ANFI
is a major 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 point research. 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 (NASDAQ:COST) 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 (NASDAQ:SBUX), 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 Depreciation 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
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.
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