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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 short-term 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 971-4-235-1755, 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.

Source: Amira Nature Foods: Inflated Financials, Undisclosed Related Party Point To Substantial Downside