Monthly Archives: January 2014

Amira Nature Foods, a good short?

While browsing on VIC I noticed that apparently a couple of short write-ups on Amira Nature Foods (ANFI) were removed from the site. I assume this was done because the company threatened VIC with legal action. This looked like a huge red flag to me, so I decided to do some due diligence to figure out if Amira Nature Foods is indeed a good short.

The great thing about researching a short thesis is that usually the shorts do a good job of explaining the short case, their sources and their reasoning behind their idea. A successful short is path dependent: you might not make any money even if the market agrees with you at some point in the future. So they have a good reason to present a compelling thesis. Unfortunately the material on VIC has been removed, but I’am guessing that the majority of the thesis is captured in this recent article on Seeking Alpha. To summarize the concerns:

  1. Low earnings quality. Free cash flow is consistently negative while earnings are positive, and the amount of cash taxes paid is lower than the reported tax expense.
  2. Not enough money for growth capex given negative free cash flow.
  3. Financials reported to SEC don’t match those reported to local authorities.
  4. Valuation very high compared to comparables listed in India.
  5. Company could be hiding potential related party transactions.

Earnings quality

I personally think that this is a pretty weak argument. It’s not weird that a rapidly growing company produces negative free cash flow: it’s actually positive if they can immediately reinvest the cash they receive in growing the business! What’s perhaps a bit weird is that the amount of money spent on new PP&E is very low. Inventories are growing rapidly, and so are their receivables. But there is a logical explanation for the growth in inventories, and the growth in inventories and receivables are not out of line with the growth in revenue.

A lot of money is invested in their inventory because Amira sells basmati rice. This type of rice needs to age approximately a year before it is sold: so a big part of what they do doesn’t require a significant amount of PP&E. It just requires time and a large inventory.

As a side note: the design of the packaging is pretty fancy. I can see how selling this for premium prices could be a good business:

Amira basmati rice

The relative low amount of cash taxes paid compared to the reported tax expense could also be a red flag, but what the author in SA article is missing is that the company is reporting various items outside the income statement as part of other comprehensive income. The losses reported here partially offset the taxes reported on the income statement.

Not enough capital?

If the reported revenues and earnings are correct this is really a luxury problem. Given the growing revenues and earnings they could probably raise additional debt (or maybe equity) if they need more capital. They could also start to generate free cash flow as soon as growth slows down. With $46 million in cash at the bank and $70 million in receivables I don’t think that there is an emergency liquidity issue. Their net debt is now lower than it has been the past five years.

Mismatch between SEC financials and Indian financials

I think this one has a pretty obvious explanation. Amira has various subsidiaries operating all over the world. The financials reported to the Indian authorities are most likely only for the Indian entity while the SEC financials include the consolidated results of all subsidiaries.

High valuation

Compared to other Indian (basmati) rice companies Amira looks expensive, but when you look at the growth in revenues and earnings it doesn’t look that crazy. Comparing a big and slow growing company with a small and rapidly growing company doesn’t make a whole lot of sense. It does raise the question what it exactly is that Amira is doing that is so successful. To be clear: I don’t really know, but if the financials can be trusted the valuation argument doesn’t look very convincing.

Related party transactions

I think this item is potentially the biggest issue. If the reported financials are correct I don’t think Amira Nature Foods is a good short, but if revenue and income growth have been overstated the downside could be huge. The screenshots of the Karam website (see SA article) are troubling, but there could be an innocent explanation. The foreign subsidiaries of Amira haven’t been in existence for a long time. The middle east entity was for example not founded until 2009. The Karam website doesn’t exactly look like it is often updated, so it’s perfectly possible that this is a related party that used to do business with Amira in the past, but isn’t doing this anymore.

Using the Wayback Machine we can see that Karam’s claim of being the sole representative of Amira Foods in the middle east dates back to at least early 2008 and that since then the page wasn’t updated until it was recently deleted.


Maybe the VIC write-ups covered something that I wasn’t able to find online, but in my opinion the short case for Amira Nature Foods is weak. It seems that there is a plausible explanation for almost every red flag. Those explanations could of course turn out to be wrong, but I don’t see the proverbial smoking gun in the evidence. To be clear: there is absolutely no way that I would consider going long this stock. It’s simply too expensive for me and I don’t understand what’s exactly driving their growth and how sustainable it is.


No position in Amira Nature foods

International Lottery & Totalizator Systems merger arb

International Lottery & Totalizator Systems (ITSI) announced today that it has entered a merger agreement with Berjaya, the majority shareholder of the company. The company will cash out shareholders at $1.33/share using a 9,245,317-for-1 reverse split after which Berjaya will be the only remaining shareholder. The merger seems to be more or less a done deal since it’s already approved by the majority shareholder, and apparently the vote of minority shareholders isn’t required under Delaware law.

I managed to pick up some shares at $1.15 at the start of trading, but I do think the merger arbitrage is also attractive at the current price of $1.25: it’s still possible to make a 6.4 percent absolute return. Not bad for what is probably a very low-risk deal.



Exited my Textura short

I’m almost starting to look like a day trader… After exiting and rebuying WSP holdings previous week (way to early it seems) I covered my Textura short today after initiating the position less than two weeks ago. The reason for covering is simple: the borrowing costs are quickly going up, and I don’t like to pay a lot of money just to be able to maintain a position. It costs almost 5% annualized to borrow shares now, and this means that the position needs to generate a negative alpha of 5% just to break even. I’m not so sure of my capabilities that I want to bet on that. I prefer jumping over lower hurdles.


No position in Textura anymore

PD-Rx Pharmaceuticals reports FY2013 results

PD-Rx Pharmaceuticals posted their 2013 annual report online yesterday. PD-Rx has been receiving some attention this year, and I don’t think this has gone unnoticed at the company since the CEO explicitly welcomes the new shareholders in the annual report. What I found very positive is that this is accompanied by an increased amount of information about the business. The 2013 annual report is the longest one since 2009 (I don’t have access to older versions) and it doesn’t even include the financial statements. Instead they have provided a link to the full audited statements that include all the footnotes.

Compared to SEC-reporting companies the amount of information that PD-Rx provides to it’s investors is of course still limited, but I do think that PD-Rx’s reaction the increased investor interest is very encouraging with respect to the shareholder friendliness of the company.

But what really matters is the financial performance and PD-Rx doesn’t disappoint here. Revenues increased by only 2 percent, but net profit jumped 74 percent from $0.40/share to $0.70/share. The increase in profitability is for a large part attributable to a decrease in SG&A costs of $348,000, and a large part of this amount can be explained by lower shipping costs ($145,000) and lower advertising costs ($33,000). I don’t know if this is sustainable – especially the shipping costs are substantially lower – but it does create a ‘pretty’ picture:

PD-Rx historical profitabilityWhat’s also worth mentioning is that the company bought back 44,609 shares (approximately 2.5% of the outstanding share capital) after the end of the period at an average cost of $2.74/share. I think this is probably a repurchase from an employee that left the company or something similar and I don’t think it really signals anything w.r.t. future capital allocation plans, but it is nevertheless good to see.


Long PD-Rx Pharmaceuticals

Exited, and rebought WSP Holdings

Just before the end of the year I exited my position in WSP Holdings. Since the (already extended) deadline for the merger agreement was 31 December 2013 I thought it was prudent to exit my position. I do think it’s more likely than not that the merger will be completed, but if there would have been a time for bad news it would have been yesterday. With the passing of the merger deadline both parties could have walked away if they wanted without paying a breakup fee. This didn’t happen, and instead the company told in a press release that both parties were in discussions to extend the deadline once again.

The share price did drop a couple percentage points yesterday, and at my entry price of $2.66/share I stand to make a 18.4% return if the merger is completed at $3.20/share. Given the multiple delays so far I do think it’s obvious that this transaction is risky, because something isn’t progressing as planned. But I do think that both parties have the intention to complete the deal, and if the intention is still there they can probably find a way to make it work. With a possible return of 20% I do think I’m getting paid enough for whatever risk it is I’m taking, but this is certainly not a big position (at the moment).


Long WSP holdings (again)