Uncovering value in India

Chief Investment Officer, Wayne Peters, and Head of Research, Nathan Bell explain the investment case of listed holding company, Fairfax India. Fairfax India provides investors exposure to high quality private and public businesses in India. Fairfax’s key assets include Bangalore International Airport, IIFL Holdings, NCML and Sanmar Chemicals.

Much is written about India. The size of the population (1.3b and growing 1.9% p.a.); the demographics (50% of the population is under 25 and 65% are below 35); and a median income per capita of US$616 p.a. The potential for investors is obvious.

Wayne’s visit to Mumbai this year hammered home this opportunity; keep in mind Mumbai’s population alone is equal to Australia’s. But more importantly, the country finally has a mostly rational and pragmatic government led by Narendra Modi, who has announced four very significant policies.

1. Demonetisation of ₹500 and ₹1,000 bank notes

In a very clear message that corruption must be stamped out, taking the 500 and 1,000 rupee bank notes (roughly A$10 & A$20) out of circulation last year immediately shrunk the black market and reduced bribery, though the longer term impact remains to be seen.

2. Introduction of the Aadhar system

Unparalleled anywhere else, India has introduced the world’s largest biometric ID system called Aadhaar with 1.2bn residents enrolled. This will eliminate duplicate and fake identities, reduce fraud and corruption, facilitate the opening of bank accounts, which eventually leads to increasing credit and economic activity. This move alone will have unfathomable benefits for the country.

3. Introduction of Goods and Services Tax

Tax revenues will finally be collected from a broad base, which can be directed to social systems (the country doesn’t have a national health care system) and desperately needed infrastructure. Government tax revenue in India is only about 12% of GDP, one of the lowest in the world, compared to about 33% in Australia.

4. ‘Housing for All’ by 2022 Mission

This is an ambitious plan, to grossly understate it. Again though, the implications and opportunities are enormous.

Fairfax India

While providing several targets to further investigate, our research trip culminated in our first investment in India. Ironically, it’s listed in Canada; Fairfax India Holdings Corporation.

Fairfax India resembles a listed investment company (LIC), as it’s a ready-made portfolio of Indian businesses providing a broad exposure to deals we could never get access to on the listed market.

Fairfax India is chaired by Prem Watsa, who is the founder and chairman of Fairfax Financial, which we also own. Normally you should buy LICs at a discount to net asset value (NAV) adjusted for fees, but we believe the current reported NAV significantly undervalues the company’s investments. We also expect rapid growth as India grows and Modi’s policies reshape the country.

The company’s key investments include a 48% share of the Bangalore International Airport, 30% of specialty PVC company Sanmar, which has the potential to increase in value many times over, and 27% of financial services company IIFL.

While partnering with an honest and capable management team with the ability to compound our capital at high rates of return for decades is the key attraction, owning assets that aren’t correlated with the US and Europe also adds diversification.

Disclosure: Peters MacGregor Capital Management Limited holds a financial interest in Fairfax India through various mandates where it acts as investment manager.

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