Introduction:
Fairfax
India Holdings Corporation (FIH.U or FFXDF) is an
investment holding company publicly traded on the Toronto Stock Exchange whose
investment objective is to achieve long-term capital appreciation, while
preserving capital, by investing in public and private equity securities and
debt instruments in India. Fairfax India was founded in 2014 and is
headquartered in Toronto, Canada. Its common shares are listed on the Toronto
Stock Exchange under the symbol FIH.U.
Fairfax Financial Holdings Limited is the
controlling shareholder of Fairfax India. Fairfax Financial Holdings Limited is
a Toronto based financial services holding company with a global presence in
insurance and reinsurance and a portfolio of assets invested worldwide. Fairfax
Financial Holdings Limited is listed on the Toronto Stock Exchange under the
symbol "FFH". Prem Watsa is the chairman of both Fairfax Financial
Holdings and Fairfax India.
All the investments of Fairfax India are
centrally managed by Hamblin Watsa Investment Counsel Ltd. (www.hwic.ca), a wholly owned subsidiary of
Fairfax Financial Holdings Limited (www.fairfax.ca).
Fairbridge Capital Private Limited (www.fairbridgecapital.com),
a wholly owned subsidiary of Fairfax Financial Holdings Limited, is sole
advisor to HWIC with respect to investments of Fairfax India.
Ownership / Current Holdings:
The following table from the annual report identifies all the investments
with the details such as the acquisition price, current carrying value and the
date of investment.
I will detail the top 2 holdings as I believe they constitute half of the capital invested and they will likely drive large value over time. I will detail the other investments in another follow up article.
Bangalore International Airport (BIAL):
Bangalore International Airport (BIAL):
Bangalore Airport is one of the modern
international airports in India, privately held, has a passenger capacity of 20
million and latest count passenger pass through of over 33 million in
2019. In 2018, BIAL entered a phase of significant investment of about
$1.9 billion to expand its designed capacity of 20 million passengers to about
50 million in 2021 by re-configuration and system improvements in the existing
terminal, building a second runway and building phase one of a second terminal
and associated supporting infrastructure. The second runway was commissioned as
planned in 2019, and significant progress has been made in the construction of
phase one of the second terminal, which is expected to be completed in 2021. A
financing plan for this expansion, based on a debt to equity ratio of 80:20,
has been approved by a syndicate of Indian banks at attractive interest rates.
Plans have also been adopted for the building of phase two of the second
terminal and related infrastructure for an incremental investment of about $1.2
billion to take the capacity to about 70 million passengers by 2028. BIAL
has three potential sources of revenue.
Aero Revenue:
Aero revenue, which has grown at a CAGR of 16%
from 2009 to 2019, is the revenue earned for providing services such as
landing, parking and other services charged as user development fees to airlines and passengers.
Non-aero Revenue:
All revenue other than aero revenue, such as
revenue from cargo handling, ground handling, fuel sales, food and beverage
sales and duty-free shops, constitutes non-aero revenue. Non-aero revenue has
grown at a CAGR of 17% from 2009 to 2019 and is expected to grow substantially
due to an increase in passenger growth rates, the availability of additional
space and the increasing propensity of passengers at the airport to make
purchases. BIAL has undertaken many innovative projects that engage passengers
and enhance their experience at the airport.
Real Estate Monetization:
BIAL has approximately 460 acres of land
adjoining the airport that can be developed. All this land is undeveloped
except for a small piece on which BIAL has built a hotel, currently operated by
the Taj hotel brand under a management contract. Bangalore’s historical
population areas are getting congested, so the city is expanding in the
airport’s direction. BIAL anticipates significant upside, over time, from
monetization of this real estate.
Some of the high-level plans for monetization of
the real estate are listed below:
• A 100% owned special purpose vehicle (SPV)
subsidiary of BIAL was incorporated to carry on the real estate activities of
BIAL.
• The Board approved the terms and conditions
under which the land to be developed will be leased by BIAL to the SPV and the
financial plans covering the first phase of developing approximately 176 acres.
• The first development will be a 775 room 3- and
4-star combination business hotel situated on approximately 5 acres of land.
The project has been awarded to the Taj Group of hotels and will be owned 100%
by the SPV.
• The second development will be a retail, dining
and entertainment village on approximately 23 acres of land. This project will
also be 100% owned by the SPV and will be developed in phases.
• The third development will be business parks
over approximately 130 acres of land that will be jointly developed in phases
through a combination of land lease, joint development and own development
models. In addition, approximately 12 acres of land will be used for the
development of an outlet mall and a 5-star hotel.
• A first of its kind large concert arena in the
region, on approximately 6 acres of land, has been awarded to a consortium and
is expected to be completed in 2021. Live Nation, a global entertainment
company, will act as the consultant to the consortium on the development of the
project.
Valuation:
Cost Basis:
Fairfax India has invested $653 million in total
to acquire 54% of BIAL, implying an equity value of approximately $1.2 billion
for the whole company. Based on BIAL’s December 2019 IFRS financial
statements, the blended purchase price valued BIAL at a price earnings ratio of
9.7 times, a price to BVPS ratio of 3.2 times and a price to free cash flow
ratio of 8.4 times.
Carrying Basis:
The increase in the valuation of Fairfax India’s
investment in BIAL to $1.4 billion (implying a valuation of $2.7 billion for
100%) is supported by future cash flow estimates (akin to DCF). In addition, In
June 2019, Fairfax India created a 100% owned subsidiary in India named
Anchorage Infrastructure Investments Holdings (AIIHL). It is intended that this
company will be Fairfax India’s flagship investment vehicle for airports and
other infrastructure investments in India and that all of the shares it owns in
BIAL will eventually be transferred to AIIHL.
Later in 2019, Fairfax India signed definitive
agreements with an investor (Canadian pension plan OMERS) whereby it will
transfer 43.6% of BIAL out of the 54% that it owns in BIAL to AIIHL and the
investor will pay about $135 million to acquire from Fairfax India an 11.5%
interest on a fully diluted basis in AIIHL. This will result in the investor
indirectly owning approximately 5% of BIAL. The transaction values 100% of BIAL
at $2.7 billion. Fairfax India intends to complete an IPO of AIIHL, targeted to
value 100% of BIAL at $3.0 billion (a targeted valuation of $1.3 billion for
100% of AIIHL).
IIFL Holdings:
In 2019, IIFL holdings split into 3 separately publicly
listed companies. I will highlight some of their business operations and
current valuation as these businesses are carried on the balance sheet based on
the public market prices.
IIFL Finance:
Based on total revenue, IIFL Finance, which is non-deposit
taking, is the 22nd largest NBFC (Non-Banking Financial Corporation) in India.
Under the able leadership of its CEO, Sumit Bali, IIFL Finance is moving
forward aggressively to consolidate its position as one of the major NBFCs in
India. It added 504 new branches in 2019, taking its total to over 2,350
branches, with over 18,000 employees and 3 million customers.
In 2019, IIFL Finance revenues increased 15% to $363 million
and profit after tax excluding extraordinary items increased by 17% to $103
million, generating a ROE of 15%. Despite these good results, IIFL Finance is
trading at a deeply discounted valuation of only 4 times price to estimated
March 2020 earnings and price to estimated March 2020 book value of 0.7 times.
IIFL Wealth:
IIFL Wealth is the number one wealth manager in India for
Ultra High Net Worth Individuals with consolidated total assets under
management (AUM) of $25.1 billion, 29 offices in India and abroad, 900 plus
employees and 64 teams consisting of 288 relationship managers serving over
5,600 families.
As part of the IIFL Holdings group, IIFL Wealth was its
fastest growing business, having compounded 5-year growth rates of 32%, 39% and
49% in, respectively, AUM, total revenue and profit after tax. IIFL Wealth has
two businesses – wealth management (the larger one) and asset management.
The wealth management business has embedded in it a non-bank
finance company (NBFC) which makes loans to its clients secured by their assets
held by IIFL Wealth and has never had a bad loan.
The smaller asset management business is India’s leading
manager of alternate investment funds (AIF). AUM for this business grew by 46%
in 2019 to $3.8 billion while revenues grew by 78% to $18 million. This
business was strengthened by the addition of a new CIO, Anup Maheshwari, an
experienced fund manager with a proven 25-year track record.
Currently, the stock traded at a valuation of 28 times March
2020 expected earnings and its market capitalization was 5% of its AUM,
reflecting the market’s confidence in its growth prospects. Given the low
penetration of wealth management in India and the high rate of wealth creation
and growth in dollar millionaires, I believe that IIFL Wealth has a very bright
future.
IIFL Securities:
IIFL Securities is one of the major
capital market players in Indian financial services. It offers advisory and
broking services (both retail and institutional), financial products
distribution, institutional research and investment banking services. It
operates in over 2,500 locations across India, comprised of a wide branch and
sub-broker network providing unparalleled research coverage on over 200
companies. It serves over 800,000 customers and has a strong online presence.
Mobile trading has significantly aided in increasing the number of customers:
mobile trading clients in 2019 accounted for 54% of trading. IIFL Securities
was founded in 1996 and became a member of the Indian stock exchanges in 2000.
It also owns a portfolio of
commercial properties, rented mostly to group companies, with a current market
value of about $100 million (amounting to about 66% of its market
capitalization), that generates rental income of approximately $7.5 million.
These assets may be monetized in the future.
At 35 rupees per share, implying a
price to earnings ratio of 4.7 times 2019 earnings and a price to book value
ratio of 1.4 times. Over the last four years IIFL Securities has generated an
average ROE of 29%
Valuation of Fairfax India:
On May 7th, 2020, Fairfax India has ~153M shares outstanding. Based on the market price of ~$8/share, the company is
trading for $1.2B. The company has about $460M in net debt. It is a deep
discount relative to even a purchase price accounting valuation of $1.8B or
less than half of the carrying value of their portfolio. Another way to look at
this valuation, It is less than the carrying value of the airport alone. If we assume the
carrying value of the BIAL is appropriate (I vote ‘Yes’), we are getting all
the other assets for free today. This is a very highly attractive way of
participating in Indian business ownership through Fairfax India.
Risks:
I own a significant stock position in Fairfax India. I wrote the article myself although I used plenty of language/materials from their annual and quarterly reports.
Investing in any company comes with its own set of risks; it's up to us to determine whether we are getting paid to take on those risks? Here are some of the risks that the potential shareholder should be aware of.
- Indian currency (Rupee) has depreciated against dollar for years, this may continue as more people believe the USD is a safe haven relative to Rupee.
- Indian economy may not rebound as quickly and growth may linger slower for longer.
- Management has an incentive fee structure based on performance (similar to a good hedge fund incentive, which I endorse) may take away some benefits from shareholders although they own third of the company themselves.
Disclosure:
I own a significant stock position in Fairfax India. I wrote the article myself although I used plenty of language/materials from their annual and quarterly reports.
Good article on FIH.U
ReplyDeleteFairfax has to better market this vehicle to draw more investor groups and HNIs. The product lacks transaction volume. It would be good for Fairfax to advertise via BNN shows or bring this product up in BNN's market call segments