Correct Me If I’m Wrong, but This Looks Like a No-Brainer Investment – Amira Nature Foods (NYSE:ANFI)

Introduction

I struggled all afternoon yesterday trying to figure out why Amira Nature Foods’ (NYSE:ANFI) share price fell 49%, but found it difficult to find a concrete answer. After some helpful insight from established value investor Dr. Sven Carlin, it seemed that sentiment was behind the drop. Given that Amira’s size is small, this limits institutional ownership due to size-constraints, meaning most of the company’s investors are retail investors. As Sven helpfully noted, no meaningful information had been released by Amira in the last 6 months, which is a long time for retail investors to wait. What began as meager selling in early April, culminated into a flash 49% selloff on May 10th. Upon Amira’s release of interim statements the following morning on May 11th, the company’s shares rebounded, rising as high as 95% from the prior day’s closing price of $1.65, before ending the day at $2.91 for a 75.3% gain. Despite the high uncertainty as to the price drop on May 10, I placed a buy order for $2.15 a share, because of the degree of attractiveness the opportunity presented me.

And when I mean attractive, I mean really attractive, whereby the feeling I got when I luckily stumbled upon the issue, to use an old adage, was akin to being “hit by a two-by-four.” After the selloff, Amira’s market cap sat at a measly $54.9 million, whereby the entire business was selling 80% below its net current asset value (NCAV) of $282 million (now $326 million). And get this: Amira was recently approved by the Directorate of Town & Country Planning of Haryana India to monetize 9 of its 17 wholly owned acres of real estate property in Gurgaon, with the remaining 8 acres pending approval. While official estimations are $350,000 per acre, Sven Carlin, given the land’s location is situated near an area of prime development, estimates the real value per acre to be close to $3.4 million. The only difference is that his estimation assumed 20 acres, for a total value of $68 million for the property, pursuant to the information provided by Amira’s 2017 20-F, whereas the official press release stated only 17 acres was available for monetization. Nevertheless, 17 acres multiplied by $3.4 million per acre gets us a gross sum of $57.8 million. If we add the previous estimation to Amira’s NCAV of $282 million, this gives us a new NCAV of $339 million. Per Amira’s May 10th closing market cap of $54.9 million, Amira was selling for a mind-blowing 84% percent below its NCAV.

Imagine the following scenario:
Mr. Market: “Hey Owen, I’ve got a great deal for you.”
Owen: “Oh yeah? What’s that?
Mr. Market: “Amira Nature Foods has a NCAV of $339 million, of which an estimated $57.8 million in real estate was recently designated as monetizable residential land. Eight acres of the seventeen are still pending approval, but should be cleared in 2018.”
Owen: “Go on..”
Mr. Market: “I’ll give you the real estate estimated at $57.8 million for $54.9 million, and I’ll throw in $282 million of net current assets and a functioning business with well incentivized management for free.”
Owen: “Holy hell! What’s the catch?”
Mr. Market: “Potentially some short-term price action due to wary investor sentiment, but the long-term story checks out okay. They’re pretty levered, but their current ratio is healthy, so it’s unlikely they’ll go out of business in the next year, not that it would be of any loss to you if the company liquidated.”
Owen: “Is there a catalyst to unlock that value for shareholders?”
Mr. Market: “I believe the shares should mean revert to at least 90% of Amira’s liquidation value following full approval to monetize their property in Gurgaon.”
Owen: “Why did shares plummet today?”
Mr. Market: “Beats me. Retail investors are notorious for being an especially sentimental bunch. It’s worth mentioning earning’s haven’t been as stellar as predicted as of late, but commodities are naturally cyclical and prone to hangups.”
Owen: “Too bad I’m not a corporate raider. Would you mind asking the board if they’ll consider liquidation immediately?”
Mr. Market: “You’re on your own with that one.”
Owen: “Oh well, it was worth a try.”

Yeah, that’s the scenario that played out in my head yesterday. The following question I’m asking myself is: after the 75% rise today, is the business still an attractive buy, or is the party over? Let’s take a look at the business to find out.

Company Profile

Amira Nature Foods is a business primarily known for processing and distributing basmati rice. It owns a fully automated 310,000 square feet facility in Gurgaon, Haryana, India, which produces about 24 metric tons of rice paddy per hour. Amira also owns 48.2 acres of land in Karnal, Haryana, India, where it plans (as outlined in its form S-1) to build a new facility capable of producing 60 metric tons of paddy per hour. Their estimation of costs to construct the new facility is $64 million, which it should be able to borrow given its high degree of collateral.

Shares have been punished in recent years due to a rather bumpy period following a short-sell attack by Prescience Point in 2015, in which they accused Amira of fraud, causing shares to fall some 90% in quick succession. Amira immediately fought back, and the short-sell was dispelled after 3rd party auditor BDO, LLP completed a Third Party Forensic Investigation, which, to Presence’s humiliation, cleared Amira of the allegations. Given the cyclicality of the industry, earnings have also fluctuated with rice prices in the past four years, making investors queasy.

Reasons for Ownership

Being a deep value investor, I like to look to the balance sheet for guidance. I look for businesses that trade at a wide discount to their liquidation value, likely due to some short-term distress, misunderstanding, confusion, or lack of favor. If the discount to liquidation value to intrinsic value is wide enough (preferably 50%> or greater), an opportunity may be presented where there is a large margin of safety (low downside), with significant upside. In other words, such situations can present low-risk high-reward scenarios.

Notable results from Amira’s recent interim financials that excite me:

• Amira’s current ratio is healthy at 2.49, meaning there is $2.49 Amira is set to receive in the next 12 months for every $1 of debt, which means Amira is highly liquid and financially capable of meeting its obligations this year.
• Total net current assets increased to $326 million. If we throw in the 57.8 million for its real estate Amira intends to monetize, this gives Amira a NCAV of $384 million.
• If we take today’s closing price of $2.91 per share, which implies a market cap of $96.8 million, Amira is still selling at 75% below its NCAV, which means the business remains extremely cheap.
• The business has been profitable since its IPO in 2010, and has grown earnings at an average 9.8% annually over the past 8 years.
• The business has, since its IPO, diluted shareholders at an average 21.5% per year, which is bad. However, management has only diluted shareholders a total 3.4% since 2014, which is great!

Macroeconomic and Managerial Tailwinds:

• The basmati rice industry has been experiencing significant growth of 13%/year (compared to a meager 2% growth for total strains) in recent years due to high global demand. This could also be seen as a risk however, which I’ll get to in a bit.
• Food companies often perform well in periods of economic uncertainty, which makes Amira a safe bet. I believe we’re in an environment where an impending recession is due within the next 10-14 months, largely due to the current global contraction of credit as well as the fact that we’re in the late part of the economic cycle.
• Around 35% of India’s rice exports go to Iran. This may cause some investors to get gittery, as the Trump Administration’s exit from the 2015 Iran Nuclear Deal means U.S. sanctions on Iran are set to be reimposed. I initially thought this was the reason behind the drop in Amira’s share price, but after India’s largest rice producer KRBL (NSE:KRBL) noted that necessities like rice were sure to be exempted from the sanctions (the aim of sanctions is to stifle economic growth, not cause rampant starvation) as they were under the Obama Administration, this seemed an unlikely reason for the drop. Amira currently believes it is in compliance with U.S. Economic Sanctions Laws, and has complied accordingly in the past as well.
• Management is well-aligned with shareholder interests, with 72% of the economic interest in Amira India (the operational company) owned by Amira Chairman and CEO Karan A. Chanana. Chanana’s compensation was also only a teeny $1.8 million of the 551 million revenues generated in FY2017, which means he must really care about how well business performs.

Other Pros:

• Only one analyst follows the company, which means its likely unnoticed by Wall Street.
• Institutional ownership is almost nonexistent.

Risks of Ownership

When a business is selling for this cheap, it’s difficult to identify where the risks lie. Even in the worst case scenario for Amira (bankruptcy), even common stock holders would be set to receive a nice chunk of the pie. In fact, if Amira were to liquidate tomorrow, and were to sell for its NCAV of 384 million, shareholders would make an approximate 300% gross gain on invested capital. However, seldom does any investment play out precisely as according to plan, so there are a number of notable risks I have identified that I think are worth acknowledging.

1. War between Iran and Israel. This scenario is unlikely, but tensions between these two nations are currently high. Just yesterday, Israel accused Iran of attacking Israeli military emplacements in Syria. While war is an unlikely scenario, given that major political bodies would almost be asymmetrically opposed to war between the two countries (spare the Trump Administration), the two countries hate each other, and the conflict in Syria has only heightened that hatred as of late. Since Iran is a major importer of Indian basmati rice, in the event of a war Israeli troops could cut Iran’s food supply, which would create a glut of rice sure to send prices plummeting.
2. Oversupply. I think this is the greatest risk to Amira currently. Remember how I mentioned the industry’s current 13% annual growth might actually be bad? Growth might intuitively seem like a positive, and depending on the business I might agree, but in the business world growth almost invariably incites fierce competition. If a business doesn’t have a clear competitive advantage, market share can be significantly eroded.The basmati rice industry is highly fragmented, with the barrier to entry low, meaning any average Joe with a fist full of dollars can get in the game. Even more concerning, is that India has recently been found to have broken World Trade Organization rules by providing local rice producers with economic support in excess of 60% of allowable support. High growth plus high government subsidies equals inevitable oversupply, which, if continued, will surely punish basmati rice prices.
3. To expand on #2, comprehensive net income for December 2017 was $24.9 million. With interest payment costs of $20.1 million, the company spends a significant amount of its income servicing debt. If commodity prices fall, Amira’s income will surely decline, which will jeopardize profitability. Debt to equity currently sits at 1 (which isn’t terrible, but not ideal), with the majority of the debt working capital debt, which represents credit limits from banks with renewal periods not exceeding one year. Amira has pledged its equipment, trade receivables, and inventories as collateral to secure repayment of the debt.
   As stated in Amira’s recent 6-K:
   “Working capital debt represents credit limits from banks with renewal period not exceeding one year. As of December 31, 2017, the Group’s property, plant and equipment, trade receivables and inventories with a carrying value of $14,984,711 (March 31, 2017: $15,808,040), $34,661,237 (March 31, 2017: $48,002,350), and $329,105,269 (March 31, 2017: $270,399,288), respectively have been pledged as collateral to secure repayment of these debts. This working capital debt carries floating rates of interest.”
   
   Days spent in receivables are the highest since the company went public, which is odd. However, receivables past due in excess of one year represents 2.4% of total trade receivables, which is low. still, in that case that past due trade receivables rise, Amira could find themselves in a difficult situation financially. However, due to the attractive current ratio, I believe Amira’s debt is of little concern in the near-term. Amira should have ample room to secure the financing it needs to build its new plant in Karnal from the monetization of its Gurgaon property and from its credit facility. Upon completion of the plant, repayment of debt should be less onerous. But, if rice prices do fall, which I’m sure they will at some point (who knows when), it could throw a wrench in Amira’s plans. Either way I could care less. At current prices it would take a hell of a lot more debt for shareholders to walk away without a profit in the case of bankruptcy, and a behemoth-size increase in debt for shareholders to walk away totally empty handed. To quote famous value investor Mohnish Pabrai, Amira really appears to be a “tails I win, heads I don’t lose that much” scenario.
4.  Small Float. The company has a small float, which can cause prices to fluctuate wildly. Add a little shake of FUD into a public company whereby the float is mostly dominated by retail investors and you’ll find yourself on one hell of a roller coaster ride (May 10th, case in point), but in the medium to long-term I expect the market to agree with me that the security is too cheap at current levels.
5. Iffy Investor Relations. The fact that Amira typically only releases annual filings means the company will almost always trade at a discount compared to companies that release quarterly reports in addition to annual ones. Investor relations is also a little difficult to get a hold of and is known to be generally unhelpful, which isn’t ideal for the scuttlebutters of the investing world. In fact, Amira stated it benefited from cutting communication costs in its recent 6-K, which suggests they are pleased to be further decreasing communication with shareholders.
6. To expand on #5, Amira reported about 71 million in finished product since December, and knowing how they accounted for this is impossible without an explanation from investor relations. It is possible that they could be cooking the books, but after the short-sell attack in 2015, while disproved, makes fraudulent activity unlikely.

The Catalyst

As I noted in my narrative with Mr. Market, I believe the full approval to monetize Amira’s 17 acres in Gurgaon should be enough to cause shares to mean revert. I could say the ultimate catalyst would be the construction of Amira’s new facility in Karnal, but investors rarely have the patience to tie their own shoes let alone wait to buy before a company project/event of significant importance is concluded. That said, the ridiculous cheapness of the business is likely a catalyst in itself. Seldom do businesses trading at such wide margins to intrinsic value remain depressed for long, as value investing founder Benjamin Graham and others have shown.

At What Price?

In my opinion, I’d peg the current price of $2.91 as a screaming buy, with a sell price at 90% of its NCAV (a per share price of about $10.00) for a gross gain of  243%. I expect shares will mean revert within the next two years, but the potential for lower rice prices may prolong reversion for as long as five years. Check out my Ownership Journal entry on Amira highlighting my reasons for ownership, as well as my ownership strategy.

Disclaimer: The information provided in this article expresses my own opinions and should not replace financial advice provided by a certified financial professional. Please seek certified professional advice for all investment-related matters.