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KeyBanc

November 13, 2014

CapitalMarkets

CONSUMER: Packaged Foods & Meats


Company Update

Amira Nature Foods Ltd.:


ANFI: Incrementally Positive on Basmati Category Growth Prospects
KeyBanc Capital Markets Inc.
Member NYSE/FINRA/SIPC

Akshay S. Jagdale: (917) 368-2317 ajagdale@key.com


Lubi Kutua: (917) 368-2335 lubi_j_kutua@key.com

Rating

BUY

Price

$15.60

12-Mo. Price Target

$27.00

Dividend

$0.00

Yield

0.0%

52-Wk. Range

$12 - $25

Trading Volume (000)

180

Market Cap. (mm)

$560.4

Shares Out. (mm)

35.92

Book Value/Share

$4.50

EPS (Net) Summary


FY Mar
1Q
Prior
2Q
Prior
3Q
Prior
4Q
Prior
YEAR
First Call
P/E

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.

KEY INVESTMENT POINTS


Basmati rice category sales have grown at a consistent high teens rate for at
least the last five years, and ANFI has outperformed the category. Although good
market data on the basmati rice category is not easy to come by, we believe analyzing
sales growth for five of the largest players in the industry serves as a good proxy for
overall category growth rates. Based on sales data for ANFI, REI Agro, KRBL, Kohinoor
and LT Foods, we estimate that the basmati rice category has grown at roughly a
17% CAGR over the last five years (see Figure 2). Moreover, we note that growth in
the category has been consistent over this time period (estimated three-year CAGR
of ~17% and two-year CAGR of ~18%) and ANFI has consistently outperformed the
industry growth rate by ~11-12 points, implying solid share gains.
Lower rice paddy costs combined with continued strong demand for basmati rice
should lead to industry margin expansion in 2016. Despite an increase in basmati
production in 2014, paddy prices rose by ~50% on a year-over-year basis, indicating
continued strong demand for basmati rice (see Figure 3). While demand is expected
to remain strong, paddy prices are expected to be down double digits in 2015, driven

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

Figure 1. ANFI Financial Summary


($ millions)

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

Adjusted Gross Profit

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

Free cash flow

-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%

Operating cash flow


Capex

Source: KeyBanc Capital Markets Inc. and company reports

Company Note
November 13, 2014

Figure 2. Basmati Industry Growth Rates (Last 5 Years)


Company

Basmati Rice % of Sales

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%

REI Agro Ltd.

88%

Amira Nature Foods Ltd.

65%

KRBL Ltd.

93%

LT Foods Ltd.

85%

Kohinoor Foods Ltd.

77%

Y/Y Growth
REI Agro Ltd.
Amira Nature Foods Ltd.

Kohinoor Foods Ltd.

Source: Company reports, KeyBanc Capital Markets Inc. estimates

Company Note
November 13, 2014

Figure 3. Basmati Crop and Paddy Price Projections


Crop measures

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

Area under acreage (hectares)

10%

19%

-10%

8%

40%

Total basmati production (mn MT)

44%

16%

-5%

7%

12%

Paddy prices (INR/MT)

15%

-27%

37%

51%

-10%

Area under acreage (hectares)


Total basmati production (million MT)
Paddy prices (INR/MT)
Y/Y Growth (%)

Source: CRISIL Research, KeyBanc Capital Markets Inc. estimates

Company Note
November 13, 2014

KeyBanc Capital Markets Inc. Disclosures and Certifications


Amira Nature Foods Ltd. - ANFI
Amira Nature Foods Ltd. is an investment banking client of ours.
We have received compensation for investment banking services from Amira Nature Foods Ltd. during the past 12 months.
We expect to receive or intend to seek compensation for investment banking services from Amira Nature Foods Ltd. within
the next three months.
As of the date of this report, we make a market in Amira Nature Foods Ltd..

Reg A/C Certification


The research analyst(s) responsible for the preparation of this research report certifies that:(1) all the views expressed in
this research report accurately reflect the research analyst's personal views about any and all of the subject securities or
issuers; and (2) no part of the research analyst's compensation was, is, or will be directly or indirectly related to the specific
recommendations or views expressed by the research analyst(s) in this research report.

Three-Year Rating and Price Target History

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

23.77 BUY [BUY]

66

45.83

12.12

17.36 HOLD [HOLD]

71

49.31

5.63

4.86

14.29

28.57 SELL [UND]

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
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