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8/2/2019 SIDBI Project Appraisal - Basic
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Project Appraisal- An Overview
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Agenda
Introduction
Aspects of Project Finance
Managerial Appraisal
Technical Appraisal
Commercial Appraisal
Selected financial indicators Case Study
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Project
A non repetitive activity
Involves large capital expenditures
Returns over a long period of timeRequires significant managerial bandwidth
Varied risks
Uncertainty of future business environment
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Project Finance
Level of funding raised based purely onthe merits of the relevant project
Lender is satisfied to look initially at thecashflows and earnings of a economic unit
Debt would be repaid from the economicunit
The loan and equity returns are tied to the
cash flows and fortunes of the projectrather than being dependant on the parentcompany/companies.
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Project Appraisal
The purpose of Project Appraisal is toascertain whether the project is sound technically, economically, financially andmanagerially and is ultimately viable as a
commercial proposition. Multifaceted activity; Requires skills ofPsychologist
EngineerFinancial Analyst
Economist
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Project Appraisal Each and every project is based upon assumptions,
necessarily involve capital expenditure in the hope of areasonable return on investment over a future period oftime.
Project Appraisal necessarily involves validation ofvarious assumptions
Appraisal of
Management/ Sponsor/ Promoter
Technical aspects
Market & Selling Arrangements
Financial viability
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Initial Screening 1/ 3
WHAT IS THE PRODUCT (Generalindustry structure)
WHO IS SETTING UP THE PROJECT
(Promoters and their experience) Our experience from similar units
Banks lending policies
Government/ RBI Regulations Past business financials
Collaterals
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Initial Screening 2/ 3
Distance of unit from branch RBI/ CIBIL/ AML Lists
ECGC Specific Approval List
Discussions with banks
Independent Market Enquiry
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Initial Screening 3/ 3
Prudential Exposure norms Individual & Group Exposure norms
Industry Exposure norms
Scheme Eligibility Norms DER, PC,DSCR, Asset coverage
Takeover norms, if applicable
Profitability Projections
Credit Risk Rating norms
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Management Appraisal 1/ 5
Who are the promoters KYC
Cohesiveness - relationship
Competence - Age, Qualifications
Experience general or similar line
Net-worth of promoters
IT/ Wealth tax status
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Management Appraisal 2/ 5
Associate concerns in which interested Associate Concerns
When established
Which industry; Products
Financial performance
Visit to associate concerns
Role of promoters in the associate concerns
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Management Appraisal 3/ 5
Bankers report of unit and associate concernsWritten
Discussions
Independent Market EnquiriesOur own customers, Suppliers, Customers Employees Prominent businessmen
Statutory Checks RBI Caution AdviceWilful defaulters database RBI and CIBIL RBI and CIBIL Defaulters list AML list - UN website
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Management Appraisal 4/ 5
Shareholding pattern% stake of promoters; Majority shareholderStake held by investment companiesStake by foreign funds/ FDI/ Overseas
investorsExamine shareholders agreements;
restrictive covenantsPartnership deed/ Society/ Trust deed to be
examined for any restrictive clausesMemorandum & AoA to be examined for
objectives, borrowing powers, security,nominee directors etc.
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Management Appraisal 5/ 5
Composition of Board Chief Executive; Organisational set up
In case promoters not qualified/
experienced, critically examine linemanagement
Adequacy of personnel for project
implementation and each of functionalareas viz. finance, marketing, technology,production, materials, HR etc.
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KYC
Companies : Memorandum and articles ofassociation object clause, borrowing powers,power to mortgage, authorized share capital,directors and board of directors, nominee
directors provision, Pvt or public ltd Partnership concerns Partnership deed
(registration), no of partners, powers to borrow Trusts, HUFs, Co-operatives necessary
safeguards Address and Identity proof, Networth
statements, ITRs, Signature attestation frombankers, PAN/Sales tax/ EPF registration
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Technical Aspects 1/3
Scope of projectPlant scale, product mix
Capacity
Bottlenecks in upscaling
LocationApproach road
Infrastructure facilities
Power distance from substationRaw materials
Availability of skilled/ unskilled labour
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Technical Aspects 2/3
Mfg process - Selection of technology Technical consultants/ collaborators
Similar technology used by other units
Selection of machinery cost and quality Performance guarantee
Training personnel
Imported After sale service Second hand/ fabricated
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Technical Aspects 3/3
Major Raw MaterialsAvailability (Quantity & Quality)
Price fluctuations
Imported or Indigenous - duty structure
Proximity
Power, Water, Fuel
Effluent Disposal
Manpower availability Implementation Schedule ????
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Market Analysis 1/ 2
Target customers Market prospects - Market Survey
Demand Supply scenario
Price trends
Competition - local
Competition foreign - duty structure
Firm tie ups (collaborator off take !!!)
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Market Analysis 2/ 2
Selling arrangements Industry practices
Credit period
Payment defaultsAdvance payments
Ancillary units : Tripartite agreements
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Financial Appraisal - Cost of Project & Means of Finance
Project Cost Means of Finance
Land & site development Equity
Buildings (Main/ Auxiliary) Promoters Equity
Plant and Machinery Internal Accruals
Miscellaneous fixed assets Unsecured Loans
Pre. & pre-op exp. Subsidy
Contingency Term Loans
Margin Money for WC Others
Total Total
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Capital Cost Validation Land
Cost as per Sale / Lease deed, Registration cost
Cost of Land Development, as estimated by a CivilEngineer
Land use permission
Building & Civil works
Approval of construction plan by LocalAuthorities Types of construction Estimates by a Civil
Engineer
Plant, Machinery & Equipments Selection criteria i.e. Technical specifications,
Capacity, Quality, After sales service, Guarantee,Delivery schedule, Cost, Terms of payment
Quotations / Offer letters from manufacturers Excise Duty, Sales Tax, Transportation Foundation, Erection & Commissioning
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Financial Viability 1/ 2 Assumptions underlying projections
Installed capacity & Capacity utilisation Selling Price Raw material, power, manpower and other direct
costs
Administration and selling costs Interest and Depreciation, Taxation structure
Projected profitability Projected cash flow
Projected balance sheet Working capital calculations
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Financial Viability 2/ 2 DER GPM and NPM comparison with peers DSCR Project IRR BEP
Cost of Capital (CoC) Return on Capital Employed (RoCE) Sensitivity analysis
Variations in capacity utilisation, selling price, raw material andother key costs
Test the performance of key parameters Inter-firm comparison
Project Cost, Means of finance, Projections of income andprofitability and DSCR
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Others
Repayment schedule EMI/ Balooning Moratorium
Capital/ interest subsidy
Internal Risk Rating External rating
Primary and collateral security
Security Margin/ Asset Coverage
Pre-disbursement conditions
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Thank You