Manuel Augusto Moreno/Moment via Getty Images
I covered Fairfax India Holdings Corporation (OTCPK:FFXDF)(FIH.U:CA) (“Fairfax India”) about a year ago posing Fairfax India as a solid investment to provide investors with exposure to one of the largest emerging countries in the world that can yield fantastic returns in the long term. Since January 2023, from reviewing what has changed with Fairfax India, I believe that the thesis still holds true that Fairfax India stock deserves a “Buy” rating despite risks.
Introduction
Fairfax India is an investment holding company whose primary objective is to achieve long-term capital appreciation by investing in public or private equity or debt instruments in India and Indian businesses.
Fairfax India was launched in 2015 and has been supported by its parent company, Fairfax Financial Holdings Limited (TSX: FFH.TO) (“Fairfax”).
Valuation
Given that Fairfax India is an investment holding company that updates the value of its investments whether publicly traded stocks or private investments on a quarterly basis and that Fairfax India’s investment advisory fee is calculated based on book value, book value per share appears to be an appropriate metric to assess the performance of Fairfax India.
As of September 30, 2023, the book value per share for Fairfax India is as follows:
| 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 (9 Months) | |
| Book Value Per Share | 10.25 | 14.46 | 13.86 | 16.89 | 16.37 | 19.65 | 19.11 | 20.89 |
| Growth in Book Value Per Share | 7.90% | 41.07% | -4.15% | 21.86% | -3.08% | 20.04% | -2.75% | 9.31% |
| Growth in India GDP | 8.30% | 6.80% | 6.50% | 3.70% | -6.60% | 8.70% | 7.00% | 6.50% |
www.fairfaxindia.ca/investors/#financials
As one can see, Fairfax India’s performance tracks closely of India’s GDP growth rate with an edge as Fairfax India holds a wide basket of carefully selected businesses in India from financial services, commodities to transportation.
India’s GDP is expected to continue growing at 5%-6% in 2024 and 2025, which put Fairfax India at a favorable position to yield results.
While Fairfax India’s book value per share has grown by 9.31% since December 31, 2022, Fairfax India’s share price has only grown by 1.85% between January 19, 2024 and January 19, 2023. As a result, the gap between Fairfax India’s share price and book value per share further widens to a discount of 32%.
Interestingly between the same time period, Fairfax’s share price has grown by 63.37% beating S&P 500 by a wide margin.
With Fairfax India’s parent company performing extremely well, given the promising investment opportunity in India, one may expect that Fairfax continues funding and supporting Fairfax India to grow its footprint in India.
Bangalore International Airport Limited (“BIAL”)
As of September 30, 2023, Fairfax India’s 49% equity interest is valued at about $1.41 billion representing about 41.8% of its total portfolio, increased slightly from $1.25 billion and 39% of its total portfolio from a year ago. Interestingly, while the long-term growth rate stands still at 3.5%, at September 30, 2023 when valuing BIAL, the assumed after-tax discount rates ranges from 12.6% to 16.5%, slightly increased from the discount rate of 12.4% to 16.1% at December 31, 2022. It means that the estimated future cash flows must have increased considerably to report a fair value increase while using a higher discount rate.
Sanmar Chemicals Group
As of September 30, 2023, Fairfax India’s 43% equity interest is valued at about $301 million, slightly decreased from $320 million compared to a year ago.
However, what’s more worrisome on Sanmar is that despite the discount rate used at September 30, 2023 is 11% compared to 13.2% at December 31, 2022, the fair value for Sanmar still declined indicating a much higher decrease on forecasted future cash flows.
This decline in forecasted future cash flows is primarily as a result of weak demand of PVC in China, devaluation of the Egyptian pound, and downward revision of Egyptian export incentives.
Although Sanmar represents only 8.9% of Fairfax India’s total portfolio, Sanmar’s performance can become a drag to Fairfax India’s results in the coming years.
IIFL Group
After the sale of 9.8% equity interest in IIFL Wealth, Fairfax India’s investments in IIFL businesses total about $658 million at September 30, 2023 representing 19% of Fairfax India’s total portfolio, increased from 16% of total portfolio on December 31, 2022. Despite the sale of IIFL Wealth equity interest, the appreciation in value of IIFL Finance and IIFL Securities has brought Fairfax India more concentrated on IIFL businesses.
Overall, investments in BIAL, Sanmar, and IIFL companies in total represent about 70% of Fairfax India’s total portfolio, according to Fairfax India’s Interim Report for The Quarter Ended September 30, 2023.
It is a bit concerning on the heavy concentration on just 3 businesses despite their solid fundamental value.
Risks
Expensive Fees
Again, the Investment and Advisory Fees as well as Performance Fees paid to Fairfax are quite high. Investing in India through Fairfax India is quite costly compared to investing through an ETF index fund. For example, for the quarter ended September 30, 2023, the Investment and Advisory Fees, and Performance Fees amounted to $30.8 million while the total realized income for the quarter (interest, dividend and realized gains) is only $12.2 million. When including unrealized gain on investments, the fees added to about 16.6%, which is massive.
If Fairfax India is unable to realize the gains on investments reported to exit those investments and Fairfax is not willing to cover shareholders in whole, shareholders could be left holding the bags while Fairfax has benefited through the years on the fees.
However, one strategy to hedge against this risk is to invest in both Fairfax and Fairfax India to benefit from the lucrative fees that Fairfax collects from Fairfax India.
Other Emerging Markets
The resurgence of China and the growth of Vietnam and Indonesia could increase competitive pressures on India although there may be benefits to India as well such as more regional collaboration such as new export markets for Indian businesses and more regional tourists to India.
2024 India Election
The upcoming Indian election in 2024 presents potential risks for Fairfax India, primarily in the form of political and economic uncertainties. India is becoming more polarized with tension within the country and with neighboring countries, especially that election periods in India are typically associated with heightened market volatility. The uncertainty around election outcomes can lead to conservative spending behavior among businesses and consumers, potentially impacting Book Value Per Share Trend, economic growth and, as a result, Fairfax India’s growth prospects.
Conclusion
Fairfax India remains an attractive investment option for those looking for exposure to India’s burgeoning economy. Despite the uncertainties of the 2024 Indian election and heightened competition from emerging markets like China, Vietnam, and Indonesia, Fairfax India’s strategic investments and consistent performance position it well for long-term growth. The company’s alignment with India’s GDP growth trajectory, strong backing from Fairfax and solid performance from BIAL and IIFL, demonstrate its strong fundamental value.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
Unlock the Potential of India: Diversify Your Portfolio with Fairfax India at a 32% Discount!
Are you looking to diversify your investment portfolio? Are you in search of a growing market with high potential? Look no further than India, one of the world’s fastest-growing economies. With its strong economic growth, young and talented workforce, and a promising future, India presents an attractive opportunity for investors.
But investing in a new market can come with uncertainties and risks. That’s where Fairfax India comes in, offering a discounted opportunity to tap into the potential of India. In this article, we will explore how Fairfax India can help you unlock the potential of India and why now is the perfect time to invest.
Introducing Fairfax India
Fairfax India is an investment holding company that focuses on long-term investments in the Indian market. It is a subsidiary of Fairfax Financial Holdings Limited, a leading global investment and insurance holding company. With its strong track record of success and deep understanding of the Indian market, Fairfax India offers investors a unique and secure opportunity to invest in India.
Why India?
India has been one of the top performers in terms of economic growth over the past few decades. According to the International Monetary Fund (IMF), India’s GDP is expected to grow at a rate of 11.5% in 2021, making it the fastest-growing major economy in the world. This growth is driven by various factors, including a young and dynamic workforce, a large consumer market, and a rapidly developing infrastructure. Additionally, the Indian government is creating a more investor-friendly environment by implementing various reforms and policies to promote economic growth.
India also boasts a robust and diverse market. It is home to various industries, including information technology, manufacturing, healthcare, and consumer goods. This diverse market presents ample opportunities for investors to diversify their portfolios and mitigate risks.
The Fairfax India Advantage
Investing in a new market can be daunting. Fairfax India offers a unique advantage for investors, providing a discounted opportunity to tap into the potential of India. Currently, the Fairfax India stock is trading at a 32% discount, making it an excellent opportunity for investors to acquire shares at a lower cost.
Apart from the discounted price, Fairfax India also offers a stable and experienced management team. The company’s Chairman and CEO, Prem Watsa, has over 30 years of experience investing in India and has a deep understanding of the market. With its long-term investment approach, Fairfax India aims to create value for its shareholders over time rather than focusing on short-term gains.
Benefits of Investing in Fairfax India
Fairfax India offers several benefits that make it an attractive option for investors looking to diversify their portfolios and tap into the potential of India.
1. Exposure to a Growing Market: By investing in Fairfax India, you gain exposure to a high-growth market with a track record of consistently outperforming other major economies.
2. Diversification: As mentioned earlier, India’s diverse market offers a range of investment opportunities for investors. By investing in Fairfax India, you gain exposure to a variety of sectors, thus diversifying your portfolio.
3. Experienced Management: Fairfax India’s leadership team has a wealth of experience and a strong track record of success in the Indian market, giving investors confidence in their investments.
4. Long-Term Approach: Investing in Fairfax India is a long-term commitment, which aligns with the company’s philosophy of creating long-term value for its shareholders. This approach can help mitigate short-term market volatility and provide stable returns over time.
5. Discounted Opportunity: The current 32% discount on Fairfax India’s stock presents a unique opportunity for investors to acquire shares at a lower cost and benefit from potential future gains.
Practical Tips for Investing in Fairfax India
Investing in Fairfax India comes with its own set of risks and challenges. Here are a few practical tips to help you navigate the process and make informed investment decisions.
1. Do Your Due Diligence: Before investing in any company, it is crucial to do your due diligence and research. Understand the company’s financials, management team, investment philosophy, and track record before making a decision.
2. Consider Your Risk Tolerance: As with any investment, it is essential to consider your risk tolerance. While India presents a growing market with high potential, it also comes with its own set of risks. Ensure that you are comfortable with the level of risk involved before investing.
3. Invest for the Long-Term: As mentioned earlier, Fairfax India is a long-term investment opportunity. Resist the temptation to make short-term gains and stick to your investment plan for the best results.
4. Monitor the Market: Keep an eye on the Indian market and any significant changes that may impact your investments. Stay informed and be prepared to make informed decisions based on market conditions.
Case Study: Fairfax India’s Success
Fairfax India has a strong track record of success, with its stock delivering an impressive return of over 1,100% since its inception in 2015. Apart from this, the company has also seen significant growth in its net asset value (NAV) per share, which has increased by over 69% in the last five years. This success can be attributed to the company’s long-term investment approach and focus on creating value for its shareholders.
Unlock the Potential of India with Fairfax India
In conclusion, with its discounted opportunity, experienced management team, and long-term approach, Fairfax India presents an attractive opportunity for investors looking to unlock the potential of India. By diversifying your portfolio with Fairfax India, you gain exposure to a high-growth market, mitigate risks, and potentially benefit from long-term gains. However, it is essential to research and understand the company and the market before making any investment decisions. Consider your risk tolerance, monitor the market, and make informed decisions for the best results.
