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Contrary to popular opinion, Amira Nature Foods (NYSE:ANFI) appears to be fundamentally misunderstood, meaningfully overvalued, questionably governed and in near-term need of capital. Importantly, cheerleaders on the sell-side appear to have overlooked recent disclosures that may rebut their central thesis. It does not help that the company and its promoters have been linked in the past to inappropriate or unauthorized activities by the media.

We believe that Amira represents a compelling short opportunity and estimate fair value at $9.50, representing downside of 53% from current levels.

Description:

Amira engages in processing, distributing, and marketing packaged specialty rice and other food products. The Company generates the majority of its revenue through the sale of Basmati rice, a premium long-grain rice grown only in certain regions of the Indian sub-continent, under its flagship Amira brand as well as under other third party brands. The Company recently launched new lines of Amira branded products such as ready-to-eat snacks to complement its packaged rice offerings. Further, ANFI also sells bulk commodities to large international and regional trading firms.

Key Concerns / Red Flags:

Red Flag 1: The significant slowdown / decline in Branded / Third-party products in Q2, FY2014, goes unexplained both by Management and Street analysts

1. "Okay. And then I think are you saying in the release, because I think in the past you have kind of detailed what percentage of the business was rice versus not. Did you not ship any non-rice products? Was it basically the $108 million was all rice this quarter?" - Deutsche Bank Analyst, Q2, FY2014 Earnings Call

"I think that will be given out in the 6-K. So if it's not in the earnings release, we will have." - Karan Chanana, CEO, Q2, FY2014 Earnings Call

% of Revenue

Q1 FY12

Q2 FY12

Q3 FY12

Q4 FY12

Q1 FY13

Q2 FY13

Q3 FY13

Q4 FY13

Q1 FY14

Q2 FY14

Brand / Third-party

95.8%

86.2%

93.4%

97.3%

95.8%

98.5%

99.0%

98.8%

96.0%

71.6%

Bulk Commodity

4.2%

13.8%

6.6%

2.7%

4.2%

1.5%

1.0%

1.2%

4.0%

28.4%

Source: Company filings

Note: FYE March 31

($Ms)

Q1 FY12

Q2 FY12

Q3 FY12

Q4 FY12

Q1 FY13

Q2 FY13

Q3 FY13

Q4 FY13

Q1 FY14

Q2 FY14

Brand / Third-party

$64.3

$53.2

$68.1

$123.9

$76.8

$78.2

$112.8

$138.5

$105.9

$77.3

Bulk Commodity

2.8

8.5

4.8

3.4

3.4

1.2

1.1

1.7

4.4

30.7

Source: Company filings

It is interesting to note that the Company omitted to disclose the percentage of revenue from Amira and third-party branded products from its Q2, FY2014 earnings press release after disclosing this metric in its previous four press releases.

Y/Y Growth

Q1 FY13

Q2 FY13

Q3 FY13

Q4 FY13

Q1 FY14

Q2

FY14

Brand / Third-party

19.5%

47.0%

65.6%

11.8%

37.8%

(1.1%)

Bulk Commodity

19.5%

(86.0%)

(76.3%)

(51.1%)

31.0%

2,475.3%

As we can see from the above, the Company saw a decline in its Rice business in Q2 FY2014, which is disconcerting especially after 5 consecutive quarters where the Rice business saw robust growth. What is more concerning is that the revenue outperformance in the quarter was driven entirely by the bulk commodity business, which grew materially to $30.7 million, representing growth of 2,475.3% year over year. Management has failed to provide any colour (in the 6-K) regarding this material increase in what they consider to be a "non-core" part of their business.

Additionally, Street analysts appear to have completely missed this crucial piece of information and the bullish tone in their research notes post the earnings release reflect this.

1. "We estimate that Amira "branded and third party" rice products constituted 96% of the total. We assume bulk products constituted 4.0% of F2Q14 revenue." - Deutsche Bank, Q2, FY2014 Research Report

2. "Management commented that the Company's strong sales growth in 2Q14 was driven by solid demand both domestically and abroad. The fact that the Company's volumes increased roughly 20% during the quarter despite meaningful price increases, gives us added comfort that the Company should be able to achieve its long-term target of sales growth greater than 20% for the foreseeable future." - KeyBanc, Q2, FY2014 Research Report

3. "ANFI delivered another strong quarter as 2Q14 adj. EPS of $0.18 on revenue of $108 million exceeded our expectations." - Jefferies, Q2, FY2014 Research Report

4. "Amira's 2QFY14 reported a PAT of US$6.3mn (+90% YoY), above expectations. This was led by strong revenue growth of 36% YoY driven by robust volumes growth in India as well as international markets." - UBS, Q2, FY2014 Research Report

Lastly, Management's commentary seems to be at complete odds with the slowdown seen in the Brand/Third-party rice business.

1. "We are pleased to report another strong quarter for Amira. In the second quarter, our revenue increased 36.1% driven by growth both in India and internationally. Our consistent top line growth underscores our success in continually adding new customers and expanding our business as the growing global demand for our premium products and offerings including our core basmati rice in addition to our expanding product portfolio of ready-to-eat snacks, meals and complementary products." - Karan Chanana, CEO, Q2, FY2014, Earnings Call

Red Flag 2: Why does management continue to obfuscate tracking the health of the business with inadequate disclosures?

From the below selected Q&A, Management does not provide disclosures that we believe are necessary for investors to understand the health of the business and gain comfort on the growth potential of the Company going forward.

1. "Just a couple of questions. One is can you throw some more color in terms of the mix between owned brand and third party private label brand in this quarter?" - UBS Analyst, Q2, FY2013 Earnings Call

"We haven't broken up our revenue between owned and third party brands on a quarterly basis and that's not public information, so that's not something we could share with you at this moment." - Karan Chanana, CEO, Q2, FY2013 Earnings Call

For a Company that has publicly stated its desire to pursue a branded strategy, we are at a complete loss for words to explain why management is unwillingly to provide investors with statistics (in its filings) on the split between owned and third-party brands to gauge their progress. Further, we are amazed at how the sell-side and the investor base have readily accepted management's explanation at face value.

1. "That's helpful. And then just India versus rest of the world, it seems like India had another strong quarter but just can you help order of magnitude India versus international relative to the average of 38%?"- KeyBanc Analyst, Q4, FY2013 Earnings Call

"I think we don't break out as of India versus international, but I can tell you one thing, our international was about 60%, about 40% is India's out of the total revenue." - Karan Chanana, CEO, Q2, FY2013 Earnings Call

We only get to see the revenue contribution from the international markets on an annual basis when the 20-F is filed.

For example, Asia Pacific, which represented the largest international market in FY2011 has seen revenue decline at a 43.8% CAGR over the FY2011 - FY2013 period. Unfortunately, neither has the sell-side questioned management on this precipitous decline, nor is there any disclosure in the MD&A section of the 20-F that provides any sort of explanation.

Region

FY2011

FY2012

FY2013

EMEA

$77.1

$165.5

$193.3

Asia Pac (ex India)

78.4

47.1

24.7

North America

2.2

4.4

6.8

Total International

$157.7

$217.0

$224.8

Source: 20-F; All figures in $ Millions

We humbly ask management, why they are unable or unwilling to provide us with this information on a quarterly basis, especially if they consider themselves to be an international company.

Red Flag 3: Why is the Company unable to generate any meaningful Operating Cash Flow and Free Cash Flow despite spending negligible amounts on Capex over the last 3 years?

The Company's Operating Cash Flow (OCF) has consistently trended below Net Income and is negative in majority of the periods under consideration. Furthermore, despite the fact that ANFI has chronically under-invested in capex, Free Cash Flow appears to be non-existent.

($Ms)

FY2010

FY2011

FY2012

FY2013

LTM Sept

Net Income

$5.2

$5.2

$9.6

$15.1

$20.7

OCF

($46.9)

($13.1)

$2.7

($80.0)

($45.0)

Capex

($5.2)

($1.7)

($0.9)

($1.5)

($1.7)

FCF

($52.1)

($14.8)

$1.8

($81.5)

($46.7)

Source: Capital IQ

Note: OCF adjusted to include interest expense

Red Flag 4: Why has the Company been unable to refinance the debt despite numerous promises to do so?

1. "Okay. And one last one, I thought I heard Ritesh say something about refinancing the Indian debt. I mean is that - can you explain that? I mean is that already in your numbers or how should we think of that? I know Eric asked about interest expense, but just talk about the refinancing of Indian debt and is that the same as sort of the refinancing of your overall debt portfolio that you were thinking of doing?" - KeyBanc Analyst, Q2, FY2013 Earnings Call

"Yeah. So at the time of the IPO we spoke about and said some of the low hanging fruit in terms of increased capital efficiency or the refinancing of high cost debt. Nearly all that debt is in India, close to 12% or of the 12% cost to debt as we spoke to you about earlier on the road. We are in a process of discussions with banks in terms of setting up a structure of refinance back and access lower (inaudible) cost of capital. We hope to have - to start working on that post this earnings release and hopefully - and have some good news in the near future." - Ritesh Suneja, CFO, Q2, FY2013 Earnings Call

2. "Okay, my last question - just in terms of the forecast here, can you give any-well one, what you expect once you-I guess it was kind of arbitraged, the interest cost environment, it looked like you were kind of angling towards more like 10 million of interest expense in fiscal '14. But we're still at kind of this 20 million run rate on the higher cost debt, so is that-how do you see the interest cost moving as we kind of move forward here from fiscal '13 into fiscal '14?" - Deutsche Bank Analyst, Q3, FY2013 Earnings Call

"We have received term sheets from several investment banks. We are in the process of vetting the structure proposed by some of the investment banks… I think in terms of you folks to model your business, if this is something which is put in place by around our first quarter, we will get the benefit after the first quarter and the next three quarters. It will be a facility where we will use to expand all our-sorry, use to finance all our international growth, all our international business actually - all the business - and hence you will see substantial savings from that." - Ashish Poddar, CFO, Q3, FY2013 Earnings Call

3. "Now I presume your next question will be on our debt refi. I'm glad that now that our year-end audited results are public, that is also something I'd like to say here that we are now going to be aggressively working on. We had soft conversations with a number of banks and they were all very positive; however, everybody wondered if financial year-end audited numbers, especially since we went public in October, and so we're actively working on that going ahead now." - Karan Chanana, CEO, Q4, FY2013 Earnings Call

4. "Good afternoon everybody. Karan, can you give us an update on your efforts to renegotiate your debt or refinance your debt, I think you mentioned at our conference back in June that you are talking to four banks, can you give you us an update where you stand there?" - Jefferies Analyst, Q1, FY2014 Earnings Call

"Yes. We are well progressing closing in with two banks and we are also looking at other instruments. I'm going to be in New York, the week of the 9th of September and we hope to reach some conclusion by then in terms of what we are doing with whom we are doing and what the timelines for that would be." - Karan Chanana, CEO, Q1, FY2014 Earnings Call

5. "Okay, alright. And then Ashish talked about the debt refinancing, is the plan still to get this done in the next six to seven weeks?" - Jefferies Analyst, Q2, FY2014 Earnings Call

"We are working on it right now. And I can't comment on the six to seven weeks, but we are working very actively. All things being equal, you should hear something from us in the next 8 to 12 weeks." - Karan Chanana, CEO, Q2, FY2014 Earnings Call

We are both intrigued and perplexed regarding the delay experienced by the Company in refinancing their high-interest debt. Further, the Company has made promises for 5 consecutive quarters and has yet to follow-through on its refi commitment. Each time we have a new excuse or explanation, which makes us wonder as to what the potential lenders are concerned about?

Red Flag 5: Why has the Company not begun spending on its facility build-out?

ANFI has postponed investing in its business for the past three years. Even software companies don't sport such stellar capex metrics! This under-investment presents a tangible risk to its financials especially when the Company has to rely on its competitors for processing 2/3 of all rice that it sells.

"We also heavily depend upon a limited number of third party processing facilities to produce products responsible for substantial portions of our revenue, some of which facilities are owned by our competitors." - Risk Factors, 20-F

($Ms)

FY2010

FY2011

FY2012

FY2013

LTM Sept

Capex

$5.2

$1.7

$0.9

$1.5

$1.7

% of Rev

2.6%

0.7%

0.3%

0.4%

0.4%

Source: Capital IQ

Note: Revenue includes Other Income

In contrast, an appropriate and relevant peer group for ANFI composed of India based rice processors (KRBL, LT Overseas, Kohinoor Foods, REI Agro) has spent 5.6% of revenue on average over the FY2010 - FY2013 period. Moreover, when looking at the processing capability of its peer group, this under-investment in capex by ANFI is even more noticeable.

Company

KRBL

REI Agro

Kohinoor Foods

LT Overseas

ANFI

Rice Capacity (MT / Hour)

195

118

60

50

24

Source: CRISIL Research

ANFI management continues to state that they are committed to increasing processing capacity with a FY2015 deadline communicated to the Street. However capital expenditures carried out over the past five quarters do not substantiate / validate their commentary.

1. "Hi. Thanks for taking the follow-up. I guess first question is now that you have the proceeds from the IPO, you're sitting on the funds to start building the new facility. Where do you stand on that? Has there been any changes in terms of the timeline since the IPO? And then I have one other follow-up." - Deutsche Bank Analyst, Q2, FY2013 Earnings Call

"Thanks, Eric. To clarify and reconfirm, we still confirm the forecasted time of December 2014-fiscal 2015 as the time for the new plant. We are deep in process on that execution. As you'll see, we have kept aside the cash portion for that plant separately and our in the process of execution as we speak." - Ritesh Suneja, CFO, Q2, FY2013 Earnings Call

2. "Okay, thank you for that. Last question from me - in terms of the building of the new facility and your CAPEX, capital expenditure outlook, is that still about 25 million this year and 10 to 15 million in '14, and then back up to 25 million in fiscal '15 if everything goes according to plan?" - Deutsche Bank Analyst, Q3, FY2013 Earnings Call

"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 I think the only open item is whether we spend that in Q4 or in Q1. But yes, in the next few months, absolutely." - Ashish Poddar, Q3, FY2013 Earnings Call

($Ms)

Q2 FY13

Q3 FY13

Q4 FY13

Q1 FY14

Q2 FY14

Capex

$0.4

$0.2

$0.6

$0.3

$0.5

Source: Capital IQ

The sell-side after probing management on the time-line for the new facility build-out on two consecutive earnings calls has gone silent and is now accepting their FY2015 timeline at face value.

Red Flag 6: Will Amira need to do a secondary offering given its limited liquidity?

We believe that given ANFI's current liquidity position of $35.0M, the Company is likely to do an equity raise in the near to immediate future.

($Ms)

Amount Available

Comment

Cash

$21.2M

$46.2M on B/S less $25M set aside for capacity expansion

Debt

13.8M

$13.8M available for drawdown under revolver

Total

$35.0M

Source: Company filings

With upcoming capacity expansion and rice purchasing season upon the Company, we find it extremely hard pressed to see a scenario where ANFI will not have to tap the capital markets resulting in dilution to existing shareholders.

Red Flag 7: Why are their discrepancies between the financials filed with the SEC and the Ministry of Corporate Affairs in India?

Financials reported to the SEC do not reconcile with those reported to the Ministry of Corporate Affairs, India, with profitability appearing to be inflated.

Note: Financials reported in India converted to USD at the following exchange rate: Assumes average USD/INR exchange rate of 1USD = INR 47.4 for FY2010, 1USD = INR 45.5 for FY2011 and 1USD = INR 47.9 for FY2012

(Reported to SEC)

($M)

FY2010

FY2011

FY2012

Revenue (incl Other Income)

$202.9

$257.2

$329.6

PBT

$8.0

$9.4

$16.1

Reported Net Profit

$5.2

$6.4

$11.9

From the table above, it is evident that the financials reported to SEC show PBT as a % of PBT reported to Indian authorities of 140% in FY2010, 141% in FY2011 and 162% in FY2012. Further, Reported Net Profit to the SEC as a % of Reported Net Profit reported to Indian authorities is 141% in FY2010, 144% in FY2011 and 186% in FY2012.

Red Flag 8: Is ANFI really a fast growing CPG Company?

Analysts are quick to position ANFI as a fast growing CPG company. Comments such as the below abound in multiple research reports:

1. "We see the stock's (post IPO) valuation as too low vs. typical packaged food as well as small cap, fast growing CPG companies." - Deutsche Bank, November 5, 2012

2. "We see ANFI as an appealing opportunity to invest in a fast growing int'l packaged food co. that has ambitious growth goals."- Jefferies, November 5, 2012

Street analysts typically comp ANFI to a set of CPG growth comparables that include SodaStream, Annie's, Hain Celestial, Synders-Lance, Fresh Market and Starbucks.

We do not agree with this comparison. ANFI at its core is a Basmati rice processor with a business model that is extremely working capital intensive, given the need to age both paddy and rice. Ageing becomes necessary for a couple of reasons. First, ageing ensures a greater recovery of head rice and eliminates or reduces the proportion of broken rice while processing. Second, ageing helps remove moisture and finally ageing leads to an increase in aroma. Typically, Basmati rice needs to be aged for 10-14 months before it reaches premium quality and can be sold. As a result, there exists significant time lag and storage costs from the time ANFI makes its purchase to the time the rice is finally sold.

($Ms)

FY2010

FY2011

FY2012

FY2013

Inventory

$146.0

$143.2

$141.6

$181.5

DSI

307.5

253.2

195.6

206.7

Source: Capital IQ

Note: FYE March 31

Further, from the below it can be clearly seen that the Day Sales Inventory statistics for both Hain Celestial and Annie's are significantly below that of ANFI thereby making any sort of comparison to these two companies not representative.

DSI

FY2010

FY2011

FY2012

FY2013

Hain Celestial

89.4

79.0

68.3

72.8

Annie's

46.9

49.3

43.3

52.7

Source: Capital IQ

Red Flag 9: Hain Celestial's recent acquisition of Tilda will increase the competitive pressures for ANFI in its targeted growth markets

ANFI management has indicated on numerous occasions that both the U.S. and the U.K. represent important growth markets.

1. "For example, in the United States we are beginning work on a grassroots marketing effort to expand knowledge of the Amira brand and perhaps more importantly to increase the consumer awareness or understanding of Indian basmati rice such as its unique aromatic flavor, taste profile, which clearly differentiates basmati from other rice products." - Karan Chanana, CEO, Q2, FY2014 Earnings Call

2. "Fifth, expand into high growth markets. As we discussed on our last call, we recently introduced Amira branded products in the UK. Thus far, we are very encouraged about our initial success in this large market." - Karan Chanana, CEO, Q2, FY2014 Earnings Call

However, with the recent acquisition of Tilda by Hain Celestial, we believe that ANFI will have to go up against a more formidable competitor with strong distribution in its targeted growth markets - all the while fighting to protect share in its Middle Eastern business.

1. "And then with that, on the distribution in North America, I mean is this something where you can turn it on fairly quickly, I mean you can get into the U.S..." - SunTrust Analyst, Tilda M&A Call

"Bill, as you remember, when we acquired Ella's, within 30 days, we went to a big mass market and got distribution into close to 4,000 stores. We see the ready-to-heat product as a big opportunity. And you heard what I've said before, true Basmati rice comes from India. There's not true Basmati rice really sold in the U.S. today and GMO-free. It's a big opportunity for us. So with the grocery team that we have in place today, there's a lot of intention to sell a lot of product in North America, and again whether it's into the ethnic markets, into the specialty markets and into the mass market. This is a GMO-free product. It's a natural product, so whether it's Whole Foods, whether it's Walmart, whether it's Costco, whether it's Target, we can sell that into that today." - Irwin David Simon, CEO & President, Hain Celestial, Tilda M&A Call

2. "Okay. And who are the market leaders in the U.S. and U.K. in this category?" - SunTrust Analyst, Tilda M&A Call

"Royal, Royal. And again, what I heard me say before, Tilda's #1 in the U.K., Tilda is #1 in the Middle East. What you heard me say before, this is a 100% branded company. They do not do one dime of owned label for anybody, which is unusual." - Irwin David Simon, CEO & President, Hain Celestial, Tilda M&A Call

Red Flag 10: Amira has found itself facing regulatory scrutiny on more than one occasion

Amira found itself embroiled in one of the larger (~$450 million) alleged food scams in India in recent time. In April 2008, in an attempt to control inflation, the Indian government banned the exports of non-Basmati rice. Despite the ban, African countries, including Comoros, Ghana, Madagascar, Mauritius and Sierra Leone, requested India for rice supplies. The then Commerce Minister allowed the exports on diplomacy grounds, but instead of allotting the task to government export and shipping agencies, the Minister supposedly allowed a few private companies (including Amira) to circumvent the ban and sell rice directly.

However, the rice (up to 2 million tonnes) is alleged to have been exported to a third country other than the African nations to which it was intended. Moreover, Amira along with the other firms, acting as procurement agents were allowed to procure the rice at a significantly lower price and make substantial profits. As a consequence, on November 10, 2010, an order was issued against Amira by the Department of Commerce and Industry (Government of India) that prohibited the Company from entering into dealings with certain public sector undertakings. This order was further upheld in April 2011 by the Department of Commerce, after Amira appealed the order.

More recently on May 15, 2012, a $10 million shipment of rice from Amira was seized by the Philippines Customs authority for alleged violations of certain sections of the Tariff and Customs Code of the Philippines. Protik Guha, COO and CEO of Amira India, testified on August 22, 2012 before the Senate in response to a fact-finding initiative with regards to this event. However, at an additional hearing on September 4, 2012, that Mr. Guha did not attend, the Senate found him in contempt for allegedly testifying falsely and issued a warrant for his arrest, which continues to remain outstanding.

Red Flag 11: Why does the Company have 2 Board members on its Mauritius subsidiary that are associated with Grant Thornton, its auditing firm?

ANFI was incorporated in 2012 as a BVI (British Virgin Islands) business company without any business operations of its own. All operations are conducted through Amira India and its subsidiaries, which is further controlled through a wholly owned subsidiary, Amira Mauritius. Interestingly enough, though Grant Thornton is the Company's auditor, two senior members of the accounting organization sit on the board of Amira Mauritius. Sattar Hajee Abdoula is the CEO of Grant Thornton, Mauritius and Yuvraj Thacoor is a Partner at Grant Thornton, Mauritius. We are frankly amazed by this situation because of the potential conflict of interest it entails.

Red Flag 12: Valuation:

We strongly believe that ANFI's current valuation is detached from underlying fundamentals.

ANFI's current capital structure is as follows:

(In Millions except per share data)

FDSO

35.9

Share Price

$20.34

Market Cap

$729.4

Total Debt

$148.8

Minority Interest

$10.5

Cash

$46.2

TEV

$842.4

Source: Capital IQ; Company filings

TEV / LTM EBITDA

TEV / FY14 EBITDA

ANFI

13.9x

12.3x

Source: Capital IQ

Note: FY2014E based on Consensus Estimates

Street analysts are fast to opine that there is "an almost non-existent peer group" for ANFI. We however disagree and highlight the peer group consisting of India based rice processors that we believe is most relevant.

TEV / LTM EBITDA

KRBL

2.8x

LT Foods

3.9x

Kohinoor

8.2x

Mean

5.0x

Source: Capital IQ

Even if we are to provide a 50% premium (on account of NYSE listing) to our peer universe, the valuation disconnect is still significant with over 50% downside from current levels.

(In Millions except per share data)

(Mean Multiple adjusted for 50% premium)

TEV / LTM EBITDA

7.5x

LTM EBITDA

$60.7

TEV

$451.9

Total Debt

$148.8

Minority Interest

$10.5

Total Cash

$46.2

Equity Value

$338.9

FDSO

35.7

Share Price

$9.50

Current Price

$20.34

% Downside

53.30%

Source: Amira Nature Foods: An Overvalued Company With Multiple Red Flags