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PROJECT REPORT
Student Name:Vasant Patil
Batch & Section: 2012-2013
Company/Institution Name: Punjab National Bank
Title of the report: Financial Appraisal of project finance by Punjab National
Bank
Area of research: Banking
Internship Duration: 2nd May 2013 to 30th June
Name & Logo of Institute: Alkesh Dinesh Mody Institute ofFinancial and
Management Studies
Alkesh Dinesh Mody Institute for Financial & management
Summer Internship Project Report (2013)
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
University of Mumbai’s
Alkesh Dinesh Mody Institute of Financial and Management Studies
Summer Internship Certificate
This is to certify that Mr. Vasant Patil M.M.S. (Finance) Batch 2012-14 of Alkesh Dinesh
Mody Institute of Financial And Management Studies has successfully completed his
summer internship during 2nd may 2013 to 30th June 2013.
The project was undertaken by him at Punjab National Bank titled “Financial Appraisal of
Project Financed by Punjab National Bank” under the guidance of Mr. N.K. Ramakrishnan,
Senior Manager (Credit).
The project fulfills all the stated criteria and the student findings are his original work.
I hereby certify his work is good to the best of my knowledge.
Director
Dr. S. Ratnaparkhi
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
Acknowledgement
I would like express my sincere thanks to Punjab National Bank for giving me the
opportunity to do my summer training with the organization & for providing opportunity to
work on a challenging project. I would like to extend my gratitude to various people who
provided their continuous support during these two months of our Project.
I express my sincere thanks to Mr. N.K. Ramakrishnan– Sr. Manager (Credit),
Circle Office Bandra Kurla Complex, for helping me and guiding me to understand the
organizational process of Project Finance through my internship process & geared me to
extract the best. I would like to thanks staff of Credit Department as well as Rating
Department of the Bank. I would like to thank Mr. Sanjay Chauhan Sr. Manager (HRD) to
giving me this opportunity to work in the precise bank of the country.
My sincere thanks to Prof. SmitaShukla, a highly esteemed professor, whose
precious suggestion, constructive guidance has been indispensible in the completion of my
project. She has been a source of inspiration to me and I am indebted to her for initiating me
in the project.
I would also like to thank teaching, non-teaching staff and all who had directly or
indirectly helped me to complete my project.
Vasant Patil
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
Table of Contents
Executive Summary...................................................................................................................4
Introduction...............................................................................................................................5
Objective & Methodology.........................................................................................................6
Sector Overview........................................................................................................................7
Company Overview..................................................................................................................10
Organizational structure............................................................................................................11
Theoretical Background for the project....................................................................................13
Advantages and Disadvantages................................................................................................14
Project Phases...........................................................................................................................17
Financing sources used in project financing.............................................................................18
Participants in project Financing..............................................................................................20
Process of Project Finance........................................................................................................21
The Project Company...............................................................................................................22
Project Company Agreements..................................................................................................23
Project Risks.............................................................................................................................28
Risk Minimization Process.......................................................................................................30
Process of Sanctioning..............................................................................................................31
Pre-sanction Process.................................................................................................................32
Case Study................................................................................................................................37
Recommendations & Limitation..............................................................................................56
An Assessment of Internship....................................................................................................57
Conclusion................................................................................................................................58
Bibliography.............................................................................................................................59
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
Executive Summary
“Financial Appraisal of the Project Financed By PNB, MUMBAI”
This project report mainly consists of the financial appraisal of the project financed by Punjab
national Bank. Project finance is a financing which is repaid solely out of cash flows from a specific
asset and secured by just that asset and its contracts. Lenders do not have recourse to the owners of
the project for repayment of the debt. It entails allocation of risks to entities best equipped to handle
that risk.
Such project is appraised considering various factors which are important from the lenders point of
view. The project undertaken was to sanction of term loan of Rs. 50 Crores being part finance of total
debt requirement of Rs. 126 Crores for setting up a 150,000 TPA Coal Tar distillation plant at
Halkarni, Maharashtra at total cost of Rs. 189 Crores, proposed to be funded by DER of 2:1 at the rate
of 12.75% repayable in 27 equal quarterly installments commencing from 31.12.2014 with total term
of 8 years & 10 Months.
The financials of the project are studied and various interpretations were derived to arrive at certain
conclusion for the acceptance of the project. The balance sheet, profit or loss statements and cash flow
statements were analyzed. Ratio analysis helped to evaluate the project as viable and the liquidity
position of the firm isgood and it is maintaining the standard ratio. Debt Equity ratio is in decreasing
trend, it shows that the firm is reducing itsliability portion by paying the loan year on year so
the financial risk less.
The project may face various risks. These risks and their mitigation are also taken under
consideration.
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
Introduction
As a part of curriculum, every student studying MMS has to undertake a project on a particular
subject assigned to him/her. Accordingly I have been assigned the project work on the study of
analysis of project finance in Banking Sector.
As it is rightly said that finance is the life blood of every business so every business need funds for
smooth running of its activities and bank is the one of the source through which the business gets
fund, before financing the bank appraise the project and if the projects meet the requirement of the
rules than only they will finance.
Project financing is commonly used as a financing method in capital-intensive industries for project
requiring large investment of funds, such as the construction of power plants, pipeline, transportation
system, mining facilities, industrial facilities and heavy manufacturing plants.
The core area of this project focuses on the financial appraisal of ABC chemicals pvt. LTD, who are
going to start Tar coal Distillation plant at Halkarni, Maharashtra. The financial projections and
finding are discussed and the project is evaluated on various parameters. The feasibility study consists
mainly of ration analysis. On the basis of all this analysis and various observations, recommendations
are suggested and conclusions are derived.
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
Objective and Methodology
Main objective
“Financial appraisal of project financed by Punjab National Bank”
Sub Objectives:
1. To know the projects financed by Punjab National Bank
2. To know the policies of Punjab National Bank towards project financing
3. To know the Risks involved in project finance
4. To appraise the projects using financial tools
5. To know the measures taken by bank when the clients fail to repay the amount
Methodology:
Data collection method: The report will be prepared mainly using secondary data viz,
Primary Data:
Meetings with the project guide and staff members.
Meetings and discussions with raters at PNB.
Meetings with various other department head.
Secondary Data:
www.pnbindia.com
PNB Book of instructions
PNB Compendium
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
Sector overview
Banking Industry
History of banking in India
Without a sound and effective banking system, India cannot have a healthy economy. The banking
system of India should not only be hassle free but it should be able to meet new challenges posed by
the technology and any other external and internal factors. For the past three decades India’s banking
system has several outstanding achievements to its credit. The most striking is its extensive reach. It
is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system
has reached even to the remote corners of the country. This is one of the main reasons for India’s
growth. The government’s regular policy for Indian bank since 1969 has paid rich dividends with the
nationalization of 14 major private banks of India.
Figure 1: Overview of Banks
Reserve Bank of India
Scheduled Banks
Commercial Banks
Foreign banks Regional Rural
Banks Public Sector
Banks
State Bank of India and
Associate banks
Other Natinalised bank
Private Sector Banks
Old
New
Coperatives
Urban Co-operative
State Co-operative
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
The first bank in India, though conservative, was established in 1786. From 1786 tilltoday, the
journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned
below:
Early phase from 1786 to 1969 of Indian Banks.
Nationalization of Indian Banks and up to 1991 prior to Indian Banking sector Reforms.
New phase of Indian Banking System with the advent of IndianFinancial & Banking Sector
Reforms after 1991.
Phase I
The General Bank of India was set up in the year 1786. Next came the Bank of Hindustanand Bengal
Bank. The East India Company established Bank of Bengal (1809), Bank
ofBombay(1840)andBank of Madras (1843) as independent units and called it Presidency Banks.
These three banks were amalgamated in 1920 and Imperial Bank of India was established which
started as private shareholders banks, mostly Europeanshareholders.In 1865 Allahabad Bank was
established and first time exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with
headquarters at Lahore. Between 1906 and1913, Bank of India, Central Bank of India, Bank of
Baroda, Canara Bank, IndianBank, and Bank of Mysore were set up. Reserve Bank of India came in
1935.During the first phase the growth was very slow and banks also experienced periodicfailures
between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline
thefunctioning and activities of commercial banks, the Government of India came up withThe
Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per
amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of Indiawas vested with extensive powers
for the supervision of banking in India as the CentralBanking System.In those days, public has lesser
confidence in the banks. As an aftermath deposit mobilization was slow. Abreast of it the savings
bank facility provided by the Postaldepartment was comparatively safer. Moreover, funds were
largely given to traders.
Phase II
Government took major steps in the form of Indian Banking Sector Reform after independence.In
1955, it nationalized Imperial Bank of India with extensive banking facilities on alarge scale
especially in rural and semi-urban areas. It formed State Bank of India to actas the principal agent of
RBI and to handle banking transactions of the Union and stategovernment all over the country.Seven
banks forming subsidiary of State Bank of India was nationalised in 1960 on 19thJuly 1969, major
process of nationalisation was carried out. It was the effort of the thenPrime Minister of India, Mrs.
Indira Gandhi that 14 major commercial banks in the countrywere nationalized.Second phase of
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
nationalisation Indian Banking Sector Reform wascarried out in 1980 with seven more banks. This
step brought 80% of the bankingsegment in India under Government ownership.
The following are the steps taken by the Government of India to Regulate BankingInstitutions
in the Country:
1949: Enactment of Banking Regulation Act.
1955: Nationalisation of State Bank of India.
1959: Nationalisation of SBI subsidiaries.
1961: Insurance cover extended to deposits.
1969: Nationalisation of 14 major banks.
1971: Creation of credit guarantee corporation.
1975: Creation of regional rural banks.
1980: Nationalisation of seven banks with deposits over 200 crores.
After the nationalization of banks, the branches of the public sector bank India rose toapproximately
800% in deposits and advances took a huge jump by 11000%. Bankingin the sunshine of Government
ownership gave the public implicit faith and immenseconfidence about the sustainability of these
institutions.
Phase III
This phase has introduced many more products and facilities in the banking sector as part of the
reforms process. In 1991, under the chairmanship of M Narasimham, a committee was set up, which
worked for the liberalization of banking practices. Now, the country is flooded with foreign banks and
their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking
and net banking are introduced. The entire system became more convenient and swift. Time is given
importance in all money transactions.
The financial system of India has shown a great deal of resilience. It is sheltered from crises triggered
by external macroeconomic shocks, which other East Asian countries often suffered. This is all due to
a flexible exchange rate regime, the high foreign exchange reserve, the not-yet fully convertible
capital account, and the limited foreign exchange exposure of banks and their customers.
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
Company overview
Punjab National Bank at a Glance
Punjab National Bank was registered on 19 May 1894 under the Indian Companies Act, with its office
in Anarkali Bazaar, Lahore. The founding board was drawn from different parts of India professing
different faiths and a varied back-ground with, however, the common objective of providing country
with a truly national bank which would further the economic interest of the country. The board first met
on 23 May 1894.The bank opened for business on 12 April 1895 in Lahore.
PNB has the distinction of being the first Indian bank to have been started solely with Indian capital that
has survived to the present. With over 72 million satisfied customers and 5937 domestic branches, PNB
has continued to retain its leadership position amongst the nationalized banks. The Bank enjoys strong
fundamentals, large franchise value and good brand image.
Mission Statement:
"Banking for the unbanked"
Vision Statement:
“To be a Leading Global Bank with Pan India footprints and become a household brand in the Indo-
Gangetic Plains providing entire range of financial products and services under one roof"
Since its humble beginning in 1895 with the distinction of being the first Swadeshi Bank to have been
started with Indian capital, Punjab National Bank has continuously strived for growth in business which
at the end of June 2012 amounted to Rs.6,79,823 crore. PNB is the largest nationalised Bank in the
country in terms of Branch Network, Total Business, Advances, Operating Profit and Low Cost CASA
Deposits. The CASA deposits share to the Total Deposits of the Bank was at 35.6% as on June 2012.
Bank achieved a Net Profit of ` 1246 crore during the Q1 FY’13. Bank also has a strong capital base
with Capital Adequacy Ratio of 12.57% as on June’12 as per Basel II with Tier I and Tier II capital ratio
at 9.33% and 3.24% respectively.
Punjab National Bank continues to maintain its frontline position in the Indian Banking industry. The
performance highlights of the Bank in terms of business and profit are shown below:
Rs. In Crore
Parameters Mar'10 Mar'11 Mar'12 CAGR
(3 yearly%) June’11 June’12 YOY Growth%
Operating Profit 7326 9056 10614 23.10 2474 2841 14.8
Net Profit 3905 4433 4884 16.47 1105 1246 12.8
Deposit 249330 312899 379588 21.86 324097 385355 18.9
Advance 186601 242107 293775 23.83 242908 294468 21.2
Total Business 435931 555005 673366 22.71 567005 679823 19.9
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
ORGANISATIONAL STRUCTURE
Bank has its Corporate Office at New Delhi and supervises 68 Circle Offices under which the
branches Function. The delegation of powers is decentralized up to the branch level to facilitate quick
decision making.
Head Office
FGM Offices
Circle Offices
Branches
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
A typical Hierarchy of a bank has been shown below:
Chairman
Executive Director
Chief Genaral Manager
Genaral Manager
Deputy Genaral Manager
Assistant General Manager
Chief Manager
Senior Manager
Manager
Officer
Clerical/ Subordinate
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
Theoretical Background for the project work
Project Finance
Introduction
While riding on a high-speed train through India, Europe, or Taiwan, a passenger may see massive
wind turbines scattered throughout the countryside. Marveled by the landscape, the passenger may
take a snapshot on her phone camera and send it to her family. Without realizing it, the passenger is
likely to have benefitted from infrastructure projects that have been financed by a mechanism called
“project finance”. The high-speed rail, the wind turbine, and the telecommunication towers are all
large and complex infrastructure undertakings. Sometimes such projects are made possible by
traditional financial methods; increasingly, however, infrastructure projects are financed by a
mechanism that engages a multitude of participants including multilateral organizations, governments,
regional banks, and private entities. In project finance, participants negotiate amongst themselves to
spread risks associated with an undertaking, thereby increasing the chances for success in developing
vital infrastructure projects for that country and its population.
Meaning
Project financing involves non-recourse financing of the development and constructionof a particular
project in which the lender looks principally to the revenues expected to be generated by the project
for the repayment of its loan and to the assets of the projectas collateral for its loan rather than to the
general credit of the project sponsor.
Rationale
Project financing is commonly used as a financing method in capital-intensiveindustries for projects
requiring large investments of funds, such as the construction of power plants, pipelines,
transportation systems, mining facilities, industrial facilitiesand heavy manufacturing plants. The
sponsors of such projects frequently are notsufficiently creditworthy to obtain traditional financing or
are unwilling to take therisks and assume the debt obligations associated with traditional financings.
Projectfinancing permits the risks associated with such projects to be allocated among anumber of
parties at levels acceptable to each party.
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
Advantages and Disadvantages of project finance
■ Non-recourse/limited recourse financing Non-recourse project financing does not impose any
obligation to guarantee the repayment of the project debton the project sponsor. This is important
because capitaladequacy requirements and credit ratings mean that assuming financialcommitments to
a large project may adversely impact the company’s financial structure and credit rating (and ability to
access fundsin the capital markets).
■Off balance sheet debt treatment: The main reason for choosingproject finance is to isolate the
risk of the project, taking it off balancesheet so that project failure does not damage the owner’s
financialcondition. This may be motivated by genuine economic arguments suchas maintaining
existing financial ratios and credit ratings. Theoretically,therefore, the project sponsor may retain
some real financial risk inthe project as a motivating factor, however, the off balance sheettreatment
per se will effectively not affect the company’s investmentrating by credit rating analysts.
■ Leveraged debt: Debt is advantageous for project finance sponsorsin that share issues (and equity
dilution) can be avoided. Furthermore,equity requirements for projects in developing countries
areinfluenced by many factors, including the country, the projecteconomics, whether any other project
participants invest equity inthe project, and the eagerness for banks to win the project financebusiness.
■Avoidance of restrictive covenants in other transactions: Because theproject financed is separate
and distinct from other operations andprojects of the sponsor, existing restrictive covenants do not
typicallyapply to the project financing. A project finance structure permits aproject sponsor to avoid
restrictive covenants, such as debt coverageratios and provisions that cross-default for a failure to pay
debt, inthe existing loan agreements and indentures at the project sponsorlevel.
■ Favorable tax treatment: Project finance is often driven by taxefficientconsiderations. Tax
allowances and tax breaks for capitalinvestments etc. can stimulate the adoption of project finance.
Projectsthat contract to provide a service to a state entity can use these taxbreaks (or subsidies) to
inflate the profitability of such ventures.
■ Favorable financing terms: Project financing structures can enhancethe credit risk profile and
therefore obtain more favorable pricingthan that obtained purely from the project sponsor’s credit risk
profile.
■ Political risk diversification: Establishing SPVs (special purposevehicles) for projects in specific
countries quarantines the projectrisks and shields the sponsor (or the sponsor’s other projects)
fromadverse developments.
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
■ Risk sharing: Allocating risks in a project finance structure enablesthe sponsor to spread risks over
all the project participants, includingthe lender. The diffusion of risk can improve the possibility of
project success since each project participant accepts certain risks; however, themultiplicity of
participating entities can result in increased costs whichmust be borne by the sponsor and passed on to
the end consumer –often consumers that would be better served by public services.
■ Collateral limited to project assets: Non-recourse project finance loansare based on the premise
that collateral comes only from the projectassets. While this is generally the case, limited recourse to
the assetsof the project sponsor is sometimes required as a way of incentivizingthe sponsor.
■ Lenders are more likely to participate in a workout than foreclose: The non-recourse or limited
recourse nature of project finance meansthat collateral (a half-completed factory) has limited value in
a liquidationscenario. Therefore, if the project is experiencing difficulties,the best chance of success
lies in finding a workout solution ratherthan foreclosing. Lenders will therefore more likely cooperate
in a workoutscenario to minimize losses.
Disadvantages of project finance
■ Complexity of risk allocation Project financings are complex transactionsinvolving many
participants with diverse interests. This resultsin conflicts of interest on risk allocation amongst the
participants andprotracted negotiations and increased costs to compensate third partiesfor accepting
risks.
■ Increased lender risk Since banks are not equity risk takers, the meansavailable to enhance the
credit risk to acceptable levels are limited,which results in higher prices. This also necessitates
expensive processesof due diligence conducted by lawyers, engineers and other
specializedconsultants.
■Higher interest rates and fees Interest rates on project financingsmay be higher than on direct loans
made to the project sponsor sincethe transaction structure is complex and the loan
documentationlengthy. Project finance is generally more expensive than classic lendingbecause of:
- the time spent by lenders, technical experts and lawyers to evaluatethe project and draft
complex loan documentation;
- the increased insurance cover, particularly political risk cover;
- the costs of hiring technical experts to monitor the progress of theproject and compliance with
loan covenant;
- thecharges made by the lenders and other parties for assumingadditional risks.
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
■Lender supervision: In order to protect themselves, lenders will wantto closely supervise the
management and operations of the project(whilst at the same time avoiding any liability associated
with excessiveinterference in the project). This supervision includes site visits bylender’s engineers
and consultants, construction reviews, and monitoringconstruction progress and technical
performance, as well as financialcovenants to ensure funds are not diverted from the project.
Thislender supervision is to ensure that the project proceeds as planned,since the main value of the
project is cash flow via successful operation.
■Lender reporting requirements: Lenders will require that the project company provides a steady
stream of financial and technical information to enable them to monitor the project’s progress. Such
reporting includes financial statements, interim statements, reports on technical progress, delays and
the corrective measures adopted, and various notices such as events of default.
■Increased insurance coverage: The non-recourse nature of project finance means that risks need to
be mitigated. Some of this risk can be mitigated via insurance available at commercially acceptable
rates. This however can greatly increase costs, which in itself, raises other risk issues such as pricing
and successful syndication.
■Transaction costs may outweigh the benefits: The complexity of the project financing
arrangement can result in a transaction whose costs are so great as to offset the advantages of the
project financing structure. The time-consuming nature of negotiations amongst various parties and
government bodies, restrictive covenants, and limited control of project assets, and burgeoning legal
costs may all work together to render the transaction unfeasible.
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
Project phases
Project financings can be divided into two distinct stages:
■ Construction and development phase – here, the loan will be extended and debt service may be
postponed, either by rolling-up interest or by allowing further drawdowns to finance interest payments
prior to the operation phase. The construction phase is the period of highest risk for lenders since
resources are being committed and construction must be completed before cash flow can be
generated. Margins might be higher than during other phases of the project to compensate for the
higher risks. The risks will be mitigated by taking security over the construction contract and related
performance bonds.
■ Operation phase – here, the lenders will have further security since the project will begin to
generate cash flows. Debt service will normally be tailored to the actual cash flows generated by the
project – typically a ‘dedicated percentage’ of net cash flows will, via security structures such as
blocked accounts, go to the lenders automatically with the remainder transferred to the project
company. The terms of the loan will frequently provide for alternative arrangements should cash
flows generate an excess or shortfall due to unanticipated economic or political risks arising.
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
Financing sources used inproject financing
Just as financial instruments range from debt to equity and hybrids suchas mezzanine finance, project
finance can raise capital from a range ofsources.
Raising financing depends on the nature and structure of the projectfinancing being proposed. Lender
and investor interest will varydepending on these goals and risks related to the financing.
Commerciallenders seek projects with predictable political and economic risks.Multilateral
institutions, on the other hand, will be less concerned withcommercial lending criteria and will look
towards projects that ostensiblysatisfy not only purely commercial criteria.In assembling a project
financing, all available financing sources shouldbe evaluated. This would include equipment suppliers
with access toexport financing; multilateral agencies; bilateral agencies, which may providefinancing
or guarantees; the International Finance Corporation orregional development banks that have the
ability to mobilize commercialfunds; specialized funds; institutional lenders and equity investors;
andcommercial banks, both domestic and international.
Equity
Equity, as it is well known, is more expensive than debt financing. Domesticcapital markets provide
access to significant amounts of funds for infrastructureprojects, although capital markets in
developing countriesmay lack the depth to fund large transactions. However, this is generally limited
totransactions whose sponsors are large, multinational companies.
Developmental loan
A development loan is debt financing provided during a project’s developmentalperiod to a sponsor
with insufficient resources to pursuedevelopment of a project. The developmental lender is typically a
lenderwith significant project experience. Developmental lenders, who fundthe project sponsor at a
very risky stage of the project, desire someequity rewards for the risk taken. Hence, it is not unusual
for the developmentallender to secure rights to provide permanent financing for theproject as part of
the development financing arrangement.
Subordinated loans
Subordinated loans, also called mezzanine financing or quasi-equity, aresenior to equity capital but
junior to senior debt and secured debt.Subordinated debt usually has the advantage of being fixed rate,
longterm, unsecured and may be considered as equity by senior lenders forpurposes of computing
debt to equity ratios.
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
Unsecured loans
Unsecured loans basically depend on the borrower’s general creditworthiness,as opposed to a
perfected security arrangement. Unsecuredloans will usually contain a negative pledge of assets to
prohibit theliquid and valuable assets of the company from being pledged to a thirdparty ahead of the
unsecured lender.The loan agreement may include ratio covenants and provisions calculatedto trigger
a security agreement, should the borrower’s financialcondition begin to deteriorate. An unsecured
loan agreement may alsocontain negative covenants which limit investments and other kinds ofloans,
leases debt obligations of the borrower.
Secured loans
Secured loans are loans where the assets securing the loan have value ascollateral, which means that
such assets are marketable and can readilybe converted into cash.In a fully secured loan, the value of
the asset securing the debt equals orexceeds the amount borrowed. The reputation and standing of the
projectmanagers and sponsors, and the probable success of the project, allenter into the lending
decision. The lending, however, also relies on thevalue of the collateral as a secondary source of
repayment. The securityinterest is regarded by lenders as protection of loan repayment in the unlikely
event the loan is not repaid in the ordinary course of business.Because of the security interest, a
secured loan is superior since it ranks ahead of unsecured debt.
Syndicated loans
A syndicated loan is a loan that is provided to the borrower by two or more banks, known as
participants, which is governed by a single loan agreement. The loan is arranged and structured by an
arranger and managed by an agent. The arranger and the agent may also be participants. Each
participant provides a defined percentage of the loan, and receives the same percentage of
repayments.
Bonds
In recent years, the use of the bond market as a vehicle for obtaining debt funds has increased. Bond
financings are similar to commercial loan structure, except that the lenders are investors purchasing
the borrower’s bonds in a private placement or through the public debt market. The bond holders are
represented by a trustee that acts as the agent and representative of the bondholders. Bond purchasers
are generally the most conservative source of financing for a project.
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
Participants in Project Financing:
Stakeholder Summary of role in a project financing
Sponsors
The equity investor(s) and owner(s) of the Project Company – can be a single
party, or more frequently, a consortium of Sponsors
Subsidiaries of the Sponsors may also act as sub-contractors, feedstock providers,
or offtaker to the Project Company
Procurer
Only relevant for PPP - the Procurer will be the municipality, council or
department of state responsible for tendering the project to the private sector,
running the tender competition, evaluating the proposals and selecting the
preferred Sponsor consortium to implement the project
Contractors
The substantive performance obligations of the Project Company to construct and
operate the project will usually be done through engineering procurement and
construction (EPC) and operations and maintenance (O&M) contracts
respectively
Feedstock
provider(s) and/or
Off taker
More typically found in utility, industrial, oil & gas and petrochemical projects
One or more parties will be contractually obligated to provide feedstock (raw
materials or fuel) to the project in return for payment
One or more parties will be contractually obligated to ‘offtake’ (purchase) some
or all of the product or service produced by the project
Feedstock/Offtake contracts are typically a key area of lender due diligence given
their criticality to the overall economics of the project (i.e. the input and output
prices of the goods or services being provided)
Lenders
Typically including one or more commercial banks and/or multilateral agencies
and/or export credit agencies and/or bond holders
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
Process of Project Financing
Feasibility Study
As one of the first steps in a project financing is hiring of a technical consultant and hewill preparea
feasibility study showing the financial viability of the project. Frequently, a prospective lender will
hire its own independent consultants to prepare an independent feasibility study before the lender will
commit to lend funds for the project.
Contents
The feasibility study should analyze every technical, financial and other aspect of the project,
including the time-frame for completion of the various phases of the projectdevelopment, and should
clearly set forth all of the financial and other assumptionsupon which the conclusions of the study are
based, Among the more important itemscontained in a feasibility study are:
1.Description of project
2.Description of sponsor(s).
3.Sponsors' Agreements.
4.Project site.
5.Governmental arrangements.
6.Source of funds.
7.Feedstock Agreements.
8.Off take Agreements.
9.Construction Contract.
10.Management of project.
11.Capital costs.
12.Working capital.
13.Equity sourcing.
14.Debt sourcing.
15.Financial projections.
16.Market study.
17.Assumptions.
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
The Project Company
Legal Form
Sponsors of projects adopt many different legal forms for the ownership of the project. The specific
form adopted for any particular project will depend upon many factors, including:
The amount of equity required for the project
The concern with management of the project
The availability of tax benefits associated with the project
The need to allocate tax benefits in a specific manner among the project company investors.
The three basic forms for ownership of a project are:
Corporations-
This is the simplest form for ownership of a project. A special purpose corporation may be formed
under the laws of the jurisdiction in which the project is located, or it may be formed in some other
jurisdiction and be qualified to do business in the jurisdiction of the project.
General Partnerships-
The sponsors may form a general partnership. In most jurisdictions, a partnership is recognized as a
separate legal entity and can own, operate and enter into financing arrangements for a project in its
own name. A partnership is not a separate taxable entity, and although a partnership isrequired to file
tax returns for reporting purposes, items of income,
gainlosses,deductionsandcreditsareallocatedamong the partners which include their allocated
share in computing their own individual taxes.Consequently, a partnership frequently will be used
when the tax benefits associated with the project are significant. Because the general partners of
a partnership are severally liable for all of the debts and liabilities of the partnership, a sponsor
frequently will form a wholly owned, single-purpose subsidiary to act as its general partner in a
partnership.
Limited Partnerships-
A limited partnership has similar characteristics to a general partnership except that the limited
partners have limited control over the business of the partnership and are liable only for the debts and
liabilities of the partnership to the extent of their capital contributions in the partnership. A
limited partnership may be useful for a project financing when the sponsors do not have substantial
capital and the project requires large amounts of outside equity.
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
Project Company Agreements
Depending on the form of Project Company chosen for a particular project financing, the sponsors
and other equity investors will enter into a stockholder agreement, general or limited partnership
agreement or other agreement that sets forth the terms under which they will develop, own and
operate the project.
Principal Agreements in a Project Financing-
1) Construction Contract-
Some of the more important terms of the construction contracts are-
2) Project Description-
The construction contract should set fortha detailed description of all the Work necessary to complete
the project
3) Price:-
Most project financing construction contracts are fixed- price contracts although some projects may
be built on a cost- plus basis. If the contract is not fixed-price, additional debt or equity contributions
may be necessary to complete the project, and the project agreements should clearly indicate the party
or parties responsible for such contributions.
4) Payment-
Payments typically are made on a "milestone" or "completed work" basis, with a retain age. This pay
ment procedure provides an incentive for the contractor to keep onschedule and useful
monitoring points for the owner and thelender.
5) Completion Date-
The construction completion date, together with any time extensions resulting from an event of force
majeure, must be consistent with the parties' obligations under the other project documents. If
construction is not finished by the completion date, the contractor typically is required to pay
liquidated damages to cover debt service for each day until the project is completed. If construction is
completed early, the contractor frequently is entitled to an early completion bonus.
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
6) Performance Guarantees-
The contractor typically will guarantee that the project will be able to meet certain performance
standards when completed. Such standards must be set at levels to assure that the project will generate
sufficientrevenues for debt service, operating costs and a return on equity.Such guarantees are
measured by performance tests conducted by the contractor at the end of construction. If the project
doesnot meet the guaranteed levels of performance, the contractor typically is required to make
liquidated damages payments to
thesponsor.Ifprojectperformance exceeds the guaranteedminimumlevels, the contractor may be entitle
d to bonus payments.
7) Feedstock Supply Agreements
The project company will enter into one or more feedstock supplyagreements for the supply of raw
materials, energy or other resources over the life of the project. Frequently, feedstock supply
agreements arestructured on a "put-or-pay" basis, which means that the supplier must either supply
the feedstock or pay the project company the difference in costsincurred in obtaining the feedstock
from another source. The price provisions of feedstock supply agreements must assure that the cost of
thefeedstock is fixed within an acceptable range and consistent with thefinancial projections of the
project.
8) Product off take Agreements
In a project financing, the product off take agreements represent the sourceof revenue for the project
.Such agreements must be structured in amanner to provide the project company with sufficient
revenue to pay its project debt obligations and all other costs of operating, maintaining andowning the
project .Frequently,offtake agreements are structured on a"take-or-pay" basis, which means that the
offtaker is obligated to pay for product on a regular basis whether or not the offtaker actually takes
the product unless the product is unavailable due to a default by the project company. Like feedstock
supply arrangements, offtake agreements frequently are on a fixed or scheduled price basis duringthe
term of the project debt financing.
9) Operations and Maintenance Agreement
The project company typically will enter into a long-term agreement for the day-to-day operation and
maintenance of the project facilities with a company having the technical and financial expertise to
operate the projectin accordance with the cost and production specifications for the project.The
operator may be an independent company, or it may be one of the sponsors. The operator typically
will be paid a fixed compensation and may be entitled to bonus payments for extraordinary project
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
performance and be required to pay liquidated damages for project performance below specified
levels.
10) Loan and Security Agreement
The borrower in a project financing typically is the project company formed by the sponsor(s) to own
the project. The loan agreement will set forth the basic terms of the loan and will contain general
provisions relating tomaturity, interest rate and fees. The typical project financing loan agreement also
will contain provisions such as-
11) Disbursement Controls
These frequently take the form of conditions precedent to each drawdown, requiring the borrower to
present invoices, builders’ certificates or other evidence as to the need for and use of the funds.
12) Progress Reports
The lender may require periodic reports certified byan independent consultant on the status of
construction progress.
13) Covenants Not to Amend
The borrower will covenant not to amendor waive any of its rights under the construction, feedstock,
off take,operations and maintenance, or other principal agreements without theconsent of the lender.
14) Completion Covenants
These require the borrower to complete the project in accordance with project plans and specifications
and prohibit the borrower from materially altering the project plans without theconsent of the lender.
15) Dividend Restrictions
These covenants place restrictions on the payment of dividends or other distributions by the borrower
until debtservice obligations are satisfied.
16) Debt and Guarantee Restrictions
The borrower may be prohibitedfrom incurring additional debt or from guaranteeing other obligations
17) Financial Covenants
Such covenants require the maintenance of working capital and liquidity ratios, debt service coverage
ratios, debtservice reserves and other financial ratios to protect the credit of the borrower.
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
18) Subordination
Lenders typically require other participants in the project to enter into a subordination agreement
under which certain payments to such participants from the borrower under projectagreements are
restricted (either absolutely or partially) and madesubordinate to the payment of debt service.
19) Security:
The project loan typically will be secured by multiple forms of collateral, including:-
Mortgage on the project facilities and real property.
Assignment of operating revenues.
Pledge of bank deposits
Assignment of any letters of credit or performance or completion bonds relating to the
project.
Project under which borrower is the beneficiary.
Liens on the borrower's personal property
Assignment of insurance proceeds.
Assignment of all project agreements
Pledge of stock in Project Company or assignment of partnership interests.
Assignment of any patents, trademarks or other intellectual property owned by the borrower.
20) Site Lease Agreement
The project company typically enters into long-term lease for the life of the project relating to the real
property on whichthe project is to be located. Rental payments may be set in advance at afixed rate or
may be tied to project performance.
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
Insurance
The general categories of insurance available in connectionwith project financings are:
1) Standard Insurance-
The following types of insurance typically areobtained for all project financings and cover the most
commontypes of losses that a project may suffer.
Property Damage, including transportation, fire and extendedcasualty.
Boiler and Machinery.
Comprehensive General Liability.
Worker's Compensation.
Automobile Liability and Physical Damage.
Excess Liability.
2) Optional Insurance
The following types of insurance often are obtained in connection with a project financing. Coverages
such as these are more expensive than standard insurance and require more tailoring to meet the
specific needs of the project
Business Interruption.
Performance Bonds.
Cost Overrun/Delayed Opening.
Design Errors and Omissions
System Performance (Efficiency).
Pollution Liability.
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
Project Risks
Project finance is finance for a particular project, such as a mine, toll road, railway, pipeline, power
station, ship, hospital or prison, which is repaid from the cash-flow of that project. Project finance is
different from traditional forms of finance because the financier principally looks to the assets and
revenue of the project in order to secure and service the loan. In contrast to an ordinary borrowing
situation, in a project financing the financier usually has little or no recourse to the non-project assets
of the borrower or the sponsors of the project. In this situation, the credit risk associated with the
borrower is not as important as in an ordinary loan transaction; what is most important is the
identification, analysis, allocation and management of every risk associated with the project.
The following detail shows the manner in which risks are approached by financiers in a project
finance transaction. Such risk minimization lies at the heart of project finance.
In a no recourse or limited recourse project financing, the risks for a financier are great. Since the loan
can only be repaid when the project is operational, if a major part of the project fails, the financiers
are likely to lose a substantial amount of money. The assets that remain are usually highly specialized
and possibly in a remote location. If saleable, they may have little value outside the project.
Therefore, it is not surprising that financiers, and their advisers, go to substantial efforts to ensure that
the risks associated with the project are reduced or eliminated as far as possible. It is also not
surprising that because of the risks involved, the cost of such finance is generally higher and it is more
time consuming for such finance to be provided.
Types of Risks:
Basically different types of projects are posed to different risks. Similarly the risks mentioned below
are related to this particular project.
1) Completion Risk-
Completion risk allocation is a vital part of the risk allocation of any project. This phase carries the
greatest risk for the financier. Construction carries the danger that the project will not be completed on
time, on budget or at all because of technical, labor, and other construction difficulties. Such delays or
cost increases may delay loan repayments and cause interest and debt to accumulate. They may also
jeopardize contracts for the sale of the project's output and supply contacts for raw materials.
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
2) Operating Risk-
These are general risks that may affect the cash-flow of the project by increasing the operating costs
or affecting the project's capacity to continue to generate the quantity and quality of the planned
output over the life of the project. Operating risks include, for example, the level of experience and
resources of the operator, inefficiencies in operations or shortages in the supply of skilled labour.
Operating risks are managed during the loan period by requiring the provision of detailed reports on
the operations of the project and by controlling cash-flows by requiring the proceeds of the sale of
product to be paid into a tightly regulated proceeds account to ensure that funds are used for approved
operating costs only.
3) Market Risk-
Obviously, the loan can only be repaid if the product that is generated can be turned into cash. Market
risk is the risk that a buyer cannot be found for the product at a price sufficient to provide adequate
cash-flow to service the debt. The best mechanism for minimizing market risk before lending takes
place is an acceptable forward sales contact entered into with a financially sound purchaser.
4) Credit Risk-
These are the risks associated with the sponsors or the borrowers themselves. The question is whether
they have sufficient resources to manage the construction and operation of the project and to
efficiently resolve any problems which may arise. To minimize these risks, the financiers need to
satisfy themselves that the participants in the project have the necessary human resources, experience
in past projects of this nature and are financially strong.
5) Technical Risk-
This is the risk of technical difficulties in the construction and operation of the project's plant and
equipment, including latent defects. Financiers usually minimize this risk by preferring tried and
tested technologies to new unproven technologies. Technical risks are managed during the loan period
by requiring a maintenance retention account to be maintained to receive a proportion of cash-flows to
cover future maintenance expenditure.
6) Regulatory or Approval Risk-
These are risks that government licenses and approvals required to construct or operate the project
will not be issued, or that the project will be subject to excessive taxation, royalty payments, or rigid
requirements as to local supply or distribution. Such risks may be reduced by obtaining legal opinions
confirming compliance with applicable laws and ensuring that any necessary approvals are a
condition precedent to the drawdown of funds.
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
Risk minimization process
Financiers are concerned with minimizing the dangers of any events which could have a negative
impact on the financial performance of the project. If a risk to the financiers cannot be minimized, the
financiers will need to build it into the interest rate margin for the loan.
Step 1- Risk identification and analysis-
The project sponsors will usually prepare a feasibility study, e.g. as to the construction and operation
of a mine or pipeline. The financiers will carefully review the study and may engage independent
expert consultants to supplement it. The matters of particular focus will be whether the costs of the
project have been properly assessed and whether the cash-flow streams from the project are properly
calculated. Some risks are analyzed during financial models to determine the project's cash-flow and
hence the ability of the project to meet repayment schedules. Different scenarios will be examined by
adjusting economic variables such as inflation, interest rates, exchange rates and prices for the inputs
and output of the project. Various classes of risk that may be identified in a project financing will be
discussed below.
Step2- Risk allocation-
Once the risks are identified and analyzed, they are allocated by the parties through negotiation of the
contractual framework. Ideally a risk should be allocated to the party who is the most appropriate to
bear it (i.e. who is in the best position to manage, control and insure against it) and who has the
financial capacity to bear it. It has been observed that financiers attempt to allocate uncontrollable
risks widely and to ensure that each party has an interest in fixing such risks. Generally, commercial
risks are sought to be allocated to the private sector and political risks to the state sector.
Step3- Risk management-
Risks must be also managed in order to minimize the possibility of the risk event occurring and to
minimize its consequences if it does occur. Financiers need to ensure that the greater the risks that
they bear, the more informed they are and the greater their control over the project. Since they take
security over the entire project and must be prepared to step in and take it over if the borrower
defaults. This requires the financiers to be involved in and monitor the project closely. Such risk
management is facilitated by imposing reporting obligations on the borrower and controls over project
accounts. Such measures may lead to tension between the flexibility desired by borrower and risk
management mechanisms required by the financier.
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
Processof sanctioning
The bank usually asks the firm to give the following details
1) Nature of the proposal
The purpose for which the term loan is required. (whether for expansion, modernization,
diversification etc.)
2) Brief History
In case of an existing company, essential particulars about its promoters, its incorporation,
subsequent corporate growth to date, major developments or changes in management.
3) Past Performance
A summary of past performance in terms of licensed/installed or operating capacities, sales, operating
capacities, and sales and net profit for the three years should be analyzed. The figures relating to sales
and profitability should be analyzed to ascertain the trend during the 3years. In sum, the company’s
past performance has to be assessed to study if there has been a steady improvement and growth
record has been satisfactory.
4) Present financial position-
The Company’s audited balance sheets and profit and loss account have to be analyzed. If the latest
audited balance sheet has more than 6 months old, a pro-forma balance sheet as on a recent date
should be obtained and analyzed.
5)Project-
Here the technical feasibility and the financial feasibility of the project are studied.
6) Project implementation schedule-
Examine the project implementation schedule with reference to Bar Chart or PERT/CPM chart (if
proposed to be used by the company for monitoring the implementation of the project) and in the light
of actual implementation schedules of similar project.
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
Pre sanction process-
Appraisal –
1. Preliminary appraisal-
The following aspects have to be examined if the proposal is to financing a project-
Whether the project cost is prima facie acceptable.
Debt and equity gearing proposed and whether acceptable
Promoter’s ability to access capital market for debt/ equity support
Whether critical aspects of project- demand, cost of production, profitability etc. are prima
facie in order. After undertaking the preliminary examination of the proposal, the branch will
arrive at a decision whether to support the request or not. If the branch finds the
proposalacceptable, it will call for from the applicants, a comprehensive application in the
prescribed pro-forma, along with a copy of project report, covering specific
creditrequirements of the company and other essential data/ information.
The informationamong other things should include:
Organization setup with a list of board of directors and indicating theQualifications,
experience and competence of the key personnel inCharge of the main functional areas e.g.
Production, purchase,Marketing and finance in other word brief on the managerial
resourceand whether these are compatible with the size and the scope of the proposed activity.
Demand and supply projections based on the overall market prospects together with a copy of
market research report. The report may comment on the geographic spread of the market
where the unit proposes to operate, demand and supply gap, the competitor’s share,
competitive advantage of the applicant, proposed marketing arrangement.
Current practices for the particular product or service especially relating to terms of credit
sales, probability of bad debts.
Estimates of sales cost of production and profitability.
Projected profit and loss account and Balance Sheet for the operating years during currency r
of the bank assistance.
Branch should also obtain additionally Appraisal report from any other bank/financial
institution in case appraisal has been done by them.
NO Objection Certificatefrom term lenders if already financed by them and Report from
Merchant bankers in case the company plans to access capital market,wherever necessary.In
respect of existing concerns, in addition to the above particulars regarding the historyof the
concern, its past performance, present financial position, etc. should also becalled for.
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
This data should be supplemented by supporting statements such as:
Audited profit and loss account and balance sheet for the past three years
Details of existing borrowing arrangements, if any,
Credit information reports from the existing bankers on the applicant company
Financial statements and borrowing relationship of associate firms/group companies.
2. Detailed Appraisal-
The viability of a project is examined to ascertain that the company would have the ability to service
its loan and interest obligations out of cash accruals from the business. While appraising a project all
the data/ information furnished by the borrower is counter checked and wherever possible, inter-firm
and inter-industry comparisons should be made to establish their veracity.
The appraisal of the new project could be broadly divided into the following subheads-
Promoters track record
Types of fixed assets to be acquired
Technical feasibility
Marketability
Production process
Management
Time schedule
Cost of project
Sources of finance
Commercial Profitability;
Security and Margin
Repayment period and debt service coverage;
Funds Flows statement and
Rates of return.
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
If the proposal involves financing of a new project, the commercial, economic and financial viability
and other aspects are to be examined as indicated below-
Statutory clearance from various government depts/agencies
License/ clearance /permits as applicable
Details of sources of energy requirements, power, fuel etc..
Pollution control clearance
Cost of project and source of finance
Buildup of fixed assets.
Arrangements proposed for raising debt and equity
Capital structure
Feasibility of arrangements to access capital market
Feasibility of the projections/estimates of sales cost of production and profit covering the
period of repayment.
Break-even point in terms of sales value and percentage of installed capacityunder a normal
production year.
Cash flows and fund flows
Whether profitability is adequate to meet stipulated repayments with referenceto Debt Service
Coverage Ratio, Return on Investment.
Industry profile and prospectus
Critical factors of industry and whether the assessment of these and management plans in this
regard are acceptable
Technical feasibility with reference to report of technical consultants, if available
Management quality, competence, track record
Company’s structure and systems. Also examine and comment on the status of approvals
from other term lenders, project implementation schedule. A pre-sanction inspection of the
project site or the factory should be carried out in the case of existing units.
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
3. Present relationship with the Bank
The banks also take into consideration the relationship of the firm or the customer with the banks. It
takes into account the following aspects-
Credit Facilities now granted.
Conduct of the existing accounts.
Utilization of limits- FB & NFB.
Occurrence of irregularities, if any.
Frequency of irregularity i.e.; the number of times and the total number of days the account
was irregular during the last twelve months.
Repayment of term commitments.
Compliance with requirements regarding submission of stock statements, Financial Follow-up
Reports, renewal data, etc…
Stock turnover, realization of book debts.
Value of accounts with breakup of income earned. Pro-rata share of
Non-fund and foreign exchange business.
Concessions extended and value thereof.
Compliance with other terms and conditions.
Action taken on comments /observations contained in
RBI inspection Reports.
CO inspection and audit reports.
Verification Audit Reports.
Concurrent audit reports.
Stock Audit Reports
Spot Audit Reports.
Long Form Audit Report (statutory Report)
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
4. Creditrisk Rating
Draw up rating for Working Capital and Term Finance.
5.Opinion Reports
Compile opinion Reports on the company, partners/ promoters and the proposed guarantors.
6. Existing charges on assets of the unit
If the company, report on search of charges with proposed guarantors.
7.Structure of facilities and Terms of Sanction
Fix terms and conditions for exposures proposed facility wise and overall:
Limit for each facility- sub limits.
Security- Primary & collateral, Guarantee
Margins- for each facility as applicable.
Rate of interest.
Rate of commission/exchange/other fees.
Concessional facilities and value thereof.
Repayment terms, where applicable.
Other standard covenants.
8. Review of the proposal
Review of the proposal should be done covering Strengths and weaknesses of the exposure proposed
Risk factors and steps proposed to mitigate them Deviations if any, proposed from usual norms of the
bank and the reasons thereof.
9.Proposal for sanction
Prepare a draft in prescribed format with required back-up details and with recommendations for
sanction.
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
Case Study:
The further part has been dealt with respect to the project of M/s ABC Chemicals Pvt. Ltd
Project in Brief:
Name of the company: M/s ABC Chemicals Pvt. Ltd
Purpose:Setting up a 150,000 TPA Coal Tar distillation plant at Halkarni, Maharashtra
Brief Background: The plant is being designed for production of different grades of Coal Tar Pitch
(82,500 TPA), Light Oils (22,500 TPA), Heavy Oils (22,500 TPA) and Naphthalene (15,000 TPA),
which find wide applications in the aluminium and graphite industry. The product category proposed
to be manufactured by the Company is already in short supply and with increase in aluminium
production capacity in the country the demand supply gap is expected to widen further.
Technology and Equipment Supplier: Handan Xinbao Coal Chemical Company Limited, China
Borrowers profile:
a. Group Name No recognized group
b. Address of Regd./Corporate Office Raj Mahal, Veer Nariman Road, Churchgate,
Mumbai – 400 020
c Works/Factory Halkarni Industrial Area, Kolhapur, Maharashtra
d Constitution and constitution code as per
ladder
Private Limited Company
e Date of incorporation/Establishment August 27, 2010
f Dealing with PNB since New Account
g Industry/Sector Manufacturing (Chemicals)
h Business Activity (Product)/Installed
Capacity.
Setting up a 150,000 TPA Coal Tar distillation
plant at Halkarni, Maharashtra
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
Security:
A. Primary
1stParipassu charge on fixed assets of the Company, both present and future
B. Collateral
2nd charge on current assets of the Company, both present and future
Pledge of promoter’s shareholding to the extent of 26% of the paid up capital of the Company
and will be released after 2 years of COD
DSRA equivalent to 1 quarter principal and 1 month interest payment (interest amount to be
created upfront, Principal amount to be created one month prior to commencement of
repayment)
Appraising agency – The Techno Economic Viability Study of the term loan requirement is
conducted by Mott MacDonald, Chennai and the financial appraisal is done by Axis Bank
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
Financial Analysis:
1) Cost of project:
Cost of project 189 cr
Total Debt 126 cr
Promoter’s Contribution 63 cr
Proposed loan (PNB share) 50 cr
DER 2:1
Summary of cost of project and means of finance
The total project cost is estimated at Rs. 189 Crores by M/s Mott MacDonald Pvt. Ltd, the consultant
for the project.
(Rs. In Crores)
Particulars Amount
Land & Site Development Cost 7.14
Infrastructure Development 11.43
Buildings & Civil Work 8.40
Plant & Machinery 103.44
Misc. Fixed Assets 1.00
Design, Engineering & Technical support 10.37
Total Hard Cost 141.78
Provision for Contingency 9.92
Pre-operative Expenses 13.02
IDC & Finance cost 11.84
Working Capital Margin 12.43
Total Soft Cost 47.22
Total Project Cost 189.00
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
2) Financial Position of the Company:
The company has not commenced commercial operations as on date. The COD is 30th April 2014.
Hence, the projected financial indicators for the tenor of the term loan facility are provided as
under:(Rs. in Crores)
2015 2016 2017 2018 2019 2020 2021 2022
Proj. Proj. Proj. Proj. Proj. Proj. Proj. Proj.
Net Sales
- Domestic 447.48 503.42 503.42 503.42 503.42 503.42 503.42 503.42
- Export 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
% growth * N/A 12.5% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Gross Sales 447.48 503.42 503.42 503.42 503.42 503.42 503.42 503.42
Other Income 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Operating
Profit/Loss
30.71 37.45 38.83 39.96 41.47 42.43 43.75 44.51
Profit before tax 30.71 37.45 38.83 39.96 41.47 42.43 43.75 44.51
Profit after tax 20.75 24.12 26.23 26.99 28.02 28.66 29.56 30.07
Depreciation/ 8.52 8.52 8.52 8.52 8.52 8.52 8.52 8.52
Cash profit/ (Loss) 34.27 36.51 37.66 37.61 37.94 37.98 38.37 38.44
PBIDTA 57.34 64.61 63.88 62.64 61.77 60.36 59.30 58.13
Paid up capital 63.00 63.00 63.00 63.00 63.00 63.00 63.00 63.00
Reserves and
Surplus excluding
20.74 44.87 71.10 98.10 126.11 154.77 184.32 214.39
Deferred Tax Liab /
(Assets)
4.99 8.87 11.78 13.87 15.26 16.06 16.34 16.19
a) Tangible Net 88.74 116.73 145.87 174.97 204.37 233.83 263.66 293.58
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
Worth
b) Investment in
allied concerns and
amount of cross
holdings
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
c) Net owned
funds/Adjusted
TNW
88.74 116.73 145.87 174.97 204.37 233.83 263.66 293.58
(a –b) *
Share application
money
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Total Borrowings 153.96 139.94 121.30 102.67 84.04 65.42 46.80 42.16
Secured 153.96
Unsecured (0.00) 139.94 121.30 102.67 84.04 65.42 46.80 42.16
Investments 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Total Assets 271.86 289.49 299.99 310.46 321.22 332.07 343.27 368.55
Out of which net
fixed assets
168.05 159.52 151.00 142.48 133.95 125.43 116.91 108.38
Net Working Capital 56.03 73.87 92.88 111.83 131.09 150.40 156.09 185.20
Current Ratio 2.17 2.32 2.66 2.99 3.33 3.67 3.22 3.47
Debt Equity Ratio 1.31 0.84 0.54 0.35 0.21 0.10 0.02 (0.00)
Operating
Profit/Sales
6.86% 7.44% 7.71% 7.94% 8.24% 8.43% 8.69% 8.84%
Long Term Sources 29.27 32.65 34.75 35.52 36.54 37.19 38.08 38.59
Short Term Sources 66.46 8.31 0.02 0.04 0.03 0.05 0.04 0.03
Short Term Uses 91.38 26.15 19.02 18.99 19.29 19.36 19.73 33.81
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
Surplus/ Deficit (24.93) (17.84) (19.00) (18.95) (19.26) (19.31) (19.69) (33.78)
3) Projected Profitability Statement
(Rs. in Crores)
Particulars FY15 FY16 FY17 FY18 FY19 FY20 FY21
Net Sales 447.48 503.42 503.42 503.42 503.42 503.42 503.42
Cost of Sales
Raw Material 309.60 348.30 348.30 348.30 348.30 348.30 348.30
Direct Labour 6.60 7.26 7.99 8.78 9.66 10.63 11.69
Other Manufacturing
expenses
46.46 52.27 52.27 52.27 52.27 52.27 52.27
Depreciation 8.52 8.52 8.52 8.52 8.52 8.52 8.52
Total Cost of Sales 371.18 416.35 417.08 417.88 418.75 419.72 420.78
Selling, Admin and General
expenses
27.48 30.98 30.98 31.42 31.42 31.86 31.86
Total Operating Cost 398.67 447.33 448.05 449.29 450.17 451.58 452.64
Operating Profit before
interest
48.81 56.09 55.36 54.12 53.24 51.84 50.77
Interest 18.11 18.64 16.53 14.16 11.78 9.41 7.03
PBT 30.71 37.45 38.83 39.97 41.46 42.43 43.74
Provision for Taxation 9.96 13.33 12.60 12.97 13.45 13.77 14.19
Net Profit/Loss 20.74 24.12 26.23 27.00 28.01 28.66 29.55
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
4) Projected Balance Sheet
(Rs. in Crores)
Particular FY15 FY16 FY17 FY18 FY19 FY20 FY21
Sources of Funds
Net Worth 83.74 107.87 134.10 161.10 189.11 217.77 247.32
Share Capital 63.00 63.00 63.00 63.00 63.00 63.00 63.00
Reserves & Surplus 20.74 44.87 71.10 98.10 126.11 154.77 184.32
Term Liabilities 158.95 148.81 133.08 116.55 99.30 81.48 63.14
Rupee Term Loans 116.67 98.00 79.33 60.67 42.00 23.33 4.67
Working Capital 37.29 41.95 41.97 42.01 42.04 42.09 42.13
Deferred Tax Liability 4.99 8.87 11.78 13.87 15.26 16.06 16.34
Total Liabilities 242.69 256.68 267.18 277.64 288.41 299.25 310.46
Application of Funds
Gross Block 176.57 176.57 176.57 176.57 176.57 176.57 176.57
Less: Acc. Depn. 8.52 17.05 25.57 34.09 42.61 51.14 59.66
Net Block 168.05 159.52 151.00 142.48 133.95 125.43 116.91
Capital Work In Progress - - - - - - -
MAT Credit Entitlement 1.18 - - - - - -
Current Assets, Loans &
Advances
102.64 129.97 148.99 167.98 187.27 206.63 226.36
Less: Current Liabilities &
Provisions
29.17 32.81 32.81 32.81 32.81 32.81 32.81
Net Current Assets 73.47 97.15 116.18 135.17 154.46 173.82 193.55
Total Assets 242.69 256.68 267.18 277.64 288.41 299.25 310.46
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
5) Projected Cash Flow Statement
(Rs. in Crores)
Particulars FY15 FY16 FY17 FY18 FY19 FY20 FY21
PAT 20.74 24.12 26.23 27.00 28.01 28.66 29.55
Depreciation 8.52 8.52 8.52 8.52 8.52 8.52 8.52
DTL 4.99 3.87 2.91 2.09 1.39 0.80 0.28
Interest 18.11 18.64 16.53 14.16 11.78 9.41 7.03
CFO before WC 52.37 55.16 54.20 51.77 49.71 47.39 45.39
Changes in WC (49.72) (6.21) (0.03) (0.06) (0.04) (0.06) (0.05)
Net CFO 2.65 48.95 54.17 51.71 49.67 47.32 45.34
Invest.in Fixed Assets 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Change in non-CA (1.18) 1.18 0.00 0.00 0.00 0.00 0.00
Net CFI (1.18) 1.18 (0.00) 0.00 (0.00) 0.00 0.00
Increase in Share Capital 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Increase in term loans (9.33) (18.67) (18.67) (18.67) (18.67) (18.67) (18.67)
Increase in WC Borrowing 37.29 4.66 0.02 0.04 0.03 0.05 0.04
Interest (18.11) (18.64) (16.53) (14.16) (11.78) (9.41) (7.03)
CFF 9.85 (32.65) (35.17) (32.78) (30.42) (28.02) (25.66)
Change in cash 11.32 17.47 18.99 18.93 19.25 19.30 19.68
Opening Cash Balance 12.43 23.75 41.23 60.22 79.15 98.40 117.70
Closing Cash Balance 23.75 41.23 60.22 79.15 98.40 117.70 137.38
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
6) Detailed Sensitivity Analysis:
Assumptions/Projections FY15 FY16 FY17 FY18 FY19 FY20
Base Case 1.91 1.48 1.54 1.58 1.63 1.69
Sales decrease by 5% 1.79 1.39 1.44 1.48 1.53 1.58
Sales decrease by 10 % 1.66 1.30 1.35 1.38 1.43 1.47
Raw Material cost increases by 5 %. 1.44 1.13 1.17 1.19 1.23 1.26
Sales decrease by 5 % & RM cost
increases by 5 %
1.31 1.04 1.07 1.09 1.12 1.15
Average Interest Rate Increases by 2% 1.75 1.39 1.45 1.49 1.56 1.62
The DSCR is found to be acceptable under all scenarios, except in case of sales decrease by 5% &
raw material cost increases by 5%. In this scenario, DSCR falls to 1.04 in FY16. However, with
available cash at the end of FY15, the Company is expected to be able to service debt obligation
without additional equity infusion.
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
7) Ratio Analysis:
While analyzing the financial aspects of project, it would be advisable to analyze the important
financial ratios over a period of time as it may tell us a lot about a unit's liquidity position,
managements' stake in the business, capacity to service the debts etc. The financial ratios which are
considered important are discussed as under:
The two major aspects of financial analysis are liquidity analysis and capital structure.For this
purpose ratios are employed which reveal existing strengths and weakness of the project.
a) Liquidity ratios
Liquidity ratio or solvency ratio measure a project’s ability to meet its current or short-term
obligations when they become due. Liquidity is the pre-requisite for the very survival of a firm. A
proper balance between the liquidity and profitability is required for the efficient
financial management. It reflects the short-term financial strength or solvency of the firm. Two ratios
are calculated to measure liquidity, the current ratio and quick ratio.
Current ratio-
The current ratio is defined as the ratio of total current assets to total currentliabilities. It is computed
by,
������������ =�������������
������������������
FY15 FY16 FY17 FY18 FY19 FY20 FY21
Current
Ratio
2.17 2.32 2.66 2.99 3.33 3.67 3.22
Interpretation-
It is an indicator of the extent to which short term creditors are covered byassets that are expected to
be converted to cash in a period corresponding to the maturityof claims. The ideal current ratio is 2:1.
The firm current ratio indicate that the firm is ina position to meet its short term obligation because
the ratio is in increasing trend , byobserving the above table we can say that though the firm does not
maintain ideal currentratio, it is still in a position to meet its current obligations. After clearing all the
dues thefirm is still in a position to maintain liquidity.
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
b) Capital structure ratio:
The long-term lenders/creditors would judge the soundness of a firm on the basis of the long term
financial strength measured in terms of its ability to pay the interest regularly as well as repay the
installment of the principal on due dates or in one lump sum at the time of maturity. The long term
solvency of firm can be examined by using leverage or capital structure ratios. The
leverage or capital structure ratio’s may be defined as financial ratios which throw light on the long
term solvency of a firm as reflected in its ability to assure the long term lenders with regard to (i)
periodic payment of interest during the period of the loan and (ii) repayment of the principal on
maturity or in predetermined installments at due dates.
Debt equity ratio-
This ratio measures the long term or total debt to shareholder’s equity. This ratio reflects claims
of creditors and shareholders against the assets of the firm. Debt Equity Ratio is given by:
��������������� =������������
������
FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22
Debt Equity Ratio 1.31 0.84 0.54 0.35 0.21 0.10 0.02 (0.00)
Interpretation-
The debt equity ratio is an important tool of financial analysis to appraise the financialstructure of the
firm. The ratio reflects the relative contribution of creditors and ownersof the business in its financing.
A high ratio shows a large share of financing by thecreditors of the firm; a low ratio implies a smaller
claim of the creditors. Debt – Equity ratio indicates the margin of safety to the creditors. The debt-
equity ratio is in decreasing and in 2022 it become nil, which implies that the owners are putting
uprelatively more money of their own.
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
c) Profitability ratio’s related to sales-
These ratios are based on the premise that a firm should earn sufficient profit on each rupee of sales.
If adequate profits are not earned on sales, there will be difficulty in meeting the operating expenses
and no returns will be available to the owners.
Net profit margin-
It is also known as net margin. This measures the relationship between the net profits and sales of
a firm. Depending on the concept of net profit employed. , this ratio can be computed as follows-
��������������� =����������
�����× 100
Net Profit/Loss 20.74 24.12 26.23 27 28.01 28.66 29.55
Net Sales 447.48 503.42 503.42 503.42 503.42 503.42 503.42
Net profit
margin 4.634844 4.791228 5.210361 5.363315 5.563943 5.693059 5.86985
Interpretation
The net profit margin is indicative of management’s ability to operate the business with sufficient
success not only to recover from revenues of the period, the cost of services, the operating expenses
and the cost of borrowed funds, but also to leave a margin of reasonable compensation to the owners
for providing their capital at risk. A high profit margin would ensure the adequate return to the owners
as well as enable the firm to withstand adverse economic conditions. A low net profit margin
has theopposite implications. With respect to the above firm the net profit margin is increasing trend
so it will show that the company is in good condition and the demand for the product is increasing.
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
Debt Service Coverage Ratio: (DSCR)
It is considered a more comprehensive and apt measure to compute debt service capacity of firm. It
provides the value in terms of the number of times the total debt service obligations consisting of
interest and repayment of principal in installments are covered by the operating funds available after
the payment of tax : earnings after taxes,EAT+interest+Depreciation+Other non cash expenditure like
amortization
���� =��� ��������� ������
����� ���� �������
(In Rs. crores)
Financial Year 2015 2016 2017 2018 2019 2020 2021
Cash Accruals 34.26 36.52 37.67 37.61 37.93 37.98 38.36
Add: Interest 18.11 18.64 16.53 14.16 11.78 9.41 7.03
Total (a) 52.37 55.16 54.20 51.77 49.71 47.39 45.39
Debt repayment 9.34 18.69 18.69 18.69 18.69 18.69 18.69
Interest 18.11 18.64 16.53 14.16 11.78 9.41 7.03
Total (b) 27.45 37.30 35.20 32.82 30.45 28.07 25.70
DSCR (a/b) 1.91 1.48 1.54 1.58 1.63 1.69 1.77
Min. DSCR 1.48
Average DSCR 1.68
Since the debt repayment starts in the 3rd quarter of FY15, the DSCR is higher at 1.91
The lowest DSCR occurs in FY16 due to the highest interest payment in FY16.
Overall, considering the business model of the Company of manufacturing activity, average
DSCR of 1.68 may be considered acceptable.
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
8) Capital Investment Evaluation:
Net Present Value
It is calculated by discounting the future cash flows of the project to the present valuewith the
required rate of return to finance the cost of capital. A project is acceptable if thecapital value of the
project is less than or equal to the net present value of cash flows over the operating life cycle of the
project. This method is highly useful when selection has to be made among many projects, which are
mutually exclusive, and there are no budgetaryconstraints. Selection of projects with the largest
positive NPV will yield highest returns.But this method is useful only to determine whether a project
is acceptable or not butdoesn’t indicate which project is best under budgetary constraints. It is difficult
to rank different compatible projects with NPV as there is no account for ‘scale’ of investmentwhile
calculating NPV
Year Cash flow PV factor @ 10% Total present value
1 34.27 0.909 31.15
2 36.51 0.826 30.17
3 37.66 0.751 28.29
4 37.61 0.683 25.69
5 37.94 0.621 23.56
6 37.98 0.564 21.44
7 38.37 0.513 19.69
8 38.44 0.467 17.93
Total PV 197.93
less:Initial Outlay 189
NPV 8.93 The acceptance rule using NPV method is to accept the investment proposal if its
net present value is positive (NPV > 0) and to reject it if the NPV is negative (NPV<0).Positive
NPV’s contribute to the net wealth of the shareholders which should result in theincreased price of a
firm’s share. The positive net present value will result only if the project generates cash inflows at a
rate higher than the opportunity cost of capital. Sincethe Net Present Value of the above project is
positive, the proposal can be accepted.
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
Internal Rate of Return-
It is the rate of return at which the Net Present Value (NPV) of a project becomes zero.A project is
acceptable if the IRR exceeds the cost of capital. It is possible to rank variouscompatible projects with
IRR method and a project with highest IRR can be selected.However, this method is not useful when
selection has to be made among mutuallyexclusive projects. This method assumes that the net cash
flows from a project are firstnegative and then positive for the rest of the project life and vice
versa. But thiscondition is not always fulfilled resulting in multiple IRRs for the same project. Due
toambiguous results, project selection becomes difficult. Further, selection of a
projectbasedonhighest IRR alone, without taking project specific risk factors intoconsideration, may
be often misleading.
Year Cash flow weights weighted average
1 34.27 8 274.16
2 36.51 7 255.57
3 37.66 6 225.96
4 37.61 5 188.05
5 37.94 4 151.76
6 37.98 3 113.94
7 38.37 2 76.74
8 38.44 1 38.44
total PV
36 1324.62
����ℎ��� ������� ���� =1321.62
36
= 36.795
������� ������ =������� ����������
����ℎ��� ������� ����
=189
36.795
= 5.14
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
A)
Year Cash flow pv factor @ 10% Total present value
1 34.27 0.909 31.15
2 36.51 0.826 30.17
3 37.66 0.751 28.29
4 37.61 0.683 25.69
5 37.94 0.621 23.56
6 37.98 0.564 21.44
7 38.37 0.513 19.69
8 38.44 0.467 17.93
total PV 197.93
less:Initial Outlay 189
NPV 8.93
B)
Year Cash flow
pvfacttor @ 12 % Total present value
1 34.27 0.893 30.60
2 36.51 0.797 29.11
3 37.66 0.712 26.81
4 37.61 0.636 23.90
5 37.94 0.567 21.53
6 37.98 0.507 19.24
7 38.37 0.452 17.36
8 38.44 0.404 15.53
total PV
184.06
less:Initial Outlay
189
NPV
-4.94
�������� ���� �� ������ = � +�
� − �∗ (� − �)
= 10 +8.93
8.93 − 4.94∗ (12 − 10)
=14.47
Thus the project with higher IRR is good and could be accepted.
53
Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
Demand Supply Scenario
Domestic Market:
As per the analysis conducted by Mott MacDonald (consultant for the project), the present demand
supply equation for CTP in domestic market is as under:
(In ’000 Tons)
Financial Year 2007 2008 2009 2010 2011 2012
Demand 153.53 169.99 185.83 210.17 224.61 244.03
Supply 130.80 154.87 169.29 197.94 211.26 231.73
Gap 22.73 15.12 16.54 12.23 13.35 12.30
The demand supply gap is primarily met by imports. Domestic CTP demand is expected to reach
0.67 MTPA owing to huge CTP requirements from aluminium industry and other application
industries like graphite electrodes.
The demand for CTP is expected to witness a CAGR growth of 10.8%. Around 3.34 MTPA of
aluminium smelter capacity is expected to be set up by FY20 in India which will create an
additional demand of about 0.34MTPA of high QI CTP.
Demand-supply gap for CTP is expected to shoot up in FY13 owing to the commercial
operational of VAL aluminium smelter plant of 1.1 MTPA during FY13. This indicates the need
for more CTP plants in the country.
Due to commissioning of new CTP plants by AVH during FY14 and Himadri Chemicals during
FY15 the demand supply gap is expected to be met to a large extent.
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
Strengths & Weakness with mitigations, if any
Strengths
The project is being implemented by an experienced project execution team having past experience in
implementing large projects in other companies.
The product category proposed to be manufactured by the Company is already in short supply and
with increase in aluminium production capacity, the demand is expected to increase considerably in
future.
The Company has proposed to enter into a long term agreement with JSW Steel Limited for the
supply of key raw material i.e. coal tar.
The Company has already received environmental clearance from the Ministry of Environment and
Forests for the project. The Company has received Consent to Establish from Maharashtra Pollution
Control Board.
The Company has appointed Handan Xinbao Coal Chemical Company Limited as technology and
equipment supplier for the proposed coal tar distillation unit and for initial support. By virtue of
technical arrangement and agreement for support at operational level for initial period, the Company
is not expected to face significant difficulty in installing and operating the plant.
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
Risk Factors Risk Mitigants
Project
Implementation
Risk
The Company has already appointed competent project execution team for the
project.For technical installation and sourcing, the Company has already
appointed Handan Xinbao of China.
By virtue of technical arrangement and agreement for support at operational
level in the initial period, the Company is not expected to face significant
difficulty in installing and operating the plant.
Project Off take
and Competition
Risk
The existing CTP market is mainly catered to by Himadri Chemical. The
capacity of AVH’s plant will be one third of Himadri Chemicals’ capacity. Even
after increase in overall capacity, increasing demand from aluminium industry
and high demand supply gap globally will ensure that the Company will not face
any difficulty in selling its product.
By virtue of new plant & machinery and support from the supplier in operations
during initial years, the Company is expected to meet quality standards of the
end consumer segments.
Raw Material
Risk
The Company has planned to enter a long term purchase agreement with JSW
Steel Ltd for supply of coal tar of 150,000 TPA.
The plant of the Company is located near its key raw material supplier.
Some coal tar is also proposed to be purchased from different sources like
RINL, Vizag for blending with JSW tar and achieving the various grades
required in the market.
Geographical
Concentration
Risk
The Company’s products are proposed to be marketed across a number of states
in India to downstream sector users like aluminium, steel etc. Majority of end
customers of the Company are located in east and central India
Considering the industrial applications of the product and demand supply
scenario, the Company is not expected to face geographical concentration risk.
Environment
Risk
The Company has already obtained the most critical environmental approvals
from Environment Department (State Environmental Impact Assessment
Authority (SEIAA), Environment Department, Govt. of Maharashtra), which is
the key approval required for the proposed project.
Consent to Establish approval (required from Maharashtra Pollution Control
Board) was obtained on 16.08.2012.
The Company has also proposed to invest in adequate effluent treatment
facilities.
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
Measures taken by Punjab National Bank when the repayment is
not possible
1) Firstly they send a notice to the clients stating therein to pay their dues.
2) When there no improvements in the repayments even after the notice being sent then
the bank will forward the legal notice stating the clients to make payments
3) Third is the compromise dealing wherein both the parties sit together and decide what
measures has to be taken which means whether the clients make the payments, or whether to
file a suit or decide to sell the Properties etc.
Recommendations:
The time taken for appraisal and sanctioning of loan is experienced to be more in Punjab National
Bank. They should look after the time frame and decision making should be quick.
Limitation of the study:-
Some of the information are confidential in nature that could not divulged for study
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
An Assessment of the Internship:
Skills and Qualifications Acquired:
I have learnt both Financial and technical skill that are required in appraisal of Project financial.
Financial skills which I have learnt consist of analyzing actual balance sheet, sensitivity analysis,
profit and loss account and cash flow of a company.
Responsibilities Undertaken:
I was working as an assistant of my mentor in analysing the appraisal of Project Finance.
Influence of Internship on career plan:
Now I am more confident that, whatever career path I will choose in future because both technical and
financial skills are required in Corporate.
Correlation with classroom Knowledge:
Whatever I have learn like ration analysis, Balance sheet analysis, cash flow, sensitivity analysis in
my classroom was quite helpful for me during my internship and I came to know that how this
concept are implemented in business.
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
Conclusion:-
The project undertaken has helped a lot in understanding the concept of project financing in
nationalized bank with reference to state bank of India. The project financing is an important aspect
which helps in increasing the profit of the banks .Project financing is a vast subject and it is very
difficult to apply all the aspect in all type of project when bank want to finance, and it is very difficult
to cover all aspect in this project. To sum up it would not be out of way to mention here that the state
bank of India has given a special impetus on “Project Financing” .the concerted efforts of the
management and staff of state bank of India has helped the bank in achieving remarkable progress in
almost all important aspects .Finally the success of project financing would mostly depend on the
proper analysis of the projects before financing project in accordance with the cost and production
specifications for the project. The operator may be an independent company, or it may be one of the
sponsors. The operator typically will be paid a fixed compensation and may be entitled to bonus
payments for extraordinary project performance and be required to pay liquidated damages for project
performance below specified levels.
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Alkesh Dinesh Mody Institute of finance and management Summer Internship Project Report (2013) Vasant Patil
Bibliography
The data is collected from the list of books and web site given below
www.pnbindia.com.
www.Google.com
www.wikipedia.com
www.investopedia.com
PNB Book of instruction.
Commercial Banks Book.
Project financing by Machiraju
Introduction to project finance by Andrew Fight
Financial management by Khan and Jain