Amira Nature Foods: Can This Purveyor Of Rice Entice Investors?

| About: Amira Nature (ANFI)

Summary

Amira Nature Foods is a foremost international purveyor of branded packaged Indian specialty rice and other products.

It mainly sells Basmati rice under its flagship Amira brand and under other third-party brands.

2015 was the 100-year anniversary of Amira Nature Foods.

Amira Nature Foods had its Initial Public Offering (IPO) in October of 2012.

The Company now has sales in more than 60 countries.

"Rice is great if you're really hungry and want to eat two thousand of something."

- Mitch Hedberg (from BrainyQuote)

Today, I'm looking at Amira Nature Foods Ltd. (NYSE: ANFI), a company that supplies rice, a product that has a long tradition as a food staple in the global marketplace. "Rice has fed more people over a longer period of time than any other crop." (Section of Plant Biology Division of Biological Sciences: University of California, Davis - © Thomas L. Rost 1997)

Amira Nature Foods is a foremost international purveyor of branded packaged Indian specialty rice and other products. It mainly sells Basmati rice under its flagship Amira brand and under other third-party brands. Grown only in specific areas of the Indian sub-continent, Basmati rice is a premium long-grain rice.

Regarding rice overall, approximately 50 percent of the global population is entirely dependent upon rice as a staple food. This includes almost all of East and Southeast Asia. Moreover, humans eat 95 percent of the globe's rice crop. (Encyclopedia Britannica Online)

2015 was the 100-year anniversary of Amira Nature Foods. The Company now has sales in more than 60 countries. Its growth plans include targeting close to 70 countries by 2017. Amira has more than 200 SKUs (Stock Keeping Units) globally.

Its products include the aforementioned Premium Basmati Rice; and also Value Basmati Rice; Amira Thai Jasmine Rice; Amira Sharbati Aromatic Long Grain Rice; Amira Kheer Rice; and Amira Khichdi Rice.

Additionally, the Company's portfolio includes brands of snacks, dairy products, ready-to-eat meals, as well as oils (Vegetable Ghee - [Vegetable Clarified Butter]; Shortening; Margarine). Amira says that ready-to-eat snacks is capitalizing on the $3 billion Indian snack market, expected to grow 20%.

Amira Nature Foods had its Initial Public Offering in October of 2012 and the Company lists on the NYSE.

The rice industry

In January 2016, the USDA (United States Department of Agriculture) estimated that World Rice Production 2015/2016 would be 470.12 million metric tons. This is roughly 0.8 million tons more than the prior month's projection. Rice Production last year was 478.25 million tons. This year's 470.12 estimated million tons could represent a drop of 8.13 million tons or 1.7 percent in rice production worldwide. (WorldRiceProduction.com) The USDA expects worldwide rice production to drop because of an expected decline in acreage and average yields that could be influenced by unfavorable weather conditions.

The Food and Agriculture Organization of the United Nations notes that "…in calendar year 2016, world rice trade is anticipated to rebound by 2.6 percent, sustained by stronger import demand by Indonesia, the Philippines, the Islamic Republic of Iran, and Nigeria." (World Food Situation - FAO Cereal Supply and Demand Brief)

Moreover, the IGC (International Grains Council) says that worldwide rice consumption will outstrip rice production in 2016-17 "… and remain so in the next few years." (Oryza: Global Rice Consumption to Exceed Production in 2016-17, IGC Says)

India is one of the world's largest rice producers. The country accounts for 20% of all the world's rice production.

Competitors

Amira Nature Foods' competitors include KRBL Limited - The National Stock Exchange of India Limited. (KRBL). Its competitors also include Riceland Foods, Inc. (privately held); American Rice, Inc. (privately held); and Producers Rice Mill, Inc. (privately held).

What Amira's expertise is in

The Company has a two-pronged approach that it believes will drive growth - third party sales and the Amira brand in concert. It says that its "… emerging markets business has benefited from increased volumes as we continue to grow along with our third-party existing branded customers and add new geographies and expand the Amira brand." (Amira Nature Foods' Q4 2015 Results - Earnings Call Transcript)

Notable for the Company is that Basmati rice is of first-rate quality and therefore, commands a premium price. A specialty product grown only in the Indian Subcontinent, it is an allergy-free product, which must be aged for approximately 12 months. Basmati rice grows exclusively in the foothills of the Himalayas in India. Amira Nature Foods is seeing India consumers trading up to Basmati rice, a higher end rice.

Amira obtains the highest quality paddy for production. This includes proprietary technology for the testing of purchased paddy. The Company indicates that it has established relationships with foremost procurement agents and local paddy farmers in all major paddy procurement centers. It has plentiful warehousing capacity to store the paddy for optimal aging. This results in a high-end, premium all natural Basmati rice.

The Company engages in procurement, milling, separation, packaging, and sales (retail partners and distributors). It operates a state-of-the-art, fully automated and integrated processing and milling facility that is strategically located in the area of the important Basmati rice paddy producing districts.

Amira has 15 company-managed distribution centers. It says that these centers have brought the Company closer to the end markets across the Indian Subcontinent.

Revenue

For Q4 2015 ended March 31, 2015, (its most recent reported financials) Amira's revenue increased 22% to 226.8 million, which was a record for the Company. Regarding its full tear results, Amira had revenue of $699.4 million. This was an increase of $152 million (27.8%) from the year prior. In addition, this was above the Company's revised guidance of 25% for full year growth.

The principal growth enhancer for Amira regarding revenue was a continuation of volume. It also profited from a continued trade-up result, which it said positively influenced mix. The Company's India sales rose 28% for the quarter, worldwide sales rose 27.7%. Its branded and third-party branded rose 38.6%. Sales of its institutional business were 36.9 million versus 69.4 the year prior. Institutional sales comprise bulk non-rice agricultural products. Institutional is Amira's non-core business.

The Company's Amira brand and its third-party brand contributed to around 95% of overall sales. Amira's institutional business was responsible for roughly 5% of sales. India was roughly 41% of sales, and international was 59%.

Of note for investors is that Amira Nature Foods has developed from a domestic Indian business to a high-growth globally branded enterprise. Its Basmati rice is a value-add, high growth, high margin product. The Company's third-party branded rice includes Bulog, Platinum Corporation FZE, and S.G.S. International, Inc.

Furthermore, Amira launched its Organic business segment in June of 2013 to drive sales. As of the Company's March 2014 Investor Relations report, it had a total of 3,660 farmers practicing organic farming associated with the Amira group, cultivating approximately 7,250 hectares of collective land.

The Company's organic products include Amira Organic and Natural Rice (traditional Basmati Rice; brown rice) and Amira Organic & Natural Ready-to-Heat (Basmati rice with Kidney Beans; Tomato Rice with Herbs; Red and Brown Rice Medley; Basmati Rice Vegetable Biryani; Quinoa Biryani; Walnut Brown Rice).

Adjusted EPS

For Q4 2015, Amira's adjusted earnings per share - EPS - was up 11% to $0.52 per share, which was also a record. For the full year, adjusted EPS was $1.51, up greater than 30% from $1.14 the year prior.

Important for investors is that adjusted EPS typically takes out the effects on profit of exceptional items and other one-time charges. This gives a better picture of a company's fundamental performance and developments. However, the adjusted EPS can be manipulated by a company, for example, what it considers one-time charges and such. Nonetheless, EPS shows how much profit a company produces per common share of the business.

Current Ratio

Amira Nature Foods' current ratio for its most recent quarter (Q4 2015) was 1.76. Its competitor, KRBL Limited, had a current ratio of 1.98 as of its most recent quarter (September 30, 2015).

The current ratio computes if a company can pay, without difficulty, its short-term liabilities (and also long-term requirements) with short-term assets. This is important because it's an indication of the safety of a business. The higher the number here, the better for an enterprise as it's a measure of a firm's survivability. A current ratio of less than 1 shows that an organization's liabilities are more than its assets.

Profit margin and operating margin

Amira's profit margin and operating margin for the trailing twelve months (as of March 31, 2015) were 6.02% and 12.53%, respectively.

KRBL Limited's profit margin and operating margin for the trailing twelve months (as of September 30, 2015) were 9.14% and 12.26%, respectively.

KRBL performed better regarding profit margin, while Amira had a slightly better operating margin. As a gauge of profitability, operating margin conveys how much of each dollar of revenue is left after COGS (Cost of Goods Sold) and operating expenses are taken into consideration. Therefore, the higher the operating margin, the more profitable an entity's fundamental business is.

Return on Assets (ROA)

Amira's ROA for its trailing twelve months (as of March 31, 2015) was 11.92%.

KRBL Limited's ROA for its trailing twelve months (as of September 30, 2015) was 11.85%.

The two companies are almost lock-step here regarding this ratio. As I stated in my Seeking Alpha article on Dean Foods, "ROA is an important metric for investors to look at as it highlights the return produced by a business' assets - for the shareholders and creditors who financed the assets."

Capital Cube noted that over the last five years, Amira Nature Foods' ROA, "… has improved from median to better than the median among its peers, suggesting the company has found relative operating advantages." (Capital Cube - January 26, 2016: Amira Nature Foods Ltd.: Leads amongst peers with strong fundamentals)

Return on Equity (ROE)

Amira's ROE for its trailing twelve months (as of March 31, 2015) was 27.04%.

KRBL Limited's ROE for its trailing twelve months (as of September 30, 2015) was 24.33%.

Amira has performed better here. ROE is an important ratio for investors to take a look at as it focuses on the return for the common shareholders only.

Amira's United Kingdom and Europe initiatives

In the UK, Amira Nature Foods is currently in 4 out of 5 large retailers. The Company is in Asda, Morrison's, Tesco, and Waitrose. Amira entered the UK market with its Amira branded products.

Moreover, Amira has acquired Basmati Rice GmbH. This company is a specialty distributor of premium branded rice, especially Basmati rice in Germany. The Company will use distribution relationships acquired from Basmati Rice GmbH to grow its Amira brand.

Amira in the United States

Amira is working to grow its presence in the U.S. market. It has relationships with Mariano's, Publix, Jewel-Osco, Gelson's, and Amazon and others in the United States. Recently, it announced that Amira branded products are now available in Shaw's Supermarkets, Inc., which is a subsidiary of Albertsons LLC. Shaw's Supermarkets has stores in five New England states. These states are Massachusetts, Maine, New Hampshire, Rhode Island and Vermont.

Amira has deals with CROSSMARK, with UNFI, and national. This gives the Company more ability to get its products into the marketplace. More of its organic and the national commercial products are getting onto retailers' shelves. This is vital as this is always a challenge for Consumer Packaged Goods - CPG - companies as there is limited shelf space in food retailers' outlets and the competition for this shelf space is fierce.

Goals

The Company's long-term goal is $1 billion in sales and $150 million in adjusted EBITDA within five years of its IPO (of 2012). Its expectation is to realize double-digit revenue growth and adjusted EBITDA in this fiscal year (from March 31, 2015).

Of note is that Amira Nature Foods' Mr. Karan Chanana, Chairman and Chief Executive Officer, stresses to investors that, "… the only way to look at our business is revenue and EBITDA margins. We, not only run the business that way, we are an IFRS [International Financial Reporting Standards] company. So COGS and gross margin is for U.S. GAAP companies. So I would like to remind investors we are IFRS."

Amira's underpinning for global expansion is third-party branded products. The Company states that these third-party relationships enable low risk entry for its branded products in these marketplaces. Amira is targeting Middle East growth. It is centering on adding new geographies in that region and subsequently growing from there.

A challenge that Amira and other Consumer Packaged Goods companies must address

The CPG industry is a tough, hyper-competitive industry. It's a challenge to keep up on what consumers are thinking and desire. This is especially true of millennials. A Food Business News article (January 28, 2016 - Keith Nunes) stated that, "Consumers will remain entrenched in their conservative purchase behaviors in 2016, according to I.R.I. One-third of the consumers surveyed by the market research firm said they will make their purchase decisions before they enter the retail store." I.R.I. stands for Information Resources, Inc.

Therefore, Amira Nature Foods must successfully broadcast its brands, and the benefits of its brands. It must capture the hearts and minds of consumers through traditional and online channels so that consumers know the Company better and make a determined trip to grocers and other retail outlets to specifically get Amira's products. This goes for getting the word out about its products' availability online as well, for example, Amira's product offerings on Amazon (NASDAQ:AMZN), where a good assortment of its products are available for purchasing.

Conclusion

I believe that Amira Nature Foods is beginning to produce the growth that could entice investors to take a stake in the Company for the long haul. It will mean being patient with its international forays, especially in the U.S. market. For the full year and Q4 2015, Amira increased its revenue, adjusted EBITDA, and adjusted EPS at double-digit rates. To reiterate its accomplishments, to underscore its importance as part of due diligence on fundamentals, it ended FY 2015 with $699 million in revenue, $99.5 million in adjusted EBITDA, and $1.51 in adjusted EPS. All of these metrics were up in excess of 25% for the full year.

A concern that I have with Amira Nature Foods is that its total debt/equity for its most recent quarter (ended March 31, 2015) was 95.36. KRBL Limited's total debt/equity for its most recent quarter (ended September 30, 2015) was 36.39. Debt-to-equity is a leverage ratio. It is the ratio of total liabilities to shareholders' equity. Debt-to-equity evaluates the scope to which the assets of a business are financed by the debts and the shareholders' equity of the company. Concerning debt-to-equity, a number greater than 1.00 means more assets are financed by debt than those financed by money of shareholders'. You normally want to see a low debt-to-equity ratio.

Furthermore, Amira's levered free cash flow for its trailing twelve months (ended March 31, 2015) was - 31.64 million. So, up to its last financials, it is not performing well at all in this category. Levered free cash flow highlights the amount of cash a business has available to pay stakeholders after it has paid its debt. There's no cash here, hence, one reason why Amira Nature Foods doesn't pay a dividend. But I have to hearken back and give some credence to Capital Cube's analysis that Amira Nature Foods leads amongst its peers with strong fundamentals. However, I would like to see improvement in this metric as a possible investor in the Company as I'm a seeker of regular dividends and every stock I own pays dividends.

Important is that Amira's product range is for all consumer sectors. These include gourmet, premium, mainstream, as well as popularly priced products. This broad base is important as downturns in one segment can be offset by growth in others. In addition, Amira has geographic diversity, while having a strong foundation in its home market of India. It also has relationships with top international retailers including Wal-Mart, Carrefour, Costco, Metro, Reliance Retail, Wegmans, The Fresh Market, Spar, and others. Finally, Amira Nature Foods is seeing strength in its new product launches in India.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.