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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.
