Fairfax India net loss widens as Covid-19 impacts mkt price of investments

Prem Watsa, chief executive officer at Fairfax Financial
Prem Watsa-led Fairfax India Holdings Corporation has said it has incurred a net loss of $253.8 million in the first quarter of 2020, compared to a net loss of $52.6 million in the first quarter of 2019, reflecting net unrealised losses on investments of about $274.3 million. The loss, mainly due to the decline in market prices of the companies it has invested in India amid Covid-19, was partially offset by recovery of a previously accrued performance fee of $47.1 million. 

The company also recorded unrealised foreign exchange losses of $165.4 million due to the weakening of the rupee against the dollar.

Unrealised losses on investments of $274.3 million arose largely from the decrease in market prices of the company's investments in the public entities such as CSB Bank ($105.4 million), IIFL Finance ($77.1 million), other public Indian investments ($37.3 million), IIFL Wealth ($22.4 million), Fairchem ($16.4 million), IIFL Securities ($11.8 million) and 5paisa ($7.6 million). 

Announcing the financial results for the quarter ended March 31, the company said there was also a decrease in the fair value of its private investment in Sanmar ($8.7 million), although this was partially offset by an increase in the value of the its private investment in NSE ($13.5 million). 

"The overall impact during the first quarter of 2020 can be seen through the decline in the fair values of the company’s public Indian investments and unrealised foreign currency translation losses as its net assets. The company's net earnings are primarily denominated in the Indian rupee," the company said. Its Indian investments faced varying degrees of business disruption as a result of the response to the Covid-19 pandemic. 

During the quarter, the company faced added uncertainty in determining discounted cash flows for assessing the fair values of its private Indian investments due to the economic and social impact of the Covid-19 pandemic. Its Indian Investments rely to a certain extent on free movement of goods, services, and capital from around the world, which has been significantly restricted as a result of Covid-19. Operations of some of the firms it has invested in were interrupted due to the pandemic. The moratorium on loan payments may put liquidity pressures on India Housing Fund. However, it has sufficient capital in place to withstand these pressures. 

"Given the ongoing dynamic nature of the circumstances surrounding Covid-19, it is difficult to predict how significant the impact of the pandemic, and the responses to it, will be on the global economy and the company's Indian Investments in particular. It is also not certain for how long the disruptions are likely to continue," said the company. 

The extent of such impact will depend on future developments, which again are highly uncertain, rapidly evolving and difficult to predict. These include new information which may emerge concerning the severity of Covid-19 and additional actionthat may be taken to contain Covid-19, as well as the timing of the re-opening of the economy in various parts of the world. Such further developments could have a material adverse effect on the company's business, financial condition, results of operations and cash flows, it added.

COVID-19 has increased uncertainty and may adversely impact the fair value or future cash flows of the company's equity investments. The company's exposure to market price risk decreased to $2,628,307 at March 31, 2020 from $3,032,907 at December 31, 2019 primarily as a result of these losses.

The Indian equity markets experienced significant declines with the S&P BSE Sensex 30 falling 32.6% in the first quarter of 2020. The sell-off of Indian equities was consistent with the market decline observed in other major emerging markets globally and a result of the economic impact of the Covid-19 pandemic. The Indian rupee also declined by 5.6% in the first quarter of 2020 consistent with declines observed in other emerging market currencies. The declines in equity markets and emerging market currencies is primarily attributable to higher risk aversion in global financial markets, leading to a "flight to quality", it added.

During this period of uncertainty, Fairfax India is strong in financial health, with undeployed cash and marketable securities of approximately $217 million, and an available line of credit of $50 million. The company is continuing to buyback shares under its normal course issuer bid.

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