Amira Nature Foods: More Questions, Fewer Answers

Amira Nature Foods (ANFI) released Q3, FY2014 results on 2/25/14 that beat on the top-line but missed consensus EPS estimates. We believe the earnings release provided further validation of the unraveling of the ANFI growth story, and we continue to have the highest conviction that ANFI represents an extremely compelling short opportunity at current levels.

Below, we highlight some key red flags discerned through analysis of the earnings release and conference call transcript. Note that the 6-K is yet to be filed, and we will update our thoughts accordingly.

A. Poor quality of earnings

The tax rate of 18.95% was the lowest reported over the past 11 quarters. To put this in context, the tax rate in Q2, FY2014 was 30.00% and in Q3, FY2013 was 38.81%. If we were to take the average tax rate over the past 6 quarters (ex most recently reported quarter), the rate would imply 29.01%. Applying this to the reported EBT of $9.5M results in an adjusted EPS of $0.19 versus the $0.22 reported number, and further heightens the EPS miss to $0.09 or 32% versus consensus estimates. The sell side seemed to have missed this anomaly, as the lower tax rate was not raised by a single analyst during the Q&A section of the call.

B. Decrease in gross margins might signal that peak margins might be finally behind us

Gross margins declined 200 basis points year-over-year. We believe that this is a combination of the inability to fully pass through raw material costs and the continued increase in the lower margin bulk commodity business that might set the Company up for lower margins going forward.

C. Continued increase in Bulk Commodity / Institutional business despite management calling it opportunistic and non-core

Bulk Commodity / Institutional business continued to see strong growth, with an increase of 425% year-over-year. This, after the Company reported a 2,475% increase year-over-year in the prior quarter. We find it highly questionable that on one hand management calls this business "opportunistic", yet is aggressively out in the market bidding on tenders, being in some instances the lowest-cost provider. Moreover, given that this business has the lowest gross margins of third-party, branded and institutional, we are at odds to explain why management continues to chase this business despite emphatically stating otherwise.

"We don't go out and look for clients for the institutional business, they come to us and say, hey, we want this." - Karan Chanana, CEO, Q3, FY2014 Earnings Call

D. Reduction in freight / forwarding and handling expenses seem to be at odds with management commentary around tonnage growth

The freight / forwarding and handling expenses line saw a marked decrease of 39% year-over-year. This, in a time when the rice business grew 21% and the Bulk Commodity / Institutional business grew 425%. Therefore, we find it incredibly strange as we struggle to reconcile this reduction in expense with management's comments that they saw tonnage growth of 15% to 20% in the quarter. We are once again surprised that neither did management attempt to clarify this material decline in expense on the call and nor did the sell side probe them on this development.

E. Spike in Accounts Payable

Accounts Payable saw an almost 50% increase year-over-year. This increase is highly concerning both in % and absolute $ terms. DPOs spiked to 58 days, an increase of 16% on a year-over-year basis. This spike in Payables also drove an increase in interest expense due to vendor financing arrangements, which should be considered debt but are not shown as such by management. We are of the view that management is facing a liquidity crunch, and hence, has been aggressively using vendor financing in order to preserve cash for future operating use.

F. Rice Revenue growth starting to stall significantly

Despite management increasing revenue guidance for the full year for FY2014, the implied growth rate for Q4, FY2014 is only 7.8% at the mid-point of management's guidance. Moreover, when comparing the last two quarters (Q2, FY2014 and Q3, FY2014) over the comparable two quarters in the previous year, revenue growth has averaged approximately 12%, a noticeable deceleration versus 38% average growth for Q2, FY2013 and Q3, FY2013 versus their comparable year-ago quarters. Note we have adjusted Q3, FY2013 to exclude a shipment to a repeat customer ($23.6M) when comparing to Q3, FY2012 to ensure consistency when comparing periods.

G. Debt refinancing timeline continues to be vague

We continue to be amazed at the lack of clarity that management has provided to shareholders and prospective investors relating to its debt refinancing plan. On its Q2, FY2014 earnings call, management indicated an 8 to 12-week period for the completion of the debt refinancing. Assuming 12 weeks, that would suggest the debt refinancing to go through by end of February. However, when prompted on the Q3, FY2014 earnings call, management once again acted nonchalant, and when pressed on timing, offered a middle of April time-frame.

"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, Q2, FY2014 Earnings Call

"We hope to do it - if everything remains equal in the markets, before - we are targeting by middle of April, if not the end of March, the timing is - as you know the market is important, so that's what the banker say who we are in touch with to do this." Karan Chanana, Q3, FY2014 Earnings Call

H. Non-existent Capital Expenditures

Once again, management continues to avoid putting their money where their mouth is. We continue to remain perplexed as to why the company is unwilling to spend on capex, especially after earmarking a significant portion of the IPO proceeds for the establishment of a new processing facility. Given the fact that ANFI lags its domestic peers meaningfully in terms of processing capacity, we are amazed as to the lack of urgency displayed by management, a full 16 months post the IPO.

On a more positive note, it was encouraging to see the sell side finally begin to ask management some of the highly relevant and timely questions (though they did not press the issue with management in all instances).

We continue to believe that Amira is grossly over-valued and that at least 50% downside exists from current levels.

Source: Amira Nature Foods: More Questions, Fewer Answers

Disclosure: I am short ANFI. 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. (More...)

This entry passed through the Full-Text RSS service — if this is your content and you're reading it on someone else's site, please read the FAQ at http://ift.tt/jcXqJW.