Net-Net Stock to Consider: Amira Nature Foods (ANFI)

Amira Nature Foods (ANFI), founded in 1915, is over 100 years-old Indian food company primarily engaged in the business of processing and selling packaged Indian specialty rice, primarily basmati rice and other food products. Company’s headquarter is located in Dubai, United Arab Emirates.

The stock price has been under the pressure for a couple of years for various reasons. Not least because of a short research report that was published at July 31, 2015 by Prescience Point that claimed the company was a scam and was artificially inflating their accounting numbers. ANFI reached a settlement with Prescience Point on its claim, but the reputation suffered badly. Nothing is worse for investors than suspicion and uncertainty.

ANFI’s main product is basmati rice. ANFI buys basmati from farmers, ages the paddy (raw materials) for 12 months, packages it and distributes to customers in India and around the globe. The business is very simple and because of that it is highly competitive. Unfortunately, this means to keep and grow market share requires fighting on price.

ANFI’s main market is India where it has built strong brand and reputation. India is one of the best economies in the world in terms of GDP growth at the moment. This will lead to a healthy level of sales in India for a long time to come and it is good for the future. International markets are more challenging. Competition is increasing there. Good news is that global rice consumption is growing all the time. ANFI’s business is globally diversified and it is present on five continents. During this year ANFI has expanded its distribution footprint in Germany and it is one of the only 14 companies that were approved by the Chinese government to export basmati to China.

Worrying is that ANFI is increasingly becoming a creditor to its suppliers and customers. If you look at the growth of receivables and cash conversion cycle you will realize it. The company’s explanation is as follows: “Our trade receivables primarily comprise receivables from our retail and institutional customers to whom we typically extend credit periods. Our prepayments and current assets primarily consist of advances to our suppliers to secure better prices and availability of inventory in future periods.” Everyone can believe what he wants. However, a positive fact is that the top five customers account for only 25% of total receivables, so the risk is pretty diversified.

Many investors in the past raised also the question about the high level of liabilities ANFI has. This is an important question as deep value investors prefer the company to be without or very little debt. However, given the nature of the business, where rice is bought and then aged 12 months, it is logical to take on debt. In any case debt levels have stabilized in the last few years.

It is also worth noting that ANFI is a family business, the CEO Karan A. Chanana owns about ¾ of the company and Fidelity management owns about 10%. So the remaining free float is very small. But then again management have been doing well with no actions that go against minority shareholders. Finally, ANFI is very little followed by Wall Street analysts (only Jefferies), which is good sign for small investor.

 

Amira Nature Foods as an investment

Amira Nature Foods is definitely not a new discovery. The company is wide recognized among the bargain hunters. Many indicators have pointed out that the company has been undervalued for a long time. As often, value investors tend to buy too early and the price of the stock continue to decrease, as it happened also with ANFI. It is nearly impossible time the market and instead of that we should time the valuation based on fundamental analysis.

At a price of under $4.50 ANFI is being priced as if its position as a going concern was at risk. This means that the company could potentially go bankrupt. If you believe this is a company that is going to stay in business, now it provides an attractive opportunity with low downside risk and possible substantial gains.

It is not normal that growing and profitable business is priced under its net current asset value. Although company’s debt level is a bit high it has been consistently profitable all the time. The book value of ANFI has risen by 15% over the past few years. Following financial numbers are not rationally explained.

 

Amira Nature Foods

Market Cap: $135.19 M

Price: $4.29 (Book Value 8.47, Net Current Asset Value 7.83)

Price/NCAV: 55%

P/B: 0.5

P/E: 5

EV/EBIT: 5.7

 

There’s also visible catalyst. Basmati rice prices have increased about 50%, thus ANFI’s revenue and earnings should increase accordingly. It is presumable that it will reflect in the significant rise of company’s revenue, leading to higher margins and higher earnings. In addition, the company’s low valuation level serves as a catalyst for itself.

In this case markets are clearly mispriced ANFI, mainly because of some bad and false information. It takes time before the reputation is restored. Add to it that ANFI is incorporated in Dubai and its main business area is in India, it has been perfect target for short sellers. ANFI has tackled claims and suspicions credibly. The company’s openness has also increased and the management has begun to participate at investors’ conferences. Overall, in this case odds are in the favor of investor.

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