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Amira Nature Foods (ANFI) made its public debut on Wednesday. Shares of the provider of packaged Indian specialty rice ended their first day with losses of 19% to $8.10 per share.

The public offering

Amira is a provider of packaged Indian specialty rice with sales in over 40 countries. The company is known from the sale of Basmati rice, a premium long-grain rice under the Amira brand launched in 2008, and other third party brands. The company has taken the brand global in recent years, and the company launched new lines of Amira branded products. Amira's customers include global retailers such as Wal-Mart, Spencer's retail, Carrefour and Costco, among others.

The company sold 9.0 million shares for $10 a piece. Amira Nature Foods raised $90 million in gross proceeds in the offering process. Based on the offer price of $10.00, the company is valued at $357 million.

The offering is quite a disappointment. The offer price was set far below the preliminary $13-$15 price range set by the company and its bankers. All of the shares offered in the offering were sold by the company. In total, 24% of the company's shares outstanding were offered. At Friday's closing price of $8.30 per share, the company is valued at $296 million.

Major banks which brought the company public were UBS, Deutsche Bank, Jefferies and KeyBanc Capital Markets.

Valuation

Amira Nature Foods operates in the global rice market which had a total size of $240 billion in 2010, according to FAO. The Indian rice market has a total size of $40 billion, of which Basmati rice makes up $4 billion in total size. Basmati sales in India showed a compounded annual growth rate of 25% between 2006 and 2011. International sales rose even faster, at 39.5% between 2007 and 2011, according to CRISIL.

For the annual year of 2011 ending in March of 2012, Amira generated revenues of $330.8 million, up 28.6% on the year before. The company reported a net profit of $11.9 million, up from $6.4 million on the year before.

For the second quarter of 2012, the company generated revenues of $80.2 million, up 19.5% on the year before. The company almost doubled its second quarter earnings from $1.7 million in 2011, to $3.3 million this year.

Amira intends to use the $90 million gross proceeds of the offering to invest $25 million in a new processing facility. Originally, the company planned to repay $85 million in long term loan facilities and credit facilities. Given the disappointing offering, Amira will not be able to reduce its leverage as much as planned.

Excluding the offering proceeds, the company operates with roughly $3.6 million in cash and equivalents. The company operates with $143.6 million in short and long term debt, for a net debt position of $140 million. Based on the $90 million in gross proceeds from the offering, underwriting expenses and investment plans, the net debt position is expected to fall to levels around $85 million.

Based on a rough annual revenue estimate of $400 million for 2012, the market values Amira at just 0.7 times annual revenues. The company could earn almost $15 million in an optimistic scenario, valuing it at 20 times annual earnings.

Investment Thesis

The offering of Amira Nature Foods is a big disappointment. Initially, the company was supposed to go public for a price between $13 and $15 per share. Eventually, shares were offered for $10 a piece, and shares have lost another 17% of their value after three days of trading. Shares which closed at $8.30 per share on Friday are trading some 40% below the initial midpoint of the preliminary price range.

Given the growth ambitions, the company does not expect to pay a dividend anytime soon.

The sentiment around Amira's offering has been very weak. Other market commentators attribute this to the ownership structure and concerns about corporate governance. CEO Karan Chanana continues to hold a two-third stake in the company after the offering. Furthermore, Amira holds an 85% stake in the main operating company, Amira India.

After a 40% discount, the valuation seems much more appealing. Shares are valued at just 0.7 times annual revenues and 20 times earnings, which is far from excessive. Yet many investors are concerned about the fact that CEO Chanana owns the majority stake in Amira Nature Foods and a minority stake in Amira India.

While the valuation seems fair, I am hesitant to initiate a position in Amira Nature Foods given the dubious structure of the company. I find it hard to judge whether there are significant risks related to the structure. To play it safe, I will stay on the sidelines on the back of my concerns.

Source: Amira Nature Foods: Stay Away On Concerns About Ownership Structure