Fairfax India earnings down 79% in 2018 to $96 mn on unrealised gains

Fairfax India's net earnings in 2018 were down 79 per cent to $96 million from $453 million in 2017. India-born Canadian billionaire Prem Watsa's investment firm said that this was largely due to net unrealised gains on investments being $179 million compared to $592 million in 2017. However, over the four years since Fairfax India's inception, the company has significantly outperformed the markets, with the key performance measure growing at a compounded annual rate of 15 per cent.

Fairfax India's book value per share (BVPS) declined by 4.1 per cent in 2018, from $14.46 at the end of 2017 to $13.86, a performance generally in line with, and in many cases significantly superior to, the performance of Indian equity indices, and reflecting a 9.4 per cent decline in the Indian rupee during 2018.

Change in Fairfax India's BVPS in 2018 was primarily due to drop in the value of its holdings in IIFL Holdings ($1.33/share) and a drop in the value of the Indian rupee ($1.47/share). It was substantially offset by an increase in the value of Sanmar Chemicals ($2.04/share) and an increase in the value of Bangalore International Airport ($0.55/share). However, over the four years since Fairfax India's inception, the company Fairfax India has significantly outperformed the markets. Fairfax India BVPS was plus 8.7 per cent as compared to the US Dollar S&P BSE Sensex 30 plus 2.5 per cent.

During the same period last year, valuations of the private companies that Fairfax India invested in remained relatively close to the prices it paid for them, while two of the three publicly-traded companies in its portfolio, IIFL and Fairchem speciality, had posted strong mark-to-market gains since inception (including foreign currency translation changes) of $632 million and $75 million respectively.

"The situation changed significantly in 2018, so that at the end of 2018, IIFL and Fairchem Speciality had posted mark-to-market gains since inception (including foreign currency translation changes) of only $356 million and $22 million respectively. In total, this was a decrease of $329 million in 2018 in the value of these two investments. However, at the end of 2018 the valuation of two of Fairfax India's private companies, Sanmar and Bangalore International Airport, had increased during the year by $276 million and $28 million respectively. In total, this was an increase of $304 million in 2018 in the value of these two investments," said a company filing.

Investments in India

Since its inspection Fairfax India has completed investments in nine companies (eight currently, as two of them have combined), all sourced and reviewed by Fairbridge, Fairfax Financial Holdings' (Fairfax Financial) wholly-owned sub-advisor in India.

During 2018, Fairfax acquired an additional six per cent of Bangalore International Airport Limited (BIAL) from Siemens Project Ventures GmbH (Siemens) for $67 million. This increases its ownership of BIAL to 54 per cent, with Siemens retaining 20 per cent ownership.

In addition, the company agreed to invest approximately $168 million for a 51 per cent equity stake in Catholic Syrian Bank. Fairfax completed an initial closing of the transaction, investing $60 million in equity shares and warrants, resulting in an equity interest of 19.7 per cent. The remaining consideration is payable within 18 months, upon which its ownership will go to 51 per cent on a fully-diluted basis.

Also in 2018, Fairfax agreed with Chennai-based Sanmar Chemicals Group (Sanmar) to settle its $300 million of 13 per cent bonds for around $404 million, of which Fairfax would invest around half in additional common shares of Sanmar based on an effective equity valuation of around $1.0 billion for the whole company, thereby increasing its equity ownership interest to 43 per cent from 30 per cent.

This transaction will return 67 per cent of the capital Fairfax India originally invested while increasing its ownership of Sanmar.