ANFI is a majar
International producer of packaged food, Indian specialty Basmati rice with
sales in over 60 countries. It generates the majority of its revenue through
the sale of Basmati rice, a long-grain rice grown only in certain regions of
the Indian subcontinent, selling its products, primarily in emerging markets,
through a distribution network.
Looking at what the CEO
Mr. Karan A Chanana has to say about Amira's successes and failures, it is
clear that he has delivered on most of his statements in the past. In January
2013, when Amira's brand was selling in 40 countries, he estimated that it will
sell in 70 countries by 2017. Today, the brand has already reached sales in 60
countries. There have been some delays in certain projects like the debt issue
where the attempted offering of $225 million Senior Secured Second Lien Notes
due in 2020 failed because of a short-selling attack by prescience Consequently,
the building of the new processing factory that would have enabled even faster
future growth was delayed. But the business model of Amira as it is now is
working pretty well and the earnings are growing. The company is expanding
globally and last year increased its revenue by 35%. Also a development that
has worked was the increase of up to 15 distribution centers in India to
exploit the promising demographics and economic development in India. If we
estimate future projections like the goal of reaching 1 billion in revenues
through the analysis of past projections, we can be very confident in the
current management team.
Possible catches - the
cheapness of the Amira stock
As it is not an US
company, investors find it difficult to trust a business from another part of
the world. It is very difficult to call your mate from college and ask about
the building of some distribution centre in north India. On the other hand, we
can simply walk into department stores and see the rice they sell. For me,
those are stores like tesco, Asda, Waitrose and Morrison in the UK and for
US readers it should be Costco with new additions coming month by month. This
research aims to show that unfamiliarity can be a great play for investors.
The second issue is the financing problem that arose after
missing the bond issue because of a short-seller attack a few months ago. This
was quite unfortunate for Amira because of the relatively high interest rates
in India, but nothing that deteriorated the current situation that is very
positive by itself. The way Amira does business now by financing operations
through a consortium of Indian banks works pretty well, so a future possible
lowering of the interest rate would only be beneficial.
The third issue that is also related to the second one is the
continuous delays in finishing the new factory because of lack of financing.
The CEO promises updates on finishing factory in the next quarterly
presentation. The new factory would only improve the growth possibilities and
future outlook for Amira.
The forth possible issue is the expected growth of the rice crop
2015 that will impact volume, thus lower prices. Also not such a bad thing
because the consumer will get a better price and Amira will have the
opportunity to increase the margins and pass some of the price decreases to its
customers.
The fifth issue is that the organic product is still not on US
shelves. Here it has to be said that the business model of Amira involves an
aging process of more than 12 months, so it takes time for the new product
lines to reach its customers. It is understandable that Wall Street would like
everything immediately, but this gives the opportunity to more patient
investors to buy a gem in the making, and let it age to grasp all the flavors
by letting it become older and better (the rice and also the stock). The CEO announced
the organic product line on US shelves by the end of this year.
The sixth issue could be the possible diminishing demand from
Middle East countries because of lower oil prices and thus lower purchasing
power. Amira wants to be a global player, and partly already is one, so
geographical diversification lowers specific geographical risks.
The seventh reason can be the very extensive global growth plans
that might be overstretching the possibilities of Amira and putting more risk,
but 27 million of cash with 20 million more of available financing plus
negotiations for more finances should help, and a low debt-to-equity ratio
makes this an unlikely risk (Total debt/LTM adj. EBITDA = 2.0x). A financial
crisis that would hit the eastern markets might shake a little bit its
financial position, but again, with the growth going on in Asia, it is
something unlikely to happen. The competitor KRBL expects rice market volume to
grow at a CAGR of 7% in India for the coming years.
The eighth reason can be
that Amira is developing a brand strategy. You probably know of places where
the atmosphere is nicer, the coffee is better and much cheaper than at
Starbucks but the brand is what attracts people to it. Amira is trying to
create that feeling in the premium Basmati rice growing segment. If it
succeeds, we have in our hands a stock that might be the one that we will be
telling stories to our grandchildren. If it does not succeed in creating a
worldwide famous rice brand, it will probably be bought out by a large corporation
at a nice premium. So for the long-term investors, there is a win-win situation
with low possible downside risks at the current pricing.
Comparison with KRBL
KRBL is the world's
largest rice miller and Basmati rice exporter. The company is quoted on the NSE
(Indian National stock exchange) and BSE (Bombay stock exchange). It operates
in the same market as Amira but without the global focus. The growth of the two
companies has been almost the same that can be seen in the following table.
Here we have also to take into account that the accounting currency for KRBL is
the Indian Rupee and for ANFI the US dollar. The deprecation of 18.9% in the period from January 2011 till December
2014 of the Indian Rupee in relation to the US dollar makes ANFI's numbers look
even more impressive.
Table 1. Growth comparison ANFI and KRBL
Source: ANFI and
KRBL investor presentations. Data for KRBL is in thousands of Lacs and
data for ANFI in million USD.
But looking at the graph that compares the stock prices of ANFI
and KRBL since the quotation of ANFI on the NYSE, we can see the same pattern
up to February 17, 2014 which was the high point of ANFI. After that, with only
good news from the company, beating estimates with growing revenues and
earnings, the stock has not been the investors' favorite on the NYSE. For KRBL,
which is an Indian company quoted in India, the story is completely different
where the stock price has followed the developments in the business. It can be
assumed that the same will happen for ANFI, so now is a great opportunity to
buy at this bargain prices.
Graph 1. Comparison of stock price movement ANFI and KRBL
Source: yahoo.com/finance
Conclusion
It is our opinion that all the possible risks are already
calculated in the price and also overestimated. Thus for now, we expect at
least a PE of 15 for ANFI that brings us to a current valuation of $20.25 per
stock. Viewing the current developments and future possibilities when we account
for a sustainable 20% growth rate in the next 5 years with a PE of 15, we
estimate a price of $51.05 per stock.
Looking at the downside, the risks are minimized as all the
possible negative developments that in reality are just plan delays have already
been accounted in the price thus giving a great buying opportunity.
Amira could be a gem to own in order to exploit the developments and
growth in the healthy food and organic segment plus the big possibilities
arising from the economic growth of the Indian subcontinent
