Description

Fairfax India - Solid portfolio of investments available at a 40%+ discount to NAV !

Elevator Pitch:

Fairfax India has a portfolio of growth businesses trading at reasonable valuations. The IPO of Bangalore airport (largest asset in the portfolio) would be a key catalyst in the next 2 years and will show how attractively it has been marked by the management. The fee structure is exorbitant (2/20 structure like a PE fund), but a mix of factors (entry discount, share buybacks, cheap leverage etc) will allow investors to get similar (if not better) returns as the underlying growth in NAV (~15% expected CAGR over the next 5 years). 

Investment Thesis:

Fairfax India owns 59% of the Bangalore airport after the recent acquisition of 10% additional stake from Siemens. This is the crown jewel of Fairfax India and pretty much equates to 1.6 billion USD in value. This would translate into 85% of the current market cap and 54% of overall NAV/ Book value. Thus, a bet on Fairfax India is a bet on Bangalore airport, at least in the next 3-5 year time frame. 

Bangalore Airport:

Bangalore Airport is an extremely attractive asset to own. I believe that the true discovered value of the airport in a domestic IPO process would be upwards of 4 billion USD compared with the management’s mark of 2.7 billion USD. The reason for the conservative marking of the asset would be due to the recent transaction of Fairfax India buying 10% stake from Siemens around these levels. In my view, Siemens was an uneconomic seller (they got this stake in return for building the asset in 2007) and Fairfax India was able to get an attractive deal for themselves.

In 2019, Fairfax was able to sell part of the Bangalore airport to OMERS at a similar valuation to the current mark. The peer valuations of other Indian airports are 3X higher now than 4 years back. The Bangalore airport would have a rousing welcome in Indian markets and be bid up by domestic investors as high quality long duration assets which benefit from urban consumption growth are rare. 

Bangalore has been India’s fastest growing city for the last 2-3 decades (not only in India, but globally as well) and is well exposed to secular trends like technology, electronics manufacturing etc to drive further growth. The Bangalore airport has the concession until 2068 (almost 45 years from now). The airport when opened was far outside the city, but the city continues to develop towards the airport with multiple infrastructure projects to connect the airport with the city. The airport within the next 3 years would be well connected by Metro and Suburban trains in addition to the strong road infrastructure that has already been built. This is important as the airport has almost 460 acres of land that it can develop and lease. 

The airport has a regulated ROE of 16% on passenger fees and then unregulated income from retail, advertising, parking rentals, etc. Within the Indian airport space, Delhi was amongst the first airports that went to private hands. As per their last results, the regulated passenger revenue was just 1/3rd of the total revenues and the remaining 2/3rd was from unregulated sources (Land rental & retail - 33%, Duty Free & F/B - 19%, Parking & Ads - 6% and Others - 8%). This shows that an investment in the airport is a bet on the discretionary consumption trend of Bangalore. As India gets richer and more Indians travel and spend money on retail/ F&B etc, Bangalore airport will achieve higher operating leverage and profits will grow exponentially.  That is a no brainer bet from a 10-20 year view (FWIW, I live in the suburbs of Bangalore and have absolute conviction on the city’s growth). 

The airport has been growing passenger volumes at double digit rate over the last 10 years and we can expect the same going forward as well. Bangalore airport is expected to achieve full capacity by 2030 with almost 90 million yearly passengers. To put that in perspective, London’s Heathrow in 2019 (pre-COVID peak) flew 80 million passengers. The city is expected to start searching for land for a 2nd airport within the next few years as it continues to grow (current population is 13 million people). 

The absolute valuation of 2.6 billion USD for Bangalore airport looks attractive from a general thumb check across similar assets in India and globally. The management uses the following conservative inputs to calculate their value. 

From the private filings of the Bangalore airport, the approximate data points are as follows:

The airport opened its new Terminal 2 last year and that creates accounting entries that are difficult to normalise. Also, there are certain tax writebacks that make it difficult to analyse the true earnings power. Indian passenger traffic has smartly recovered from COVID and 2024 and 2025 should be good years for the airport. 

Public Equity Portfolio:

Fairfax India has a public equity portfolio that as of today is equivalent to 1.25 billion USD. The major value in this comes from IIFL group and CSB Bank (almost 1 billion USD). 

We are bullish on IIFL Finance (largest position in our global portfolio and we own around 1.5% of the firm). The group is run by a wonderful owner-operator who understands capital efficiency and shareholder value creation. The stock trades at <10X earnings and 2.3X price to book with ROE and growth of 20%+. 

We don’t own CSB Bank directly, but it is a well run mid sized bank with a good management team that wants to scale up the business 10 fold over the next decade. The stock trades at 12X earnings and <2X book value with a healthy 18% ROE. 

The rest of the portfolio (IIFL securities, 5 Paisa, Fairchem Organics etc) are good businesses that are trading at reasonable valuations. There are no large valuation or growth risks that I see in their public portfolio. 

Private Portfolio:

The largest allocations in the private portfolio outside of Bangalore airport are Sanmar (300 million USD) and NSE (176 million USD). Fairfax has investments in the holding company of Sanmar in line with the promoter family, but majority of the underlying value of the group is in the listed firm - Chemplast Sanmar. You can see from the market cap of the listed firm that the marking of the holding asset is reasonable. Fairfax’s indirect holding of the listed firm is approximately worth 220 million USD and the group has other large assets outside the listed firm in Egypt. Another way to check their valuation is that the pro-forma profit before tax of Sanmar for Fairfax’s stake was 39 million USD in 2022 (7.7X multiple on 2022 PBT). 

NSE is India’s largest stock exchange and should have a listing over the next few years. The exchange has been growing leaps and bounds with increasing equity participation in the country. It is a good asset that we should be happy to own for the next decade (marked at 19X 2022 earnings). The unlisted shares change hands currently at 25%+ higher than the valuation assigned by Fairfax team. 

The rest of the private portfolio is worth 350 million USD that is spread over 6-7 businesses. I don't have any strong views on them and are not material to our thesis. 

Valuation & other factors:

The stock is trading at less than 60% of the underlying portfolio and I believe that is a large discount despite the high fee structure. The firm has been buying back shares (along with the parent Fairfax Financial) and the shares outstanding has reduced by 1.25% this year (they have retired 11% of outstanding shares in the last 5 years). I expect the share buybacks to accelerate as we get closer to the Bangalore airport IPO. The net debt is around 400 million USD, but has a 5 year tenure with 5% fixed cost. 

While the discount can theoretically widen even further from current levels, I believe that the current discount of 40% is on the higher end and the management can buy back shares aggressively if it persists (especially once the Bangalore airport listing gives them more liquidity). There are multiple levers of shareholder returns in Fairfax India - NAV compounding, discount narrowing, share buybacks etc. 

The biggest catalyst for the idea continues to be the expected IPO of the Bangalore airport. If the IPO doesn’t happen, then it is equivalent to paying a PE fund a 2/20 fee structure to get access to a good private deal (positive is that we are buying it at a 40% discount). So, the overall Risk-Reward looks attractive to us. 

Catalyst

Bangalore Airport IPO, Share Buybacks