CapitalMarkets
Rating
BUY
Price
$15.60
$27.00
Dividend
$0.00
Yield
0.0%
52-Wk. Range
$12 - $25
180
$560.4
35.92
Book Value/Share
$4.50
2014A
2015E
2016E
$0.21
$0.26A
$0.38
$0.21
$0.26
$0.40
$0.18
$0.29
$0.47
$0.18
$0.36
$0.50
$0.22
$0.42
$0.55
$0.22
$0.43
$0.57
$0.53
$0.66
$0.73
$0.53
$0.57
$0.66
$1.13
$1.62
$2.13
--
$1.43E
$1.78E
13.8x
9.6x
7.3x
ACTION STATEMENT
We are reiterating our BUY rating and $27 price target for Amira Nature Foods Ltd.
(ANFI-NYSE) following investor meetings we hosted recently with management as well
as our deeper analysis of recent basmati industry dynamics. Overall, our long-term
thesis remains intact we continue to believe ANFI represents a solid play on per capita
income growth in India (~40% of sales), the Middle-East (~35% of sales) & Africa and
the resulting trade-up in consumers rice consumption preferences (to more premium
basmati rice), and we view the stocks current valuation as attractive. Furthermore, we
think the stock's upside potential remains intact even if the Company does not gain
market share given the impressive demand growth for basmati rice over the last several
years.
To the latter point, our analysis of five key players in the basmati rice industry (ANFI, REI
Agro, KRBL, Kohinoor and LT Foods) points to the fact that industry sales have grown at
a consistent high-teens rate for at least the last five years, with ANFIs growth tracking
well ahead of the industry average (~30% CAGR). The aforementioned solid industry
growth gives us added confidence in our longer-term positive view of the basmati rice
category. Furthermore, rice paddy costs are expected to be down double digits in 2015,
which, when combined with resilient consumer demand, likely bodes well for basmati
rice companies across the board. We continue to expect ANFIs margins to improve
more than those of the industry over the next several years owing to increased vertical
integration, branded share gains and sales growth leverage.
With regard to valuation, we believe the current stock price represents a compelling
entry point the stock currently trades at 6.5x our NTM EBITDA estimate, which is a
~40% discount to its small/mid-cap packaged food peers and a ~54% discount to its
consumer growth peers. Similarly, on a P/E basis, the stock trades at a ~52% discount
to its small/mid-cap packaged food peers and a ~68% discount to its consumer growth
peers, which we believe is unwarranted. We are reiterating our BUY rating.
FOR IMPORTANT DISCLOSURES AND CERTIFICATIONS, PLEASE REFER TO PAGES 6 - 7 OF THIS NOTE.
Company Note
November 13, 2014
by significantly higher acreage planted. The aforementioned lower paddy prices should translate into lower cost of sales in 2016, given
that finished rice product needs to be aged for a year before it is sold for consumption.
FY15 represents a significant investment year. Recall that part of the IPO proceeds are being held in escrow for the new plant that the
Company expects to build in FY15. We expect capex to be in the range of $40 million-$60 million in FY15, which represents a significant
increase from prior year levels (total capex was ~$4 million, ~$2 million and ~$1 million in FY14, FY13 and FY12, respectively).
The majority of the capex is earmarked for land purchases related to the Companys new factory (the Company is consolidating its
manufacturing and warehouse facilities to improve operational efficiencies).
ANFI will likely pursue debt refinance opportunistically given volatile HY debt markets. Some investors think that the delay in
ANFIs planned debt refinancing could be an indication that something is wrong. However, according to management, the Company
continues to explore opportunities to lower its financing costs but plans to do so opportunistically given recent volatility in the high yield
debt markets. We believe ANFI could potentially lower its cost of debt by ~500 bps (from its current high teens range to low double
digits), which we estimate would lower the Companys annual interest costs by ~$8 million or (~$0.17/share).
VALUATION
We believe ANFIs valuation remains attractive: 1) on a P/E basis, ANFI is currently trading at 9.3x our NTM EPS estimates, which is
roughly a 52% discount to its small/mid-cap packaged food peer group average of about 19.6x and a ~68% discount to its consumer
growth peer group average of about 29x; and 2) on an EV/EBITDA basis, ANFI is currently trading at 6.5x our NTM EBITDA estimates,
which is roughly a 40% discount to its small/mid-cap packaged food peer group average of about 10.8x and roughly a 54% discount
to its consumer growth peer group average of 14.1x.
Our $27 price target implies a P/E multiple of about 12.7x on our FY16 EPS estimate of $2.13 (which is a ~35% discount to its small/
mid-cap packaged food peers and a ~56% discount to consumer growth peers) and an EV/EBITDA multiple of about 10.3x on our
NTM estimates (~5% discount to its small/mid-cap packaged food peers and a ~27% discount to its consumer growth peers).
RISKS
Risks that could impede the stock from reaching our price target include:
Relatively low gross margins and high exposure to commodity costs. Raw material costs (mainly rice in paddy or semi-finished
form) represent roughly 85% of ANFIs COGS compared to roughly 50% for most packaged food companies. As such, changes in
these costs could significantly impact the Companys gross margins. Furthermore, ANFIs gross margins are well below its peers, which
increases the aforementioned risk related to commodity cost fluctuations. That being said, we note that the Companys gross margins
have been on an upward trajectory over the last three years (despite increasing commodity costs), which points to strong pricing power.
Furthermore, all basmati rice companies (including ANFI) have to age their inventories for over a year which gives the industry significant
visibility on its cost structure well in advance of selling its product, which likely reduces the risk related to commodity cost fluctuations.
Working capital intensive business limits Free Cash Flow (FCF) generation. Basmati rice is a lot like wine in that it needs to be
aged for at least 6-18 months, which makes it a highly capital intensive business especially given the strong growth prospects (cash
conversion cycle is high owing to high level of days in inventory). As such, we expect most of the Companys operating cash flow to
be invested back into working capital to fund growth, which implies limited FCF generation.
Unfavorable weather. Rice production and, to a lesser extent, basmati rice production, is dependent on adequate rainfall. As such,
changes in rainfall can significantly impact rice supply and pose a risk to manufacturers. The cultivation of basmati rice requires less
water compared to normal rice; however, unseasonal rains and floods may damage the crop. Since the major basmati rice producing
states such as Punjab and Haryana (in India) are well-irrigated, scant rainfall does not pose a major risk to production; however,
the risk of floods persists.
Foreign exchange rate fluctuations. Given that roughly two-thirds of ANFIs sales come from international markets, the Company
is exposed to foreign exchange risk. Exports are subject to risk of an appreciation in the Indian rupee this may impact profitability,
at least over the short term.
Economic and political conditions in importing countries. Since 80-90% of Indian basmati rice is exported to Gulf countries, any
adverse impact on the regions economic and political conditions may affect demand. Recent political unrest in the Middle East has
slowed down buying by countries such as Iran, Yemen, Syria and Bahrain. The unrest has also forced Indian exporters (especially
small-scale ones) to resort to aggressive pricing to sell inventory.
Company Note
November 13, 2014
FY11
FY12
FY13
1Q14
2Q14
3Q14
4Q14
FY14
1Q15
2Q15E
3Q15E
4Q15E
FY15E
Net Sales
255.0
329.0
413.7
110.3
108.0
142.5
186.6
547.3
138.8
134.4
182.1
227.6
683.0
813.6
26.5%
29.0%
25.7%
37.6%
36.1%
25.1%
33.0%
32.3%
25.9%
24.4%
27.8%
22.0%
24.8%
19.1%
% change
COGS
FY16E
218.7
279.7
342.7
94.5
85.7
113.9
145.5
439.7
113.7
103.2
140.9
171.4
529.3
627.4
36.3
49.3
71.0
15.8
22.3
28.5
41.1
107.7
25.1
31.2
41.2
56.2
153.7
186.3
SG&A
10.0
12.8
21.9
5.5
5.1
10.5
13.2
34.3
8.0
11.5
14.9
16.5
50.8
59.8
Adjusted EBIT
28.9
37.6
50.2
14.0
13.6
17.1
27.9
72.7
18.4
19.7
26.4
39.7
104.1
126.5
40.2%
30.1%
33.7%
44.1%
40.1%
30.2%
58.4%
44.7%
31.5%
44.5%
53.7%
42.3%
43.3%
21.4%
% change
Adjusted EBITDA
% change
Adjusted Net Income
30.8
40.0
52.2
14.5
14.1
17.7
28.5
74.7
19.0
20.3
27.0
40.4
106.7
129.5
43.6%
29.9%
30.4%
42.4%
38.1%
29.3%
57.2%
43.3%
31.3%
43.8%
53.0%
41.8%
42.8%
21.4%
6.4
11.9
19.2
7.3
6.3
7.7
18.9
40.3
9.2
10.6
15.4
24.3
59.5
78.5
Adjusted EPS
$0.18
$0.33
$0.59
$0.21
$0.18
$0.22
$0.53
$1.13
$0.26
$0.29
$0.42
$0.66
$1.62
$2.13
% change
22.8%
86.3%
75.8%
124.5%
90.0%
30.6%
122.4%
91.8%
25.3%
63.3%
92.6%
24.4%
43.7%
31.4%
-11.5
3.5
-75.5
10.5
0.7
-21.8
-6.6
-17.3
-5.4
53.3
-33.2
-4.9
9.7
-11.4
1.7
0.9
1.5
0.3
0.5
0.6
2.4
3.7
0.6
20.2
10.0
14.8
45.6
12.5
-13.2
2.6
-77.1
10.2
0.2
-22.4
-9.0
-21.0
-6.0
33.1
-43.2
-19.7
-35.9
-24.0
Net debt
152.8
133.4
128.3
107.7
102.6
125.5
148.2
148.2
150.2
120.4
168.5
195.9
195.9
244.6
Equity
39.3
36.7
131.3
123.7
123.5
135.8
153.8
153.8
161.5
172.1
187.5
211.8
211.8
290.3
# of diluted shares
35.7
35.7
35.7
35.7
35.7
35.7
35.7
35.7
35.9
35.9
35.9
35.9
35.9
35.9
Gross margin
14.2%
15.0%
17.2%
14.3%
20.6%
20.0%
22.0%
19.7%
18.1%
23.2%
22.6%
24.7%
22.5%
22.9%
SG&A/sales
3.9%
3.9%
5.3%
5.0%
4.7%
7.4%
7.1%
6.3%
5.7%
8.6%
8.2%
7.2%
7.4%
7.3%
EBIT margin
11.3%
11.4%
12.1%
12.7%
12.6%
12.0%
15.0%
13.3%
13.2%
14.6%
14.5%
17.4%
15.2%
15.5%
Tax rate
31.5%
25.7%
28.2%
23.5%
30.1%
19.1%
11.7%
18.7%
23.2%
24.0%
24.0%
24.0%
23.9%
24.0%
FCF margin
-5.2%
0.8%
-18.6%
9.2%
0.2%
-15.7%
-4.8%
-3.8%
-4.3%
24.6%
-23.7%
-8.7%
-5.3%
-2.9%
Company Note
November 13, 2014
FY09
FY10
FY11
FY12
FY13
FY14
2-Yr CAGR
3-Yr CAGR
5-Yr CAGR
530
777
816
1,118
1,757
1,685
22.7%
27.3%
26.0%
202
255
329
414
547
29.0%
29.0%
28.3%
284
333
341
338
383
483
19.5%
12.3%
11.2%
233
219
270
294
408
408
17.8%
14.8%
11.9%
161
180
223
223
225
235
2.7%
1.7%
7.8%
18.3%
17.0%
17.1%
15.3%
46.7%
5.1%
37.0%
57.1%
-4.1%
26.4%
29.0%
25.7%
32.3%
KRBL Ltd.
14.9%
17.1%
2.4%
-0.8%
13.3%
26.1%
LT Foods Ltd.
36.7%
-6.0%
23.5%
8.9%
38.5%
0.2%
-8.8%
11.2%
24.5%
-0.1%
0.7%
4.7%
14.5%
17.3%
16.4%
14.8%
27.1%
11.8%
88%
65%
KRBL Ltd.
93%
LT Foods Ltd.
85%
77%
Y/Y Growth
REI Agro Ltd.
Amira Nature Foods Ltd.
Company Note
November 13, 2014
FY10
FY11
FY12
FY13
FY14
FY15e
1,968,390
2,165,229
2,570,000
2,310,000
2,500,000
3,500,000
4.5
6.5
7.5
7.1
7.6
8.5
19,567
22,504
16,508
22,660
34,232
30,809
FY10
FY11
FY12
FY13
FY14
FY15e
10%
19%
-10%
8%
40%
44%
16%
-5%
7%
12%
15%
-27%
37%
51%
-10%
Company Note
November 13, 2014
Rating Disclosures
Distribution of Ratings/IB Services Firmwide and by Sector
KeyBanc Capital Markets
CONSUMER
IB Serv/Past 12 Mos.
Rating
Count
Percent
Count
BUY [BUY]
265
46.74
63
HOLD [HOLD]
288
50.79
50
14
2.47
SELL [UND]
Percent Rating
IB Serv/Past 12 Mos.
Count
Percent
Count
Percent
66
45.83
12.12
71
49.31
5.63
4.86
14.29
Company Note
November 13, 2014
Rating System
BUY - The security is expected to outperform the market over the next six to 12 months; investors should consider adding the
security to their holdings opportunistically, subject to their overall diversification requirements.
HOLD - The security is expected to perform in line with general market indices over the next six to 12 months; no buy or sell
action is recommended at this time.
UNDERWEIGHT - The security is expected to underperform the market over the next six to 12 months; investors should
reduce their holdings opportunistically.
The information contained in this report is based on sources considered to be reliable but is not represented to be
complete and its accuracy is not guaranteed. The opinions expressed reflect the judgment of the author as of the
date of publication and are subject to change without notice. This report does not constitute an offer to sell or a
solicitation of an offer to buy any securities. Our company policy prohibits research analysts and members of their
families from owning securities of any company followed by that analyst, unless otherwise disclosed. Our officers,
directors, shareholders and other employees, and members of their families may have positions in these securities and
may, as principal or agent, buy and sell such securities before, after or concurrently with the publication of this report.
In some instances, such investments may be inconsistent with the opinions expressed herein. One or more of our
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compensated based on various factors, including the analyst's productivity, the quality of the analyst's research and stock
recommendations, ratings from investor clients, competitive factors and overall Firm revenues, which include revenues
derived from, among other business activities, the Firm's performance of investment banking services. In accordance with
industry practices, our analysts are prohibited from soliciting investment banking business for our Firm.
Investors should assume that we are seeking or will seek investment banking or other business relationships with the
company described in this report.