$3 billion. At June 30, Digit's share price closed at INR 338. This valued Digit at $3.7 billion. As of today, Digit's share price closed at IRR 373.90. This values Digit at $4.1 billion. 

 

So over the past 3 months Go Digit General Insurance has increased in market value by about $1.1 billion. Not too shabby. 

 

Now what exactly does this mean for Fairfax? Fairfax owns a significant amount of Digit. So the market value of Fairfax's position is up, and by a lot.

 

How much exactly? Not being an accountant, I am not sure. Is it possible to estimate Fairfax's ownership position in Go Digit General Insurance? Is 65% too high? Or too low? Or is this the wrong way to look at Fairfax's current ownership position (too simplistic)? Perhaps others can wade in and provide an estimate/some clarity. 

 

How much of the value creation that has happened at Digit over the past 3 months has been captured captured in Fairfax's current book value? Again, I am not sure. But my guess is there is likely a sizeable gap building up (between market value and carrying value). 

 

I do find Fairfax's ownership structure with Digit to be confusing.

 

And as @glider3834 has pointed out in the past, Digit also has a early-stage life insurance business that is worth something.

 

Bottom line, I like that Digit General Insurance is now a publicly traded entity. This will allow us to use a market price to value the business. I also look forward to when Fairfax's ownership position has been simplified/clarified.  

 

Edited August 28 by Viking

[dartmonkey]

20 minutes ago, Viking said:

Is it possible to estimate Fairfax's ownership position in Digit General Insurance? Is 65% too high? Or too low? Perhaps others can wade in and provide an estimate/some clarity. I do find Fairfax's ownership structure with Digit to be confusing.

A first stab at this would be to separate it into 2 components, the equity and the convertible preferred shares. 

 

Fairfax owns 49% of Digit’s equity as regular shares, and Digit owns 73.6% of the publicly traded Digit Insurance (note 1, p.14, Q2 report), so that makes $1.33b as of June 30 and $1.45b at yesterday’s close.

 

We can get a pretty close estimate of the value of the preferred shares because the Level 3 non-Canada non-USA preferred shares went from $1989.9m on Dec 31st to $1.9m on June 30, so that was almost certainly about $1988m worth, and we know they realized a $43.6m gain on those shares. This squares fairly well with the fact that Level 2 assets in the same line went from $286.6 on Dec 31st to $2125.8m on June 30, for an increase of $1839m.

 

So it looks like the full stake would have been worth $1.33b+$1.84  = $3.17b on June 30, and estimating that the preferred shares gained value by the same proportion, $1.45b+$2.01b = $3.46b now. 

[TwoCitiesCapital]

38 minutes ago, Viking said:

So over the past 3 months Go Digit General Insurance has increased in market value by about $1.1 billion. Not too shabby. 

 

Now what exactly does this mean for Fairfax? 

 

It means Carson Blocks entire thesis is falling apart

 

"It'll never IPO" 

"It's not worth anything close to what Fairfax marks it at"

 

[Haryana]

4 minutes ago, TwoCitiesCapital said:

 

It means Carson Blocks entire thesis is falling apart

 

"It'll never IPO" 

"It's not worth anything close to what Fairfax marks it at"

 

 

American shorts are becoming a joke in the Indian market.

 

No impact from the recent Hindenburg accusations either.

 

[dartmonkey]

8 minutes ago, dartmonkey said:

Is it possible to estimate Fairfax's ownership position in Digit General Insurance? Is 65% too high?

 

 

 

8 minutes ago, dartmonkey said:

So it looks like the full stake would have been worth $1.33b+$1.84  = $3.17b on June 30,

OK, please ignore what I just wrote, since it's hard to believe that 36% of Digit Insurance is worth $1.33b and the preferreds are worth 38% more, or 50% of Digital, which would be a total of 86%. I don't know why the preferreds SEEM to be worth so much, but the answer doesn't sound right.

[nwoodman]

1 hour ago, dartmonkey said:

 

 

 

OK, please ignore what I just wrote, since it's hard to believe that 36% of Digit Insurance is worth $1.33b and the preferreds are worth 38% more, or 50% of Digital, which would be a total of 86%. I don't know why the preferreds SEEM to be worth so much, but the answer doesn't sound right.

I had crack see attached.  Based on share count and closing price of INR 373 I get a valuation for FFH’s position in the listed entity Go Digit General Insurance at around $1.5bn.  This excludes Digit Life Insurance, which has the same promoters but I believe is a separate entity that also resides in the Digit Infoworks entity.  I would not be surprised if the Life Insurer ends up being worth as much or more than the P&C business in <10 years time based on higher potential penetration rates (uptake). So your $3bn+ may be a happy coincidence

 

“India's life insurance industry is expected to grow at a CAGR of 10% from INR 9.3 trillion ($151.7 billion) in 2024 to INR 13.5 trillion ($216.1 billion) in 2028, driven by rising demand for traditional life insurance policies, favorable regulatory changes, and increasing adoption of insurtech.  The non-life insurance sector is projected to expand at a CAGR of 9.9% from INR 3.35 trillion ($40.36 billion) in 2024 to INR 4.89 trillion ($57.3 billion) by 2028.

Life insurance penetration in India increased from 2.2% in FY 2002 to 3.2% in FY 2022, while non-life insurance penetration grew from 0.5% to 1% during the same period. Despite this growth, India's insurance penetration rates remain lower compared to other Asian markets like Japan, South Korea, Hong Kong, and China as of 2023.”

Digit Ownership.pdf

[Viking]

42 minutes ago, nwoodman said:

I had crack see attached.  Based on share count and closing price of INR 373 I get a valuation for FFH’s position in the listed entity Go Digit General Insurance at around $1.5bn.  This excludes Digit Life Insurance, which has the same promoters but I believe is a separate entity that also resides in the Digit Infoworks entity.  I would not be surprised if the Life Insurer ends up being worth as much or more than the P&C business in <10 years time based on higher potential penetration rates (uptake). So your $3bn+ may be a happy coincidence

 

“India's life insurance industry is expected to grow at a CAGR of 10% from INR 9.3 trillion ($151.7 billion) in 2024 to INR 13.5 trillion ($216.1 billion) in 2028, driven by rising demand for traditional life insurance policies, favorable regulatory changes, and increasing adoption of insurtech.  The non-life insurance sector is projected to expand at a CAGR of 9.9% from INR 3.35 trillion ($40.36 billion) in 2024 to INR 4.89 trillion ($57.3 billion) by 2028.

Life insurance penetration in India increased from 2.2% in FY 2002 to 3.2% in FY 2022, while non-life insurance penetration grew from 0.5% to 1% during the same period. Despite this growth, India's insurance penetration rates remain lower compared to other Asian markets like Japan, South Korea, Hong Kong, and China as of 2023.”

Digit Ownership.pdf 51.06 kB · 3 downloads

@nwoodman does your summary include the value of the compulsory convertible preferred shares in Digit that Fairfax owns?

 

These increased in value in Q2 (from year end). From Fairfax’s Q2 earnings release:

“On May 23, 2024 Digit Insurance, the general insurance subsidiary of the company's investment in associate Digit, completed an initial public offering comprised of an issuance of new equity and an offer for sale of existing equity shares held by Digit and other shareholders, which valued Digit Insurance at approximately $3 billion (249.5 billion Indian rupees or 272 Indian rupees per common share). As a result of the initial public offering and the increase in the fair value of the company's investment in Digit compulsory convertible preferred shares at June 30, 2024, the company recorded a total pre-tax benefit of $149.9 related to its investment in Digit.”
 

“The pre-tax gain to common shareholders' equity was comprised of:

• (i) a gain of $106.3 recorded in net changes in capitalization in the consolidated statement of changes in equity on the company's 49.0% equity interest in Digit (related to Digit's equity interest in Digit Insurance decreasing from 83.3% to 73.6%, resulting in the recognition of a dilution gain for the excess of fair value over the carrying value of Digit Insurance on the offer for sale and a dilution gain on new equity issuance), and
• (ii) a net gain on investments in the consolidated statement of earnings of $43.6 on the company's holdings of Digit compulsory convertible preferred shares. Digit Insurance's common shares are now traded on the BSE and NSE in India and closed at 338 Indian rupees per common share on June 30, 2024.”

 

Edited August 29 by Viking