Digit

[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, 2024 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, 2024 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, 2024 by Viking

[nwoodman]

32 minutes ago, Viking said:

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

 

 

I believe the CCPS is what gets them to a 49% stake in Digit Infoworks. 

 

[glider3834]

2 hours ago, nwoodman said:

 

I believe the CCPS is what gets them to a 49% stake in Digit Infoworks. 

 

its higher - below from AR 2023 - but we have to adjust now post IPO sale

 

 

 

[nwoodman]

1 hour ago, glider3834 said:

its higher - below from AR 2023 - but we have to adjust now post IPO sale

 

 

 

That’s true, but subject to approval is the key.  My numbers are based on the 49% that is “in the hand” so to speak.  Still a good question for  a CC in terms of the likelihood of it gettng approved.  Not sure if it helps or hinders the cause the longer it remains unresolved

 

- If Fairfax’s ownership in Digit Infoworks increases to 68% following the conversion of securities, the effective ownership in Digit Insurance would increase to approximately 50.05%.

 

-Based on the current market price of 373 INR per share, Fairfax’s stake in Digit Insurance could be valued at approximately $2,063.80 million USD post-conversion.

 

Edited August 29, 2024 by nwoodman

[gfp]

9 hours 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

 

This analysis (36% of Digit insurance not including the CCPS) is correct.  The CCPS are in addition to this look through ownership level for the straight equity and will now be marked more or less to market based on Digit Insurance's market prices at quarter end.

[dartmonkey]

11 hours ago, nwoodman said:

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.  

 

That's nicely done. I think there is one mistake though, here:

 

Pre-IPO Valuation

Total Shares Outstanding (Approx.): 917.65 million shares

Pre-IPO Share Price: 272 INR

Fairfax’s Effective Ownership Pre-IPO: 40.82%

49% Å~ 83.3% = 40.82%

49% Å~ 73.6% = 36.06%

Calculation

Total Value of Digit Insurance Pre-IPO:

Fairfax’s Stake Pre-IPO:

Convert to USD (assuming 1 USD = 83 INR):

Post-IPO Valuation at June 30, 2024

Total Shares Outstanding: Approximately 917.65 million shares

 

The number you quote is very close to the post-IPO count listed here: https://www.chittorgarh.com/ipo/go-digit-general-insurance-ipo/1727/, but the pre-IPO count should be 41m lower:

 

Total Issue Size	96,126,686 shares (aggregating up to ₹2,614.65 Cr)
Fresh Issue	41,360,294 shares (aggregating up to ₹1,125.00 Cr)
Offer for Sale	54,766,392 shares of ₹10 (aggregating up to ₹1,489.65 Cr)
Issue Type	Book Built Issue IPO
Listing At	BSE, NSE
Share holding pre issue	875,842,046
Share holding post issue	917,202,340

 

 

The more important point is whether the 49% includes or doesn't include the ownership via the convertibles. It is true that there is a note in the table on p. 14 of the Q2 report that says: "Ownership percentages include the effects of financial instruments that are considered in-substance equity." 

 

On the other hand, in the annual report (p. 13), they pretty clearly say that the 49% stake would go to 68%, if the convertibles are converted: "

 

Confusion abounds! 

Edited August 29, 2024 by dartmonkey
corrected the excerpt from the AR

[gfp]

The 49% ownership of Go Digit Infoworks (the 73.6% owner of Digit Insurance) does not include the CCPS.

 

I believe the CCPS convert into shares of Go Digit Infoworks and not shares of Digit Insurance.  I would imagine they will not be converted until there is dilution in Digit Insurance that would cause Fairfax to indirectly own less than the current 50.05%.  

[dartmonkey]

21 minutes ago, gfp said:

I believe the CCPS convert into shares of Go Digit Infoworks and not shares of Digit Insurance.

Yes, when Fairfax refers to "Digit", they mean Go Digit Infoworks; for instance here, where they make it clear:

 

during the second quarter of 2024 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.

https://www.fairfax.ca/wp-content/uploads/2024_08_August_01-FFH-2024-Q2-Interim-Report-Final.pdf

 

26 minutes ago, gfp said:

I would imagine they will not be converted until there is dilution in Digit Insurance that would cause Fairfax to indirectly own less than the current 50.05%.  

 

Given the fact that Fairfax has convertible shares that would take them to 68% of Digit (i.e. Go Digit Infoworks!), and since Digit's stake in Digit Insurance is currently 73.6%, Fairfax would own 68%*73.6%=50.06%, so your objective would already be achieved by the IPO dilution.

 

[Viking]

Thanks to everyone for wading in. Below is my current attempt to value Fairfax's ownership in Go Digit General Insurance. It doesn't seem to square with how Fairfax values its stake in 'Digit' so I view my summary as a work in progress (it likely contains errors).

 

Part of the challenge is Digit can mean many different things - Go Digit General Insurance, Go Digit Infoworks. And then we have the CCPS. And other businesses like life insurance part of 'Digit'. Bottom line, as I learn more (from Fairfax and others on this board) I will keep updating my model (like everything else I do related to Fairfax). 

 

So please take my summary below with the usual 'grain of salt.' And please continue to point out errors (with corrections, if you have them).

 

 

[nwoodman]

7 hours ago, dartmonkey said:

The number you quote is very close to the post-IPO count listed here: https://www.chittorgarh.com/ipo/go-digit-general-insurance-ipo/1727/, but the pre-IPO count should be 41m lower:

 

Thanks that makes sense

[nwoodman]

16 hours ago, Viking said:

 

 

Part of the challenge is Digit can mean many different things - Go Digit General Insurance, Go Digit Infoworks. And then we have the CCPS. And other businesses like life insurance part of 'Digit'.

 

Ain’t that the truth.  +1 in terms of thanks to all.  Btw hope you find time to give us your thoughts on Atlas, I have a view but a gross error check is always appreciated.  

[dartmonkey]

20 hours ago, Viking said:

Part of the challenge is Digit can mean many different things - Go Digit General Insurance, Go Digit Infoworks. And then we have the CCPS. And other businesses like life insurance part of 'Digit'

Yes. Fairfax actually has a pretty consistent presentation:

 

Go Digit Infoworks = "Digit"

Go Digit General Insurance (GODIGIT.NS) = "Digit Insurance"

 

Since the IPO, Digit owns 73.6% of Digit Insurance.

And Fairfax owns 49% of Digit, and has the CCPS convertibles to take its ownership to 68% if that is approved by regulators.

So they own or have convertibles to eventually own 68%*73.6% = 50.05% of Digit Insurance, but also 50.05% of the other assets that Digit owns, including Digit Life Insurance which may actually be worth more than we think. 

 

Here is why we may be seriously underestimating the value of Digit outside of the public Digit Insurance. Note that on p.13 of the Q2 report, they mention that private company preferred shares worth $1787m were transferred from Level 3 to Level 2, and in the note (3), they explain that this was because of the Digit Insurance IPO. Since the preferred shares (CCPS) only represent 19% of Digit, logically that would mean that Digit is worth $1787m/.19 = $9.4b, or even more, $10.7b, now that Digit shares have gone from 338 on June 30 to 383.7 at last night's close. That would mean that Fairfax's stake, 68%, would be worth $7.3b??

 

Could it be that the preferred shares get marked to market because they are less than 20% of Digit, while the equity shares have to be treated as an investment in associates because they are 20-50% of Digit?

[gfp]

4 minutes ago, dartmonkey said:

but also 50.05% of the other assets that Digit owns, including Digit Life Insurance which may actually be worth more than we think. 

 

I don't know the specifics but the Fairfax Annual Report seems to indicate they only hold a 24.2% interest in Digit Life - maybe that percentage increases by the same proportion as the Digit Insurance ownership if the CCPS are fully converted.  Either way - I don't think Fairfax's stake being worth $7.3 Billion (today) is anywhere close to the truth.  The quarterly marks on FFH's books are going to be close enough.  We can watch the share price of Go Digit Insurance and keep up on the market value

[dartmonkey]

1 hour ago, gfp said:

Either way - I don't think Fairfax's stake being worth $7.3 Billion (today) is anywhere close to the truth.  The quarterly marks on FFH's books are going to be close enough.

What do you make of the fact that the CCSP's alone are valued at $1.8b in Fairfax's Q2 report?

 

Specifically, the transfer out of category line, and the accompanying Note 3:

 

 

 

Edited August 30, 2024 by dartmonkey

[nwoodman]

Morgan Stanley recently initialed coverage on Go Digit.  A couple of notes attached

• PT Rs 345
• Summary of discussions with  Kamesh Goyal at their Asia Pacific Summit

GODIGIT_20241120_1635.pdf GODIGIT_20241111_1813.pdf

[UK]

14 minutes ago, Haryana said:

What's up with it, jumped over 10% today, or it's just volatility.

Do not forget, that according to MW it is almost worthless:))