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My Findings on the Amira (ANFI) Debacle

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Introduction

I spent a good part of last night and this Wednesday morning going through the Prescient Point 40-page report.

As an FYI, I spent 2.5 years as a Transfer Pricing manager at E&Y LLP, in Minneapolis-St. Paul. My Big 4 tax clients included General Mills (GIS), Target (TGT), Sprint (S) and relevant to this investigation, the Kansas City GPS company Garmin (GRMN). I had lots of other big multi-nationals as clients.

Garmin is the best example to use versus Amira (ANFI). The CEO of Garmin, based in Olathe, Kansas, is a Taiwanese national. Garmin was fully private when I worked for them, and then IPO’d, much like Amira did.

The Taiwanese national CEO earned a PhD in electronics at the University of Tennessee. He and his American partner used to work for an electronics division of Allied-Signal based in Kansas City.  

When I worked for the CEO (on five projects), he had a corporate entity in Taiwan doing low-end semi fab manufacturing. Garmin ran their big high margin R&D and marketing and downstream facility in Kansas. E&Y put an offshore Garmin entity into the Caymans to hold the Intellectual Property. E&Y had lots of intercompany transactions going between Taiwan, the U.S. and the Caymans entity.

Garmin followed the E&Y advice on related parties and intercompany transactions. In other words, multiple related party entities were a common practice for this U.S. multi-national. And you, as a U.S. multi-national, are coached into using these complex intercompany structures.

Amira’s Story

The first thing to realize: Amira Nature Foods is a company operating as a parent entity within a branded Dubai-based multi-national structure. Effectively, it’s not a simplified Indian company anymore.

At this very moment in time, they are a Gold sponsor at a 20-year-old food trade show running all week in Dubai. This fraud report purposely hit during the time the CEO and his managers are tied up at this show, showcasing the new organic line.

The top platinum level has one sponsor. The next diamond level has one sponsor. Amira looks to be the only gold sponsor. This is out of 5000 exhibitors. This year will be the biggest European participation ever and the largest South American participation.

Here is what the Gulfoods 2015 website says about Amira Nature Foods:

“Founded in 1915, Amira has evolved into a leading global provider of packaged Indian specialty rice, with sales in over 40 countries today. Our fourth generation leadership has leveraged nearly a century of experience to take the Amira brand global in recent years. We recently launched new lines of Amira branded products, such as ready-to-eat snacks, to complement our packaged rice offerings, and we also sell bulk commodities to large international and regional trading firms.
 
We launched our flagship Amira brand in 2008 and now sell our branded products in more than 25 countries. In emerging markets, our customer channels include traditional retail, which we define as small, privately-owned independent stores, typically at a single location, and modern trade retailers. Our headquarters is in New Delhi, India, and we also have offices in United Arab Emirates, Malaysia, Singapore, the United Kingdom and the United States."


In October 2012, Amira Nature Foods Ltd completed an initial public offering. Its common stock trades on the New York Stock Exchange under ticker symbol “ANFI.”

Here is what is important. The parent is likely domiciled in the BVI for tax purposes (much like the Caymans role played with Garmin). The CEO sits with his team in Dubai. This is NOT an Indian company anymore.

The Prescient Point Fraud Case:

The crux of the Prescient Point fraud case centers on Agricultural and Processed Food Products Export Development Authority (APEDA) data. This is collected by the nation of India.  Data we are shown is for raw basmati rice for export.

Here’s one key thing to note -- This Dubai-based company sells Amira branded products and ALSO sells bulk commodities (aka basmati rice for export) to large international and regional trading firms.

What can be domiciled in the India sub are the remains of family farms; some mill processing; and other back-end activities. This is much like the Taiwanese low-end semi fab at Garmin. The original Chanana farming and processing activities are put into an Indian entity called Amira Pure Foods Private Ltd.

KEY POINT: The APEDA report lists the export of just the raw basmati rice commodity input by the Indian farming subsidiary Amira Pure Foods Private Ltd.

The NYSE-listed parent Amira Nature Foods (which we hold stock in) owns both the BVI sub and this particular Indian sub, and a number of other international subs. That is not surprising. Remember, this is a DUBAI based multi-national company with an Indian back-end. Not an Indian company.

What Prescient argues (this is the fundamental core data of their fraud) is that the raw commodity APEDA basmati rice export data  --exported via the Amira Pure Foods Private sub -- does not tie out with the parent’s revenue attributed to total basmati rice exports.

(a) This APEDA export data does show, though, Amira Pure Foods is in fact an actual functioning entity for the commodity side of the business. If this is a ‘zero’ then why the government export data running into the tens of millions?

(b) Missing revenues could be attributed to any contracting Indian rice producer on-shipping directly on behalf of the parent Amira Nature Foods.

(c) Missing revenues could also be attributed to added margins for sales, branding, packaging etc. done outside the country of India by the parent. This is a branded company beginning in just 2008.

For example, I imagine Amira U.K. products get shipped raw rice (from Amira Pure Foods directly OR from another rice producer under contract in India). That is then packaged, perhaps by a third party, to U.K. standards, etc. etc. in the U.K. under the Amira brand.

The Prescient guys keep you thinking Amira Pure Foods (the Indian farming sub) is Amira Nature Foods (the Dubai parent). They are not.

Raw basmati rice cost being shipped out of India would be a multiple less of the booked cost of any branded product. The brand and the marketing and the other downstream mark-ups would come on top of the APEDA listed volumes (and the APEDA volumes may have been contracted from other Indian basmati rice suppliers anyways).

There would be subsidiaries AND the parent entity set abroad to derive multiple tax and currency benefits. All Intellectual Property benefits from branding would not be reported at the Indian sub, much like Garmin did.

Basically, if Amira Nature Foods is thought of as a small General Mills and not a small Cargill, these arrangements make plenty of sense.

Here are other big kicker ideas the Prescient guys float...

(1) Inflation of inventory turnover by this company of 25 to 30%. As a previous CFO stated inside the Prescient report -- when you read the full comment, not just the yellow highlight -- this overstatement of inventory turnover for domestic purposes is done to acknowledge seasonality, and this is a widespread industry practice. This gets the working capital levels up for domestic finance reasons.

Rice is made in one season and stored, much like most crops. The previous CFO statement clearly indicates Amira Nature Foods is following industry standard practice, in this context, with respect to this Indian subsidiary.

(2) The Prescient guys point out there are numerous other subsidiaries in India not listed at the Amira Nature Foods level. They say these are ‘shell’ companies.  

The previous CFO stated in his published comment this is common practice in India. They net out at the parent level. They don’t get discussed in the parent’s SEC reporting. Remember: This is a very old Indian company, going back to 1915. It has recently IPO’d in 2012.

(3) In a photograph, the Prescient guys show you a picture of the Dubai or New Delhi corporate offices, looking pretty sweet. Then, they show the reader a photograph of a crummy Amira mailbox attached to an empty piece of land. I didn’t see anything about a visit to Dubai or headquarters in New Delhi anywhere in the report.

They explain this was to be an Indian ‘registered office.’ That makes you think this is corporate. They don’t explain that the corporate parent has been in Dubai for some time, or in New Delhi.

They also write that they DID find the Amira Foods (correct spelling) manufacturing plant (no picture) and/or a mill processing facility (no picture). I can imagine the registered office is located inside those facilities.

(4) The Prescient report shows a Glassdoor complaint from one individual who worked at Amira India written in 2013 as evidence of poor conditions in India.

Note: One individual complaint should be taken in a Yelp-type multiple comment context.

(5) The next big Prescient play is their ideas that concern the newly created subsidiary Amira Enterprises.

This is a new operating subsidiary created in India. It was created to hold land the Chanana family owned and was transferred into this sub. The purchase cost of the 86-acre parcel of land was booked at $5.7 million (that’s $66K an acre for commercial property). The Prescient guys say that the recent $225 million bond deal included $30 million to buy this land.  

Read more closely. The $30 million will buy the sub Amira Enterprises, which holds the $5.7 million of CEO Chanana’s land!  

The remaining $25 million will most likely be used to build the rice processing plant on the land. That makes sense. The 5x multiple fraud idea is conflating these two.

Prescient conflates the idea that capitalizing a new manufacturing/processing sub with the Chanana land put in there. You would put the $5.7 million land in the same sub with the coming $25 million factory to stand on it. Then, capitalize the sub (not the land) for about $30 million.

(6) The Prescient guys also point out Amira Nature Foods doesn’t have the substantial mill processing capacity of their competitors -- in one early part of the report. There’s a big show-all graph. Then, they turn around in a later part of the report and say that spending $30 million from this coming bond issue to add such mill processing capacity is evidence of fraud inside Amira Enterprises.

This can also make sense of the missing parent revenues. If Amira Nature Foods doesn’t have the needed additional rice processing capacity at Amira Pure Food Private, raw basmati rice would be need to be contracted from other rice supplier(s) shown across the APEDA accounts, in 2014.

(7) The final thing to note is that the financials were audited by Grant Thornton and then handed off to Deloitte over 2013 and 2014. Prescient says this handoff is a typical sign of fraud.

These two are big audit competitors and respected international accounting companies. They would do the quarterbacking on the company structure and related party transactions. E&Y competed against both of them often for business. Can both be hiding the same huge accounting problems at Amira Nature Foods and its subs?

(8) The new CFO Bruce Wacta, sits in New York. He is a U.S. citizen. As a U.S.-based CFO of an NYSE-listed company, he is subject to Sarbanes-Oxley. That means he can go to jail and do prison time if this is indeed a fraud.

I would also imagine he is the one responsible for the recent $225 million bond issuance. New 5-year notes are due in 2020, and replace shorter-term debt. Most likely, it’s a favorable interest rate term swap.

(9) Finally, there has been a B rating issued in January 2015 by Moody’s, done after their investigation. Four IBs are involved in the $225 million bond book running to their clients that was announced in late January 2015. Are they all in on this too?

Conclusion

Sitting from afar, I don’t have all the answers. But I have some good ones.

Do what you think is right, as an investor. Sell these shares if you think it is the right thing to do. Want my now well-reasoned advice? The fraud is with Prescient Point and their hedge fund sponsors, who remain purposely anonymous.

My job as editor of the International Trader is to read this Prescient Point report as a former Transfer Pricing expert. I illuminated what I think is important for subscribers to consider this putative fraud more objectively.

Is this a short-sell play, or a bona fide fraud? I don’t think we will wait long to find out. The SEC will shut the company if it is indeed a fraud.

6.6 million ANFI shares traded over the last two days.

NASDAQ says, on Jan. 30h, there were 5.2 million shares sold short. Days to cover is somewhere between 13 and 16, at 300K to 400K a day. It rises to 23 days at 225K a day.

The next quarterly report is on February 24th. That’s roughly eight trading days away.

If you take the view that the current 87% margin rates on Amira Foods borrowing to short the stock is high, I would think short covering happens rather quickly.

You don’t book any profits until you cover.

Have a Nice Evening.

John Blank

PS.  The latest news below came in from an International Trader subscriber:  

We're also moving quickly to capitalize our new sales channels, and this is evidenced through our partnership with Snapdeal.com. With the number of India's Internet users projected to double by 2018, this partnership will give us access to India's largest online marketplace with over 20 million users. The partnership with Snapdeal.com will enable us to participate in India's robust e-commerce growth, and position us as the first rice brand in India to enter the e-Commerce channel in the region.
 
Outside India, internationally, we are also making significant progress, expanding our brand's presence. This is particularly true in the developed markets, which generally provide a large market opportunity, which is still fragmented, brand ownership positions. I'm particularly pleased with the progress we made in the UK. We continue to build on more than 3,000 distribution points through key wins with two premium retail chains.
 
We launched Amira-branded products in Waitrose stores, adding 553 distribution points in the UK. Now, the Waitrose chain in the UK is pretty much like what you have, Whole Foods, in the US. They command the same premium and the same socioeconomic segment of consumer base.
 
And then we launched into Asda, which is a wholly-owned subsidiary of Walmart, the second largest British supermarket chain. Combined with our existing agreements with Morrisons and Tesco, Amira-branded products are now sold in four of the five largest food retailers in the UK. This is quite an expansion story, given that we only entered the UK a year ago. The first Amira brand came on the shelf last year in May/June with Morrisons.
 
Now to the US. We are in our early stages of expansion in the United States. We continue to invest in our sales force, build our infrastructure, and drive our scale efficiently. This quarter, we expanded our distribution by adding Chicago specialty supermarket chain Mariano's. Now Mariano's has the Amira-branded products, both in the basmati and in the jasmine segment. Now, that's quite a win for us.
 
Along with our current distribution with Costco Club stores, we are confident that we will be seen in more and more distribution points and have more distribution wins in the coming months. We are well-positioned to benefit from the healthy food trends of American consumers, as we capitalize on the growth of the ethnic population and our distribution into the mainstream retailers. We all know how Indian basmati rice coming from the Portilla de [Amalias] is gluten-free, allergy-free, cholesterol-free, and has a lower glycemic index in white form even compared to brown ordinary rice.
 
Now, in other international markets, we continue to leverage our investments and capitalize on our broad product assortment, allowing us to grow sales and brand awareness. Our acquisition of Basmati Rice GmbH in Germany, which closed this January, gives us immediate access to Continental Europe. And we continue to build on that.
 
Another exciting time we've had is in Denmark. We have launched the Amira brand, both our gold line and our silver line, across 400-odd stores there; and we've had some early wins. And if you see the shelf -- what you see in Denmark, you will see the Amira brand, and one other brand only, in the premium category. This has encouraged us to even go deeper into Central Eastern Europe and Northern Europe. We've increased now our advertising and investment significantly in the second quarter, both in India and the UK. We've gone on television in the UK. We've expanded our point of sales, outdoor, print and radio in India.
 
We are doing the same now in Germany, Scandinavia, and more of the same in the Middle East. Additionally, we expanded our product portfolio to better address changing customer needs, capture new market opportunities, and grow sales. For example, to complement our core product offering, we've recently brought to market a selection of new and enticing projects, including ready-to-eat snacks, ready-to-heat meals, and organics. While these products are still in the early stages of a global roll-out, the feedback we have received from our customers is hugely positive.



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