http://seekingalpha.com/article/1935151-amira-nature-foods-inflated-financialsundisclosed-related-party-point-to-substantialdownside?source=email_rt_article_readmore
Amira Nature Foods: Inflated Financials,
Undisclosed Related Party Point To
Substantial Downside
Jan. 8, 2014 4:13 PM ET| by: Footnote Finder 4 comments | About: ANFI
Disclosure: I am short ANFI. (More...)
Amira Nature Foods (ANFI) is an Indian business that processes and sells basmati rice. The
share price of ANFI has increased dramatically over the past year fueled by earnings results of
dubious quality and bullish analyst reports. As reviewed in the prior article on the company,
there are a number of concerns surrounding ANFI that have only been magnified as the
company's valuation has climbed higher.
The primary reasons given by the company and analysts for Amira to raise money by going
public was to pay down debt and fund the construction of a new rice processing facility to more
than double capacity. In the year since going public, alarmingly little has been done on either of
these issues.
This article will make five points:
1. ANFI's quality of reported earnings is extremely low. The company has failed to produce
positive free cash flow despite large reported net income, and the discrepancy between
IFRS reported income tax expense and cash taxes continue to diverge in direct
contravention of management's explanation for this incongruity.
2. ANFI will run out of money within 12 months based on their current cash burn rate,
before considering the substantial capital expenditures required to fund their expansion
plans.
3. Similar to other foreign-based, U.S.-listed stocks, the financials reported to U.S. investors
do not match those submitted to the local authorities.
4. Bullish analyst price targets are based on comps using U.S.-based packaged food
companies, when there are several publicly traded Indian basmati rice competitors that
are far larger than ANFI and enjoy better vertical integration. ANFI is overvalued by any
measure, again assuming you believe their numbers in the first place.
5. ANFI management appears to be hiding potentially material related party transactions by
removing websites.
Debt Repayment
Amira utilized $52 million from their IPO in October 2012 to pay down debt. Total cash for
Amira as of Sept. 30, 2012, before the IPO, was $4.3 million. Total debt was $163 million, with
$9.1 million remaining available for drawdown. The Sept. 30, 2012, 6-K states that pro forma
debt, assuming $52 million in IPO proceeds used for debt repayment, would be $111 million. For
the quarter after the IPO (Q3 2013 -- Dec. 31, 2012), total debt was $161.6 million instead of
$111 million. Total debt rose despite the $52 million repayment because ANFI immediately
needed to borrow more money to purchase inventories going into the Basmati harvest season.
Inventories did increase, from $129.6 million as of Sept. 30, 2012, to $197.5 million as of Dec.
31, 2012. This shortage of capital, as my previous article explained, was the real reason for the
IPO.
ANFI again finds itself in a precarious financial position as evidenced by their most recent
quarterly report for Sept. 30, 2013. The company is going into the primary Basmati purchasing
season with $148.8 million in debt, $13.8 million remaining available for drawdown under
existing financing arrangements, and cash of $46.2 million ($25 million of which is reserved for
capacity expansion).
Over the past 12 months, ANFI has lost $25 million in cash from operations. ANFI does not
include cash paid for interest within their cash flow from operations statement, which has been
an additional $20 million drain over the last 12 months ending Sept. 30, 2013. Combining these
numbers shows that the total operational cash burn for Amira has been about $45 million over
the last four quarters. This operational cash burn already equals Amira's entire cash balance as of
Sept. 30, 2013. This is before considering the company's capital spending plans, and the
beginning of the basmati purchasing season which appears to have necessitated the original IPO.
Capital Spending
The other purported need for IPO funds was to pay for an increase in processing capacity. ANFI
currently has capacity to process 24 metric tons of rice paddy per hour. The company has stated
they plan to build a new milling plant that will expand total milling and sorting capacity to 60
metric tons per hour by fiscal 2015. Amira estimates this will cost over $60 million, with $25
million in proceeds from the IPO set aside for the purpose of funding development of the new
facility. When contacted about guidance on capex for this new plant, and why capex had
continued to be so low, the company replied that they do not provide capex guidance -- that the
$25 million was an amount held from the IPO for future use to expand the company's rice
manufacturing facility, and pending construction of the facility the funds are being held in shortterm fixed deposits with banks. However, the company was specifically asked about capex on
the Q3 2013 earnings call held on Feb. 25, 2013:
Eric Katzman: OK, thank you for that. And, last question from me. In terms of the building of
the new facility and capex, capital expenditure outlook, is that still about 25 million this year and
10 to 15 million in '14 and then back up to like 25 million in fiscal '15, if everything goes
according to plan?
Rahul Nayar: Yes, I think the only question is, if we spend the money in Q4 this year or
whether that slips to Q1. Again, we obviously want to spend the money as late as possible, cost
of capital is expensive as you know. So, the only -- I think the only open item is whether we
spend that in Q4 or in Q1, but, yes, in the next few months, absolutely.
Contrary to the answer given by ANFI above, there was no additional capex spent in Q4 2013,
Q1 2014, or Q2 2014. Instead of spending at a $25 million or $10-$15 million annual rate,
capital expenditures averaged less than $0.5 million per quarter. If the plant expansion costs a
total $62 million and is completed by Q4 2015, ANFI would have to increase capex spending by
over $10 million per quarter for each of the next six quarters to hit this guidance. With their
balance sheet and cash burn issues, especially with the basmati purchasing season at hand, ANFI
finds itself with a desperate need for capital and may have to return to the market sooner rather
than later.
ANFI's Reported Financials Are Likely Inflated
There are several items that point to the extremely low quality of Amira's reported earnings. The
most obvious issue is that despite Amira reporting positive net income for years, this has not
been converted into positive free cash flow. In fact, ANFI has reported consistently negative cash
from operations over the last several years.
Click to enlarge images.
Additionally, Amira's provision for income tax expense on their income statement (which is a
product derived from reported pre-tax profits and applying the relevant tax rate) has diverged
from the actual cash paid for taxes over time:
In 2010, Amira's cash paid for income taxes matches their income tax expense from the income
statement almost exactly. However, as ANFI reported higher revenues/earnings, their cash paid
for taxes did not keep pace with their reported income tax expense.
One potential explanation is that, Amira has inflated reported profits on the income statement.
After all, why would you pay taxes on profits that don't actually exist? This phenomenon appears
to be unique to Amira, as other basmati companies in India reported cash paid for taxes roughly
in line with income tax expense cumulatively over the last three years.
When contacted regarding this matter, ANFI stated that:
Income tax expense in Income Statement consists of Current Income Tax Expense and Deferred
Tax Expense. Current Income tax is the one which is calculated based on Income tax rules and
deposited with Tax authorities. Deferred tax is calculated on timing differences based on IFRS
standards and gets accounted for as Deferred Tax Liability/ asset on Balance sheet hence did not
result into cash outflow. This is clearly explained in our Annual SEC filings and also in
Prospectus. This treatment is mandated by IFRS under IAS 12 and also by U.S. GAAP under
FASB 109 -- mandatory to be followed by all U.S.-listed companies. Taxes payable are booked
at the close of each quarter, however in India, any unpaid amounts of such taxes are deposited
around seven to eight months after the end of the fiscal year. Amira has correctly booked taxes
payable and pay any unpaid amounts consistent with these rules before the filing of the tax
returns.
Basically, Amira's explanation is that any shortfall in cash payments for taxes vs. income tax
expense on the income statement should show up as a deferred tax liability on the balance sheet.
However, since going public, ANFI's deferred tax liabilities have actually declined, while cash
payments on taxes continue to lag behind income tax expense.
Below is a walkthrough of the last three fiscal years and the first half of fiscal 2014 (six months
ending Sept. 30, 2013) for ANFI's income tax expense on the income statement, cash payments
for income tax on the cash flow statement, as well as the company's current and long-term
deferred tax liabilities on the balance sheet.
For the six months ending Sept. 30, 2013, the company reported an income tax expense of $4.9
million on their income statement, but income taxes paid of only $0.5 million in their cash flow
statement. This would seem to imply that more than $4 million in income tax payments were
deferred, which should create an increase in the company's deferred tax liabilities. Total tax
liabilities, however, actually declined over this period.
Finally, reminiscent of several publicly traded Chinese companies from years past, Amira's
financials reported to the Indian government do not match the financials reported in their SEC
filings. Indian companies are required to file financials with the Indian government and are
publicly available at the Ministry of Corporate Affairs website. The financials for Amira Pure
Foods Private (the Indian subsidiary through which domestic and international sales for ANFI
are booked) are also available without registration and purchase from the Ministry at the website
for Indian stock broker, Bonanza.
Below is a table converting the company's Indian financials to USD at the average exchange rate
for each fiscal year ending March 31. Data for the year ending March 2010 appears different on
the Bonanza website than in the table below, since the table uses data from more recent reports
with the ministry of corporate affairs.
ANFI Trades at a Premium to Peers
One common misconception repeated by sell-side analysts is that ANFI trades at a discount to
publicly traded peers. This relies on using an inappropriate peer group of organic and other
branded packaged food companies in the U.S., such as BNNY, GMCR, or HAIN, that are simply
not comparable. This is primarily because the majority of ANFI's revenues are not derived from
branded product sales. This peer group is a poor match for ANFI, especially considering the fact
that there are several publicly traded basmati rice companies in India. These companies produce
the same product as Amira (basmati rice), sell into the same markets (India and the Middle East),
and have greater brand presence in domestic and international markets, while possessing higher
production capacity (something that Amira purportedly went public to emulate).
KRBL is the leading basmati company in India. They have the highest production capacity and
No. 1 branded market share domestically and for exports. Amira is notably absent from a slide in
KRBL's presentation summarizing Indian market share data:
Amira similarly does not appear in a slide surveying Indian basmati industry capacity:
These tables confirm discussions conducted with industry participants while researching the
company that implied ANFI has a much smaller market presence than the companies in the table
above, or that ANFI's SEC financials imply. ANFI currently has 28,671,000 shares outstanding
and ANFI owns 80.4% of the operating subsidiary, Amira Pure Foods Private Limited. The
remaining interest in Amira Pure Foods Private Limited is owned by ANFI's CEO, Karan A.
Chanana, and other related parties. This interest is convertible into the equivalent of 7,005,434
ANFI shares, which brings ANFI's effective diluted share count to 35,676,434 shares. At a stock
price of $18.93 this equates to a fully diluted market cap of $675.35 million. With net debt of
$102.56 million, Amira's enterprise value is currently $777.91 million.
To demonstrate the absurdity of ANFI's current valuation, Amira's enterprise value is now
greater than the enterprise values of KRBL, LT Foods, and Kohinoor Foods, combined. Each of
these companies has far greater brand presence, market share, and production capacity than
ANFI. Below is a table comparing Amira to the leading basmati companies in India:
Source: Capital IQ and Company Filings as of Sept. 30, 2013, with the exception of REI Aggro,
which displays data as of their most recent fiscal year-end March 31, 2013, because their filings
for Sept. 30, 2013, were illegible.
Below is how ANFI's valuation compares to their peers:
Even if one assumes ANFI's reported financials are accurate, the company would trade at a far
lower stock price if valued based on other basmati companies. The average of the above
valuations would imply a stock price under $3/share, for potential downside of over 80% for
ANFI.
An Undisclosed Related Party
As demonstrated by the recent expose of the Tile Shop (TTS) by Gotham City Research,
undisclosed transactions with related party suppliers/distributors is a proven way for companies
to inflate revenues and earnings. The original article on ANFI discussed a related party
relationship between ANFI and Karam Industries. Karam is owned and managed by Anil
Chanana, the father of ANFI's current CEO Karan Chanana. On the company's website, Karam
notes that they are the sole representative of Amira for the Middle East (ANFI's largest export
market) and some African countries. This is not mentioned anywhere in Amira's SEC filings,
which is highly unusual since it clearly qualifies as a related party transaction. While preparing
this writeup, Amira appears to have taken down this section of their website, however the
Google cache appears to still be available, showing the old website with the quote from Karam
that "We are [the] sole representative of AMIRA Foods Ltd., New Delhi, India, for Middle East
and some African Countries":
The CEO of Karam is also the former CEO of Amira, and was listed as an owner of Amira Pure
Foods Private Limited (the operating subsidiary of ANFI in India) prior to the IPO. Amira is also
a prior owner of Karam itself. The original article also noted that Karam's website is registered to
Amira and displayed Karam's primary phone number for their headquarters in Dubai as 971-4235-1755, which is the same phone number to Amira's Dubai headquarters. After the initial
writeup, Karam Industries has suspiciously modified their website to remove the phone number
to their Dubai office, while leaving the phone numbers to their other officers on the website.
Karam website from January 2012:
Karam website from September 2013 (after the article):
Interestingly, Karam also deleted all information for their Indian offices. The information for this
office was:
Karam Industries
54, Prakriti Marg, Sultanpur Farms, Mehurauli
P.O. Box: 10817, New Delhi - 110030 (INDIA)
Tel: +91 - 11 - 260806352, 260806354, 260806346
Fax: +91 - 11 - 23731130
E-mail: india@karamenterprises.net
The deleted Indian location is still available on the metals page for Karam. Unsurprisingly, the
deleted office is the location of Amira's corporate office in India. When the company was
contacted to ask what amount of sales over the past three years Karam accounted for, the
company stated that they have not done business with Karam since IPO, but that "Related party
transactions prior to the IPO including that with Karam Enterprises, have been adequately and
properly disclosed as related party transaction in the IPO prospectus," and pointed to tables
aggregating sales from and to all related party entities in aggregate from the prospectus.
The Middle East accounts for over 80% of all Indian basmati exports. With more than half of
ANFI's sales coming from outside India, it's a major red flag to have a related party, claim, on a
website registered by Amira, to be the company's sole representative to the region. This could be
a possible mechanism to easily manipulate reported revenues and income. ANFI and Karam
appear to agree with this sentiment, having altered the information on their website after the
initial disclosure of their relationship in my prior article on the company. As demonstrated by the
recent collapse in the stock price of the Tile Shop following revelations of a similarly
undisclosed related party transaction, investor caution is warranted with ANFI. Given Amira's
nosebleed valuation, a valuation over 80% lower than current prices is warranted.
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
Amira Nature Foods - Underfunded And OvervaluedTue, Apr 2
ANFI's management discussing earnings

Amira Nature Foods' CEO Discusses F2Q 2014 Results - Earnings Call Transcript Nov.
11, 2013 •Comment!
Comments(4)
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ABM21Comments (3)
With your logic, I should short Lululemon because it is trading at a P/E of 25x while the
Gap is at 13x, short Monster Beverage because it is at 28x while Pepsi is only at 18x, and
short Chipotle at 42x because Jack in the Box is only at 22x. There's a lot more to
valuation than just looking at companies which make similar products. Perhaps you could
tell us what the future growth rates are of the other basmati companies (and ANFI),
particularly each company's growth prospects for outside of India, so we can get a better
sense for how comparable they really are?
Most US investors need to look at a potential investment relative to the alternative stocks
in which they can invest...which will often be stocks trading domestically only...not
stocks trading in India. As such, the relevant question is what US stocks should ANFI be
compared to for valuation purposes? A key here is looking at companies with similar
growth prospects, and that is why you see the sellside (correctly) using the comps that
they do. You can make an argument as to why ANFI should trade at a premium or
discount to those names, but they are definitely the more topical names to be discussing,
not the Indian names you have cited above. High growth companies easily get forward
P/E multiples in the 20s and 30s and even much higher. As a simple exercise, if you take
the Bloomberg consensus EPS number for FY15 (ending March 2015, so almost NTM)
of $1.28 and put a 25x multiple on that, it takes us to a valuation of $32 (68% upside
from here).
For the first several month's of ANFI's public existence, it went largely unnoticed. The
story is getting to be more well-known now and is starting to close the valuation gap with
its true peers...though there is arguably much more of a positive re-rating yet to come as
the company continues its strong performance and growth. What continues to take the
stock higher from here? Several positive catalysts are possible, including: More strong
quarterly results as they have consistently demonstrated thus far (we should hear from
them again next month); a refinancing of their high cost debt which would result in
meaningful interest cost savings; announcements of new retailer listings and new
countries entered into as they have already been demonstrating; continued meetings
between management and the investment community (note that the company is
presenting at the very large ICR conference next week...you might want to look at the
correlation between share price performance and timings of management roadshows);
etc., etc.
I'm sure this has been a painful short for you (and whoever else you convinced) in recent
months...but no sense in throwing good money after bad. Certainly tough to cover a
100%+ short loss...but better 100% than 200%. High growth companies at cheap
valuations tend to only go higher in my experience.
8 Jan, 07:44 PMReply! Report AbuseLike3

JHRichardsComment (1)
Hi Footnote Finder and thanks for your article. I re-read the last article that you wrote on
ANFI in April 2013 and it seems as though your arguments this time around are almost
the exact same. Since that time, the company seems to have released multiple sets of
strong results and the share price has certainly done remarkably well. Why are your
arguments going to work this time around when they clearly have not worked over the
past 9 months? As mentioned in the above comment, is there a risk that we see more
positive events than negative ones in the future and those have a greater impact on the
shares than the risks you have suggested? Also, on your valuation table above, could you
let us know what the multiples would look like if you use forward estimates instead of
historical data? With a growth stock, forward estimates seem to be the more relevant
numbers to look at. Thanks!
8 Jan, 08:50 PMReply! Report AbuseLike1
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Ja2013Comments (3)
Hi. Without commenting on Amira, your understanding about the business is incorrect.
You may read my earlier write up here - http://goo.gl/yUT3Rq
You need to analyse the cash flow statements as at october each year to understand the
working of indian basmati companies, as the crop harvests around that period. Any other
period is going to give u misleading picture.
Also check, that if company is burning cash (as you say), how is networth increasing
(minus IPO capital)?
Secondly, this season had been very good, and larger companies are sitting on massive
inventory gains. Anyone holding inventory for aging process, would make lot of money
in next 2 quaters.
So, u should enquire from AMira, whats their old rice inventory and how much tonnes of
paddy they bought in oct-nov-dec13 quater and at wat cost. That will give you a better
picture. Paddy opened at Rs35/kg and is currently ruling at Rs 45/kg.
Thirdly, a new variety of crop pusa-1509 will increase the crop size next season (oct14).
If prices remain strong, next year would can go bumper.
Fourthly, whether amira is expensive - i dont know. But comparing them with the likes of
KRBL which is at historic lows is mistake. Krbl etc r trading at 3x PE fy14 and we
expect it to trade at atleast 12-14x, as historically - so clearly, there is massive upside to
indian companies.
I suggest you to sit with some farmer and understand the crop cycles and working capital
cycle. Or u can ask me.
9 Jan, 01:01 AMReply! Report AbuseLike2

Ja2013Comments (3)
Addendum.
To age the basmati for 1-2 years, huge storage space is required.IF a company is
trader/marketer, they wont have storage capacity and they wont age crop by themselves.
This may show negligible working capital (as liked by analysts) but this will affect the
quality of produce = finally affecting the brand in long run.
Please see if amira has that kind of storage shelters. KRBL etc have nearly 200 acres of
storage space, bought at historical costs, which is one of the major compititive advantage.