Fairfax India new issue

[ICUMD]

BIAL may be on the books for 600 million with a 1.2 billion valuation. But it is reasonable to think that the airport is worth far more than that - I doubt you can build a state of the art airport serving 20 million passengers per yr for that price.  It is also growing at > 25% yoy.  Book value is understated,  in my books.....  I think it is worth at least 100% more - ~ 2 - 3 billion, pre expansion costs.

[zippy1]

So in the earlier discussion, there were concerns that Fairfax India may be a PFIC. I am wondering whether this turned out to be true or false?  Does one (a US citizen) need to file any special tax document or put it inside an IRA?

 

I assume if there is an issue people may have to deal with it during the tax season earlier this year?

 

Will appreciate any insight and suggestions!

[DooDiligence]

So in the earlier discussion, there were concerns that Fairfax India may be a PFIC. I am wondering whether this turned out to be true or false?  Does one (a US citizen) need to file any special tax document or put it inside an IRA?

 

I assume if there is an issue people may have to deal with it during the tax season earlier this year?

 

Will appreciate any insight and suggestions!

 

It is & you should own it in a tax advantaged account.

[zippy1]

So in the earlier discussion, there were concerns that Fairfax India may be a PFIC. I am wondering whether this turned out to be true or false?  Does one (a US citizen) need to file any special tax document or put it inside an IRA?

 

I assume if there is an issue people may have to deal with it during the tax season earlier this year?

 

Will appreciate any insight and suggestions!

 

It is & you should own it in a tax advantaged account.

 

many thanks!  :)

[dartmonkey]

They follow IFRS rules in their valuation of BIAL, using a DCF model, giving a calculated value $1.2b, but that does not mean that is what they really think the thing is really worth. It is not their style to buy at almost twice the price they really think its worth, even if they have to call this 'fair value' in their verbiage:

 

"The cash consideration paid for the additional 10.0% equity interest in BIAL exceeded the fair value of those additional shares acquired, as a result $74,202 (approximately 4.8 billion Indian rupees) of the cash consideration paid was attributable to the costs incurred to (i) motivate GVK to sell its remaining 10.0% equity interest in BIAL, (ii) increase the company's holdings in BIAL to enhance the company's investment returns, and (iii) accelerate the development of a second runway and terminal, and make improvements to the existing runway".

 

I would call this legalese verbiage. Yes, they paid more because they really wanted it, and a high price is often what is required to get the owner of a good asset to sell, but that is all perfectly obvious. I have been able to obtain their first draft, nixed by the lawyers, which said:

 

"We bought 38% in March, for an implied value of $1.01b, IFRS rules force us to apply crazily conservative DCF parameters like 10-13% discount rates, 3% growth rates even though is is growing like a weed, over 20% growth in traffic in recent years, not counting the value of commercial development on sited. Using those estimates, the value comes out at $1.23b - garbage in, garbage out. On the other hand, we love it so much, we were happy to buy another 10% of this fantastic asset at an implied valuation of over $2b in July. You be the judge of whether it is worth $1.2b or $2b or much more."

[rohitc99]

They follow IFRS rules in their valuation of BIAL, using a DCF model, giving a calculated value $1.2b, but that does not mean that is what they really think the thing is really worth. It is not their style to buy at almost twice the price they really think its worth, even if they have to call this 'fair value' in their verbiage:

 

"The cash consideration paid for the additional 10.0% equity interest in BIAL exceeded the fair value of those additional shares acquired, as a result $74,202 (approximately 4.8 billion Indian rupees) of the cash consideration paid was attributable to the costs incurred to (i) motivate GVK to sell its remaining 10.0% equity interest in BIAL, (ii) increase the company's holdings in BIAL to enhance the company's investment returns, and (iii) accelerate the development of a second runway and terminal, and make improvements to the existing runway".

 

I would call this legalese verbiage. Yes, they paid more because they really wanted it, and a high price is often what is required to get the owner of a good asset to sell, but that is all perfectly obvious. I have been able to obtain their first draft, nixed by the lawyers, which said:

 

"We bought 38% in March, for an implied value of $1.01b, IFRS rules force us to apply crazily conservative DCF parameters like 10-13% discount rates, 3% growth rates even though is is growing like a weed, over 20% growth in traffic in recent years, not counting the value of commercial development on sited. Using those estimates, the value comes out at $1.23b - garbage in, garbage out. On the other hand, we love it so much, we were happy to buy another 10% of this fantastic asset at an implied valuation of over $2b in July. You be the judge of whether it is worth $1.2b or $2b or much more."

 

+ 1

air traffic is growing 15%+ across india. Most airlines are operating with a PLF of 85% and still growing. I have been to the airport several times over the last 10 years and the traffic is up several times. when the airport was built, it was way out of the city and with expansion of the city, it wont be long before the airport comes within the city.

A 3% growth in anything in india is almost equivalent to 0 growth or recession. when i looked at the DCF assumptions for BIAL, it was more than obvious they are very very conservative. Look at IIFL ..they are growing 30% and thats not really too high in the space they operate. A lot of other well managed financial services companies of the same size are growing at the same rate. It may sound odd to call 30% growth as conservative, but the tailwinds in the financial services space is quite high

[hobbit]

Not to doubt you hobbit but even fairfax india isn't pricing in $1.2B for BIAL.  In their latest 10q they run a dcf model and estimate their stake in BIAL at $592m.  There is some verbage around the additional purchase that they basically overpaid to convince BIAL to sell.

 

if you buy X% stake at 1 billion mkt cap and then buy another 0.1X% stake at 2 billion mkt cap , accounting principles wont let u hold the entire investment at 2 bn mktcap until and unless there is another independent deal in the market that confirms ur valuation. if u trust fairfax management its a no brainer that the investment is already worth1.2 billion with a much higher intrinsic value.

[ICUMD]

One point however is that BIAL holds a considerable amount of debt on its books.  Furthermore, it is expanding the airport with a new runway and terminal, at a cost I believe of ~600 million USD.  They have made good strides to reduce this debt over the past year and I think they will continue to do so under Fairfax's prudent management and rapid revenue growth.  As they pay down this debt, they should be able to increase BV and induce a rise in Fairfax India's share price.

 

 

[chrispy]

I am very happy about it as I was able to pickup shares but is there any reason why ffxdf plummeted going into Dec 31 and then took off?

[obtuse_investor]

No idea. I assume since the Indian composite index dipped a little, fih fell too.

 

 

[rohitc99]

Not really, indian markets were up in december, including IIFL which was up close to 10%. again quite a few of the assets such as BIAL are not listed. irrespective of the reason, the drop was good to raise the position

[obtuse_investor]

You’re probably right. I don’t follow the Indian market. And trying to attribute reason to some of mr market’s actions is not really worth the time.

 

I happily used this buying opportunity to substantially increase my exposure.

[hobbit]

https://economictimes.indiatimes.com/markets/stocks/news/iifl-holdings-to-be-soon-divided-into-three/articleshow/62737383.cms

 

IIFL is the biggest investment

[dartmonkey]

Just to come back to the share repurchase, the NCIB was announced on Oct 4, with the shares at about $18, presumably indicating that management was confident that it was undervalued there. Since then, we had the Qe report (Nov 2nd) indicating holding that were about half public and half private.

 

On the public side, 2 holdings: IIFL (85m shares, worth $787m on Sep 30th), and Fairchem (19m shares, worth $113m). Then there is the private side, with Sanmar bonds ($323m), BIAL (very conservatively valued at $592m), NCML ($184m, Saurashtra ($34m), NSE ($40m) and Sanmar equity ($1m) for a private company total of $1173m.

 

I just looked at the 2 public holdings, and if my calculations are right, they were at the same value on Dec 31st (for the purposes of the Q4 report, due next week I think), but they have gone up over 20% since then, mostly because of IIFL. Meanwhile, the other big holding, BIAL, is very likely worth substantially more, at least FIH thinks so, since the price they paid for the latest 10% stake gives their whole stake an implied valuation of close to $1b.

 

It will be interesting to see if they took advantage of the Nov/Dec price dip in FIH shares to buy back some of their 3.5 million share NCIB (4% of the public float). I certainly bought some - now my #3 position.

 

[gokou3]

For Canadian shareholders of Fairfax India, I wonder if there is any special tax for this Indian-focused investment vehicle.  Is there any difference between holding FIH in a non-RSP vs RSP vs TFSA account?  Any withholding taxes?  Thanks,

[wondering]

Fairfax India is a Canadian domiciled company for Canadian taxpayers purposes. No different than Royal Bank from an investor - taxpayer perspective.  In the future, if FIH starts paying dividends, they will be considered eligible Canadian dividends. FIH can be held within a TFSA or RRSP.  No withholding tax on FIH dividends (should they start to pay dividends). No foreign reporting (ie T1135) required either.

 

I hope this helps.

[gokou3]

Fairfax India is a Canadian domiciled company for Canadian taxpayers purposes. No different than Royal Bank from an investor - taxpayer perspective.  In the future, if FIH starts paying dividends, they will be considered eligible Canadian dividends. FIH can be held within a TFSA or RRSP.  No withholding tax on FIH dividends (should they start to pay dividends). No foreign reporting (ie T1135) required either.

 

I hope this helps.

Thanks, you have answered all the questions that I haven't put in words. :)

[petec]

What are the odds of Fairfax's Thomas Cook and Quess stakes being swapped for Fairfax India shares at some point?

[rohitc99]

What are the odds of Fairfax's Thomas Cook and Quess stakes being swapped for Fairfax India shares at some point?

 

that would require fairfax india to list in india for the minority shareholders of these companies? not sure about the exact rules, but as an investor in the indian markets, i dont know of any foreign company being dual listed in india. the reverse exists where a few indian companies are listed in the US via ADRs

[racemize]

What are the odds of Fairfax's Thomas Cook and Quess stakes being swapped for Fairfax India shares at some point?

 

that would require fairfax india to list in india for the minority shareholders of these companies? not sure about the exact rules, but as an investor in the indian markets, i dont know of any foreign company being dual listed in india. the reverse exists where a few indian companies are listed in the US via ADRs

 

I think he's saying that FFH would give the shares to FFH india in exchange for FFH india shares.  Since they are both in Canada, I don't think there would be an issues?

[rohitc99]

What are the odds of Fairfax's Thomas Cook and Quess stakes being swapped for Fairfax India shares at some point?

 

that would require fairfax india to list in india for the minority shareholders of these companies? not sure about the exact rules, but as an investor in the indian markets, i dont know of any foreign company being dual listed in india. the reverse exists where a few indian companies are listed in the US via ADRs

 

 

 

I think he's saying that FFH would give the shares to FFH india in exchange for FFH india shares.  Since they are both in Canada, I don't think there would be an issues?

 

oh ok, got it. just change of control for thomas cook.

[buylowersellhigh]

What securities do u like in India? Any suggestions?

 

Not set up for trading in India yet.

[petec]

What are the odds of Fairfax's Thomas Cook and Quess stakes being swapped for Fairfax India shares at some point?

 

that would require fairfax india to list in india for the minority shareholders of these companies? not sure about the exact rules, but as an investor in the indian markets, i dont know of any foreign company being dual listed in india. the reverse exists where a few indian companies are listed in the US via ADRs

 

 

 

I think he's saying that FFH would give the shares to FFH india in exchange for FFH india shares.  Since they are both in Canada, I don't think there would be an issues?

 

oh ok, got it. just change of control for thomas cook.

 

Yeah I was merely wondering if they would "tidy up" the Indian holdings into FIH - partly to avoid the impression of a conflict of interest and partly to make my notes neater ;)

[ourkid8]

As a FFH shareholders, I would love if they "tidy up" their Indian holdings so that we can have the same upside AND receive a 1.5/20. :-)  It's a beautiful win/win scenario!!!  (Hint hint, did you forget you just paid Fairfax US$114.4 million)

 

What are the odds of Fairfax's Thomas Cook and Quess stakes being swapped for Fairfax India shares at some point?

 

that would require fairfax india to list in india for the minority shareholders of these companies? not sure about the exact rules, but as an investor in the indian markets, i dont know of any foreign company being dual listed in india. the reverse exists where a few indian companies are listed in the US via ADRs

 

 

 

I think he's saying that FFH would give the shares to FFH india in exchange for FFH india shares.  Since they are both in Canada, I don't think there would be an issues?

 

oh ok, got it. just change of control for thomas cook.

 

Yeah I was merely wondering if they would "tidy up" the Indian holdings into FIH - partly to avoid the impression of a conflict of interest and partly to make my notes neater ;)

[petec]

As a FFH shareholders, I would love if they "tidy up" their Indian holdings so that we can have the same upside AND receive a 1.5/20. :-)  It's a beautiful win/win scenario!!!  (Hint hint, did you forget you just paid Fairfax US$114.4 million)

 

Ha - I am an FFH holder not an FIH one! So I agree. But it's a good point.

 

Problem is consolidating it all it is a bigger job than it seems  - for example you could argue their 49% in Quantum Advisors should go in to FIH too, but that's unlisted so there is no easy way to price it. Probably just too complex so I suspect they keep it as is, although I wonder if they will take Thomas Cook private once the Quess spin is done.