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  • 1. Industry ProfileIntroduction Without a sound and effective banking system in India it cannot have ahealthy economy. The banking system of India should not only be hassle free but itshould be able to meet new challenges posed by the technology and any otherexternal and internal factors. Banking in India has its origin as early as VedicPeriod. It is believed that the transition from money lending to banking must haveoccurred even before Manu, the great Hindu Jurist who has devoted a section of hiswork to deposits and advances and laid down the rules relating to rates of interest.During the days of East India Company it was the turn of the agency houses tocarry on the banking business.History The banking system of India should not only be hassle free but it should beable to meet new challenges posed by the technology and any other external andinternal factors. For the past three decades Indias banking system has severaloutstanding achievements to its credit. The most striking is its extensive reach. It isno longer confined to only metropolitans or cosmopolitans in India. In fact, Indianbanking system has reached even to the remote corners of the country. The firstbank in India, though conservative, was established in 1786. From 1786 till today,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 1
  • 2.  Nationalisation of Indian Banks and up to 1991 prior to Indian banking sector Reforms.  New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991.Phase I The General Bank of India was set up in the year 1786. Next came Bank ofHindustan and Bengal Bank. The East India Company established Bank of Bengal(1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent unitsand called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of Indiawas established which started as private shareholders banks, mostly Europeansshareholders. In 1865 Allahabad Bank was established and first time exclusivelyby Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters atLahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank ofBaroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. ReserveBank of India came in 1935. During the first phase the growth was very slow and banks also experiencedperiodic failures between 1913 and 1948. There were approximately 1100 banks,mostly small. To streamline the functioning and activities of commercial banks, theGovernment of India came up with The Banking Companies Act, 1949 which waslater changed to Banking Regulation Act 1949 as per amending Act of 1965.Phase II 2
  • 3. Government took major steps in this Indian Banking Sector Reform afterindependence. In 1955, it nationalised Imperial Bank of India with extensivebanking facilities on a large scale specially in rural and semi-urban areas. It formedState Bank of india to act as the principal agent of RBI and to handle bankingtransactions of the Union and State Governments all over the country. By the 1960s, the Indian banking industry has become an important tool tofacilitate the development of the Indian economy. At the same time, it has emergedas a large employer, and a debate has ensued about the possibility to nationalise thebanking industry. Indira Gandhi, the-then Prime Minister of India expressed theintention of the GOI in the annual conference of the All India Congress Meeting.Seven banks forming subsidiary of State Bank of India was nationalised in 1960 on19th July, 1969, major process of nationalisation was carried out. A second dose of nationalization of 6 more commercial banks followed in1980. The stated reason for the nationalization was to give the government morecontrol of credit delivery. With the second dose of nationalization, the GOIcontrolled around 91% of the banking business of India. Later on, in the year 1993,the government merged New Bank of India with Punjab National Bank. It was theonly merger between nationalized banks and resulted in the reduction of thenumber of nationalised banks from 20 to 19.Phase III This phase has introduced many more products and facilities in the bankingsector in its reforms measure. In 1991, under the chairmanship of M Narasimham,a committee was set up by his name which worked for the liberalisation of bankingpractices. 3
  • 4. The country is flooded with foreign banks and their ATM stations. Effortsare being put to give a satisfactory service to customers. Phone banking and netbanking is introduced. The entire system became more convenient and swift. Timeis given more importance than money. The financial system of India has shown a great deal of resilience. It issheltered from any crisis triggered by any external macroeconomics shock as otherEast Asian Countries suffered. This is all due to a flexible exchange rate regime,the foreign reserves are high, the capital account is not yet fully convertible, andbanks and their customers have limited foreign exchange exposure.Liberalisation In the early 1990s, the then Narsimha Rao government embarked on a policyof liberalisation, licensing a small number of private banks. These came to beknown as New Generation tech-savvy banks and included Global Trust Bank. Thismove, along with the rapid growth in the economy of India, revitalized the bankingsector in India, which has seen rapid growth with strong contribution from all thethree sectors of banks, namely, government banks, private banks and foreignbanks. The next stage for the Indian banking has been setup with the proposedrelaxation in the norms for Foreign Direct Investment, where all Foreign Investorsin banks may be given voting rights which could exceed the present cap of 10%,atpresent it has gone up to 49% with some restrictions. Currently, banking in India isgenerally fairly mature in terms of supply, product range and reach-even thoughreach in rural India still remains a challenge for the private sector and foreign 4
  • 5. banks. In terms of quality of assets and capital adequacy, Indian banks areconsidered to have clean, strong and transparent balance sheets relative to otherbanks in comparable economies in its region. With the growth in the Indianeconomy expected to be strong for quite some time-especially in its servicessector-the demand for banking services, especially retail banking, mortgages andinvestment services are expected to be strong. One may also expect M&A,takeovers, and asset sales. In March 2006, the Reserve Bank of India allowedWarburg Pincus to increase its stake in Kotak Mahindra Bank (a private sectorbank) to 10%. This is the first time an investor has been allowed to hold more than5% in a private sector bank since the RBI announced norms in 2005 that any stakeexceeding 5% in the private sector banks would need to be vetted by them.Indian Banking system The Indian Banking Industry can be categorized into non-scheduled banksand scheduled banks. Scheduled banks constitute of commercial banks and co-operative banks. There are about 67,000 branches of Scheduled banks spreadacross India. As far as the present scenario is concerned the banking industry inIndia is in a transition phase. The Public Sector Banks (Pubs), which are thefoundation of the Indian Banking system account for more than 78 per cent of totalbanking industry assets. Unfortunately they are burdened with excessive NonPerforming assets (NPAs), massive manpower and lack of modern technology. On the other hand the Private Sector Banks are witnessing immenseprogress. They are leaders in Internet banking, mobile banking, phone banking,ATMs. On the other hand the Public Sector Banks are still facing the problem ofunhappy employees. There has been a decrease of 20 percent in the employee 5
  • 6. strength of the private sector in the wake of the Voluntary Retirement Schemes(VRS). As far as foreign banks are concerned they are likely to succeed in India Reserve Bank of India Commercial Banks Regional Rural Banks Co-operative Banks Public Sector Private Sector Banks Banks State Co-operative Banks Indian Banks Foreign Banks Central Co-operative Banks State Bank Nationalized Group Banks 6
  • 7. State Bank of India Associate Banks Primary Credit Indusland Bank was the first private bank to be set up in India. IDBI, INGVyasa Bank, SBI Commercial and International Bank Ltd, Dhanalakshmi BankLtd, Karur Vysya Bank Ltd, Bank of Rajasthan Ltd etc are some Private SectorBanks. Banks from the Public Sector include Punjab National bank, Vijaya Bank,UCO Bank, Oriental Bank, Allahabad Bank, Andhra Bank etc. ANZ Grindlays Bank, ABN-AMRO Bank, American Express Bank Ltd;Citibank etc are some foreign banks operating in India.Commercial banks Commercial banks have been in existence for many decades. CommercialBanks mobilize savings in urban areas and make them available to large and smallindividual and trading units mainly for Working Capital requirements. After1969,Commercial Banks are broadly classified into nationalized public sector banks andprivate sector banks. The State Bank of India and its associate Banks along withanother 20 banks are the public sector banks. The private sector banks include asmall number of Indian Scheduled banks which have not been nationalized.Public Sector Banks Public sector banks are those which are owned by the Central Government either directly or through the Reserve Bank of India. They are also known as 7
  • 8. Nationalised Banks. Eg: State Bank of India and its subsidiaries, Allahabad Bank, Corporation Bank, Vijaya Bank, Canara Bank, Bank of Baroda, Punjab National Bank, Syndicate Bank, the Oriental Bank of Commerce.Private Sector Banks Private Sector banks are those which are owned and controlled by privateentrepreneurs. Private sector banks are classified as Private sector Indian Banksand Private Sector Foriegn banks. Private Sector India Banks are those which are owned and controlled byIndian Entrepreneurs. Indusland Bank was the first private bank to be set up inInda. IDBI, ING Vyasa Bank, HDFC Bank, ICICI Bank, UTI Bank (Now AxisBank), Centurion Bank. Private sector Forign Banks are those which are owned and controlled byforeign entrepreneurs. ANZ Grindlays Bank, ABN-AMRO Bank, AmericanExpress Bank Ltd; Citibank etc are some foreign banks operating in IndiaRegional Rural Banks The Regional Rural Banks (RRB) came into existence since the middle of1970‟s with the specific objective of providing credit and deposit facilitiesparticularly to the small and marginal farmers, agricultural laborers and artisansand small entrepreneurs.Co-operative banks 8
  • 9. In India, co-operative Banks has assigned an important role in thedevelopment of vital areas such as agriculture, rural and small-scale industry, retaildistribution; housing etc. the co-operative banking sector has been developed in thecountry to replace the village moneylenders. They also promote savings of thefarmers and meet their credit needs for cultivation. The co-operative bankingsectors are not only in rural areas but now they have spread to urban areas also.Scheduled banks and non-scheduled banks Under the RBI Act, 1934, banks were classified as Scheduled banks andnon-scheduled banks. the scheduled banks are those which have are included in theschedule(second)of RBI Act,1934.these banks have a paid up capital and reservesof an aggregate value of not less than Rs.5 lakhs and which satisfy RBI that theiraffairs are carried out in the interest of their depositors. Scheduled Banks comprisecommercial banks and the cooperative banks, In terms of ownership, Commercialbanks can be further grouped into nationalized banks, the State Bank of India andits group banks, Regional Rural Banks and Private sector Banks (old, new,domestic and foreign).These banks have over 67,000 branches spread across thecountry. Non-scheduled banks are those which have not been included in thesecond schedule of RBI Act, 1934.at present, there are three non-scheduled banksin India. Company Profile 9
  • 10. Corporation Bank is one of the oldest Banking Institutions in the DakshinaKannada district of Karnataka and one of the oldest banks in India. As the sayinggoes on “A thousand mile journey starts with small step”. A step was taken by ShriKhan Bahadur Haji Abdullha Haji Kasim Saheb Bahadur, a businessman of Udupiway back on the 12th of March 1906 with a group of philanthropist founded the„Canara Banking Corporation of Udupi Limited‟. A handful of people representing the various interests decided topromote the „Canara Banking Corporation of Udupi Limited‟. Eleven persons whoincluded 4 pleaders, 2 educationist, 1 insurance agent and 1 retired sub magistratewhere the first signatories of the Articles of Association and Memorandum ofAssociation of the bank who had in all 111 shares. The need to start this bank was felt because there was no such facility atUdupi, an important trading centre next to Manglore in Dakshin Kannada district.The indigenous banking was largely in the hands of few rich private individualsand some thing had to be done to provide relief to the common man from theclutches of the money lenders who held fully swey. What inspired the foundingfathers was the fervor of swadeshism, for promoting the bank, the founderpresident made an appeal saying, the primary object in forming the „CorporationBank‟ is not only to cultivate habit of thrifts amongst all classes of people, withoutdistinction of the cast or creed, but also habit of co-operation amongst all classes.This is swadeshism, pure and simple and every lover of the country is expected tocome forward and co-operate in achieving the end in view. It was called throughco-operation of all, shorn of distinction of caste and creed “ The Canara BankingCorporation Limited” as the institution was called then, started functioning as a“Nidhi” with a humble beginning. The initial capital was Rs 5000. 10
  • 11. Corporation Bank which was founded in 1906 and today it is a “100 yearyoung bank”. The bank had its origin in the temple town, Udupi which was then apart of Dakshin Kannada district. The credit of introducing the bank goes to theCanara Banking Corporation of Udupi Limeted. Corporation Bank is a publicsector bank which has been silently creating waves among the domestic banks inIndia. It is one of the Nationalised Banks in India. The bank withstood the challenges of the financial sector reforms and hasemerged as the one of the financially and fundamentally strong, well capitalised,technological sophisticated, efficient, effective and one of the most profitable bankin India. In the year 1952, Corporation Bank became the third bank in the country toreceive license from the Reserve Bank of India as „Scheduled Bank‟. In the year1961, the bank of citizens was merged with the Corporation Bank. It wasnationalised in April 1980, which triggered the growth of the bank in terms ofgeographical reach and business volumes. The name of the bank was changed fromCanara Banking Corporation of Udupi Limited to Corporation Bank in the year1973 and the corporate office of the bank was shifted to Manglore.Corporate Vision “To evolve into a strong, sound and globally competitive financial system,providing integrated services to customers from all segments, leveraging ontechnology and human resources, adopting the best accounting and ethicalpractices and fulfilling corporate and social responsibilities towards all stakeholders.” 11
  • 12. Corporate Mission  To become a provider of World-Class financial services.  To meet customer expectations trough innovation and technological initiatives.  To emerge as a role model with distinct culture identity, ethical values and good corporate governance.  To enhance share holder‟s wealth by sustained, profitable and financially sound growth with prudent risk management systems.  To fulfill national and social obligation as responsible corporate citizen.  To create environment, intellectually satisfying and professionally rewarding to the employees. Service Profile The Corporation Bank will provide the different services with CAREapproach to the customer‟s. The service profile of the Corporation Bank is asfollows:Personal Productsa. Deposit Productsi. Corp Pragathi Account: The account can be opened with an initial deposit of Rs 10/- and will provide the account holder the basic banking facilities. No penalty will be levied even if the balance in the account drops below Rs 10. 12
  • 13. ii. Centenary Year Gold coin: It is 8gm Centenary Year Gold coin of 999.9 purity, 24 carat. This gold coin is available at Corp Bank branches in select cities across India to individuals or retailers at a competitive price.iii. Saving Bank: Corp Bank SB account holder will get the facilities like any Branch banking. Corp power cheque, Corp convenience card, Corp junior account, Corp senior account.iv. Kshemanidhi Cash Certificates: KCC is a money multiplier deposit. It is a reinvestment Term Deposit scheme that can be opened for a period ranging from 6 months to 10 years. The rate of interest depends on the period of deposit.v. Money Flex: The flexible term deposit- it allows the customer to withdraw money whenever he/she wants. The deposit can be made for a period ranging from 6 to 120 months. The minimum deposit is Rs 5000.vi. Fixed Deposit: The deposit can be made for period ranging from 15 days to 10 years. The rate interest depends on the period of deposit.vii. Corp classic: It is an innovative technology-based account that combines the hi-liquidity of a savings bank account and the high-returns of a Terms deposit. The account works simply by fixing by fixing your savings from a savings bank account to a term deposit and vice versa.viii. Recurring Deposit: Best suite to the salaried class, the customer can save a fixed sum every month for a period ranging from 12 months to 120 months. 13
  • 14. ix. Janatha Deposit: This deposit is for a period from 1 to 5. Our collection agent will call at customers place to collect your savings at regular intervals even daily.b. Personal Loans Productsi. Corp Plus: It is a loan facility to meet the short term financial requirement. This loan can be availed by professionals having gross income of Rs 80000 p.a. The loan amount will be limited to the extent of 25% of borrower‟s net annual income.ii. Corp Rental: The loan may be availed for any productive purpose such as taking up new projects, business or to meet domestic/personal/any other commitments. The minimum loan amount is Rs 5 lakh.iii. Education Loan: Under this scheme the bank finances the financial requirements of the student for higher studies.iv. Consumer Loan: This is a financial arrangement to finance the purchase of consumer durables. This loan can be availed to any person having an income of Rs 50000 p.a.v. Home Loan + Insurance: Corp bank in association with the life insurance corporation of India gives life insurance cover to the housing loan taken by the customers. Maximum term assure under the scheme will be 3 years.vi. Vehicle Loan: Corp Mobile offers the customer easiest motor cycle/car loans with absolutely no hassles. 14
  • 15. vii. Corp Mortgage: Under this scheme an individual can avail a loan minimum of Rs 1 lakh and maximum of Rs 25 lakh by mortgaging an asset as security.viii. Other Personal loan Products: Corporation bank also offers few more personal loan products such as Corp Mitra, Loan against shares and Corp Home etc.c. Corporate Products Corporation Bank offers several corporate banking services. The bank offersunique services tailor- made for the requirement of Corporate and large businesshouses as well as small and medium enterprises.i. Corp Fast: Corp fast is an innovative solution which facilities speedy realization of outstation cheques and instruments using latest communication technology.ii. Project Finance: Corp Bank also finances the financial requirements for certain projects on the basis of economic a technical feasibility of the project.iii. Corp Rental: This facility helps the customer to encash the rent receivable from the commercial properties.iv. Forex: Corp Bank also offers Forex services to its customers.v. Working capital: Corp Bank also provides the short term financial facility to finance the working capital requirements. 15
  • 16. vi. Term Finance: The bank extends term loans for capital investment being made by the clients on account of expansion of existing enterprises for establishment of a new enterprise.d. NRI Schemesi. Corp Express Money: The bank has entered into a tie up with UAE Exchange Center LLC for facilitating global money transfers into India from Gulf region. With a view to facilitating the NRIs in the Gulf and Middle East to transfer their earnings back home swiftly.ii. NRI Loans: Corp bank is granting loans in rupees to NRIs against security of shares, immovable property in India corp. It also provides housing loans to NRIs.iii. Forex Facility for Residents: Indian residents can get foreign exchange assistance from Corporation bank for study in abroad, foreign travel, purchase of air tickets and investments.e. Internet Bankingi. Corp-E-cheque: It is an innovative product developed by Corp bank by combining the power of Corp net the bank‟s Internet Banking Services with EFT scheme.ii. Corp Net: In the niche area of collection and payment services Corp bank has a leadership presence in the country and caters exclusively to the cash management requirements of the corporate. 16
  • 17. f. Other Servicesi. Online Railway Reservation: The Bank has entered into a tie up with the Indian railway catering and tourism corporation for online booking of railway tickets.ii. Corp Mediclaim: This is a group medical claim insurance offered by the Corp Bank to its account holders. This product has been devised to meet the medical insurance needs of banks customer.iii. Corp Junior: It enables parents whose children are studying away from them to remit money at periodic intervals in a hassle free manner.iv. Corp Mobile Recharge: Electronic Recharge of pre-pad mobile phones is a facility which customers having prepaid mobile phones to electronically recharge their mobile phones cards by debiting their account through Corp bank ATMs or through SMS from their mobile phones.v. Corp Bullet RTGS Facility: It is a remittance facility, which enables customer to transfer funds to anybody anywhere within India. The facility works on the Real Time Gross Settlement (RTGS) platform developed by the RBI.vi. Corp Power cheque Multi city cheque Facility: Multi city cheque is a facility wherein the customer can issue cheques drawn at the base branch and payable at selected remote centers. This cheques will thus, be treated as local cheques in the remote center selected by the customer. 17
  • 18. Financial Results of the BankTable No 1: Financial Results of the Bank (Rs in crores) Particulars 31st 31st 31st March March March 2006 2007 2008Interest Earned 2659.69Other income 461.34 3367.53 4516.58Total Income 3121.03 635.57 702.08Interest Expended 1413.88Operating Expenses 751.05 4003.10 5218.16Total Expenditure 2164.93Operating Profit before provision 956.10 2054.46 3063.09 and contingencies 283.88 804.47 892.26Provisions (other than tax) 672.22 3955.35PBT 229.22 2858.93 1263.31Tax 443.00 1144.17PAT 185.74 323.46 143.44 1077.57Capital 3231.45 820.71 327.16Reserves 32876.53 304.57 750.41 18
  • 19. Deposits 23962.43 516.19 Advances 10651.99 143.44 Investment 4139.78 143.44 55424.42 3622.01 39185.57 42356.89 16512.38 29949.65 14417.49Key Ratios Table No 2: Ratio analysis of Bank Particulars 31st 31st 31st March march March 2006 2007 2008 Capital Adequate Ratio (%) 13.92 12.26 12.09 Return on Avg Asset (%) 1.28 1.16 1.34 19
  • 20. Return on Equity (%) 13.12 13.71 17.51 Earnings per Share (Rs) 30.89 35.98 52.31 Book Value per Share (Rs) 235.29 262.51 294.79 Yield Spread 3.56 3.08 2.71 Non-interest income to total income 14.78 15.87 13.45 Gross NPA to Gross Advances 2.56 2.05 1.49Ratio Analysis1. Capital Adequacy Ratio Capital adequacy ratio is the ratio that signifies the amount of capital onRisk Weigted Asset of the Bank. Chart No 1: Capital Adequacy Ratio Capital Adequacy Ratio 14 13.5 13 12.5 12 11.5 11 2006 2007 2008 The banks should have 9% capital adequacy ratio, the corporation bank hasmuch more than the standerd rate. Even the ratio is decreasing it is above thestanderd.2. Return on Average Asset 20
  • 21. Return on average asset signifies that the ratio between net profit afterinterest and tax to the average asset utilised by the bank to earn the returns. Profit after Tax Return on Average Asset = 100 Average Asset Chart No 2: Return on Average Asset Return on Avg Asset 1.35 1.3 1.25 1.2 1.15 1.1 1.05 2006 2007 2008 In the year 2006 the ratio was 1.28, but in the year 20 07 there was decreasein the ratio. But in the year 2008 it goes to 1.34. It clearly shows that there isincrease in the returns. In the year 2008 there is only 25.5% increase in the assetbut there is a 45% increase in the returns.3. Return on Equity Return on equity shows the relationship between profit earned and equity. Chart No 3: Return on Equity 21
  • 22. Return on Equity 20 15 10 5 0 2006 2007 2008 Profit after Tax Return on Equity = 100 Equity + Reserves Return on equity is increasing every year. The ratio is 13.12, 13.71 and17.51 in the year of 2006, 2007 and 2008 respectively. There is increase of 45% inreturns against only 13% increase in the equity.4. Earnings per Share Earnings per share signify that the earnings available for the each share heldby the shareholder. Profit after Tax Return on Equity = 100 No of shares Chart No 4: Earnings per Share 22
  • 23. Earnings per Share 60 50 40 30 20 10 0 2006 2007 2008 The ratio is increasing year by year. That shows the bank is earningsufficient funds to its shareholders. From 2006 – 2008 the ratio has almostincreased by 70%, this is good indicator for its shareholders of the Bank.5. Book value per Share Book value per share signifies the value of the book of each equity share ofthe bank. Book value consists of equity share capital and reserves of the bank. Equity Share Capital + Reserves Book Value Per Share = No of shares Chart No 5: Book Value per Share Book Value per Share 300 200 100 0 2006 2007 2008 23
  • 24. There is increasing trend in the ratio, it because of the increase in thereserves of the bank. It is good indication from the investor‟s point of view.6. Yield Spread It is the difference between yields on advances over cost of deposits. It isuseful to know the spread of yields over cost of deposit; more the spread bank ismore efficient in lending and accepting deposit. Yield Spread = Yield on Advances- Cost of Deposits Chart No 6: Yield Spread Yield Spread 4 3 2 1 0 2006 2007 2008 The yield spread is decreasing year on year basis. This is because thepercentage increase in yield on advance is less than percentage increase in cost ofdeposits of the bank. The bank is inefficient in earning high yield on the advancesgranted by them.7. Non Interest income to Total Income This ratio indicates the relationship between non interest income and totalincome. Non-interest income arises out of the activities other than the lending. Chart No 7: Non Interest Income to Total Income 24
  • 25. Non Interest Income to Total Income 16 15 14 13 12 2006 2007 2008 The ratio was 14.78 in the year 2006, but there was slight increase in it in theyear 2007. It shows the bank earnings are increased out of lending business. But inthe year 2008 the ratio has decreased.8. Gross NPA to Gross Advances This ratio shows the relationship between Gross NPA to Gross Advances ofthe bank. It states that the percentage of Non Performing Assets out of totaladvances granted by the bank. Chart No 8: Gross NPA to Gross Advance Gross NPA to Gross Advance 3 2 1 0 2006 2007 2008 The ratio is decreasing from 2006 – 2008. It means the NPAs are decreasingfrom year to year. It is good indication for the bank. 25
  • 26. Research Design It is the conceptual structure within which the research is conducted. Itconstitutes the blue print for the collection, measurement and analysis of data. Thedesign includes an outline of what the researcher will do from writing thehypothesis and its operational implication to the final analysis of data. It constitutesthe steps taken beginning with the collection of data, classifying, analyzing andinterpretation, processing and finally putting in textual form. This is one importantchapter of project and can be considered as skeletal of project.Statement of the Problem Progressive deregulation and liberalization of the Indian financial sectorhave offered banks tremendous business opportunities and brought in competition.As there is growth in the economy many industry sectors like, Manufacturing andInfrastructure etc are growing up. This provides a good business opportunity offinancing them. The long term or short term loan providing to the project is knownas Project Financing. The banks should see the various risk related to the project beforesanctioning the loan for the project. The bank should see uncertainty involved inthe project. These risk and uncertainty may have an adverse impact on the Bank‟scapital and earnings. The project financing involves detailed and indepth analysis of the results ofthe project. In this process the technical, the marketing, the organizational, thefinancial, the economic and the social aspects of the Projects are examined to 26
  • 27. ensure technical feasibility, market necessity, financial viability, economic strengthand social desirability. The project financing is to identify measures, monitor andcontrol various risk arising for its lending. When fierce competition is the rule, the banking sector is no exception.Banks compete with each other to attract quality borrowers. In this scenario, ahasty or adequate project appraisal will result in growth of NPA. There fore thebanks should have proper appraisal methods.Objective of the study  To understand the analytical framework of project financing and to analyze the existing project appraisal mechanism at bank.  To study the project financing of Corporation Bank  To familiarize with the interrelationship among various aspects of project finance.  To understand the importance of project appraisal in sharpening the ability of the bank to identify investment opportunities of the project undertaken.  To study the assessment of the various aspects of investment proposition to arrive at a financing decisionNeed for the study  To have practical knowledge and experience towards project financing. 27
  • 28.  To sharpen the ability of identification of various attractive investment opportunities.  To value the options embedded in the project  To familiarize with the inter relationship among the various aspects of project appraisal.  To evaluate the project in order to give suggestions to the bankScope of the study The scope of the study is limited to Project Finance Department ofCorporation Bank Head Office, to the area of project financing. It will give anindepth theoretical and practical knowledge about the project financing. This studyalso covers ratio analysis, cash flow from proposed project, risk involved in theproject, analysis of the financial statement and the data found in the appraisalstatement.Methodology of Data Collection As regarded to methodology, normally both quantitative and qualitativeapproaches are adopted. In order to collect the data, this study brings a liveanalysis based on the live data collected from secondary type of data. Thetechniques of ratio analysis have been made use for the analysis of the financialstatement of the bank.  Interacting with executives, functional in charge of various areas and departments discussing informally. 28
  • 29.  Referring to the secondary that is, various project reports prepared by the bank and desk guides available with the bank.  Visiting official website of the bank and other related websites.  Referring to news papers and various business magazines.Limitation of the study  The study is limited to the Project appraisal department of Corporation Bank. The investigator could not cover all the banks, who are providing similar services.  The data recorded was presumed to be authentic  This study curtails comparison, as it is within the purview of only one organization.  The study is conducted on the data that are made available to the bank by the concern. Project Appraisal 29
  • 30. Introduction Project appraisal involves detailed and in-depth analysis of the results of theproject. In this process the technical, the marketing the organizational, thefinancial, the economic and the social aspects of the projects are examined one byone to ensure technical feasibility, market necessity, financial viability, economicstrength and social desirability. It is a process where by a lending financial institution makes an independentand objective assessment of the various aspects of investment proposition forarriving at a financial decision. Appraisal exercises are aimed at determining theviability of a project and some times helps in reshaping the project to upgrade itsviability. It is most crucial stage of project cycle at which the bank makes a criticalevaluation of all the parameter to determine the feasibility of the project and tomake a decision whether to finance or not.Need for Appraisal During recent times, not only have the number of projects increased, but thesize of projects have gone up substantially. The lenders are also concerned aboutdebt equity ratio and insist on promoters bringing in equity so that they have astake in the project. Now the ratio hovers at 4:1 for the infrastructure sector and 1:1in other projects. This is opposed to the situation in the 1990‟s when the ratio usedto go even as high as 15. Mega projects like Power Projects, Infrastructure are very common thesedays. When the project is of such size, it is easy desirable that the project 30
  • 31. Technical, Feasibility and Commercial possibility are assessed by the committeemember of lending institution to ensure to lend funds for the projects. CorporationBank is one such institution and has a vibrant and efficient team of professionals,which are most capable in appraising projects.Steps in Project Appraisal The steps which are followed by the bank in appraisal of a project are asfollows.  The borrower (promoter) approaches the bank with his project report and gives a written request to bank to appraise the project.  Bank quotes a fee for the appraisal (usually 0.25% of the total cost of the project). Along with it bank also gives a questionnaire to borrower. Questionnaire will cover all financial, economical and technical factors of the project.  If the borrower agreed over fee charges, term and condition of the payment of fees as it is indicated by bank along with the reply of questionnaire, then the bank has to study the report that is submitted by the borrower.  The appraising staff should visit the project site to make physical verification.Functions of Project Appraisal Group 31
  • 32.  Undertake detailed techno-economic appraisal of large projects seeking financial assistance from bank and preparation of appraisal report by evaluating technical, managerial, financial and commercial aspects of the project.  Undertake regular evaluation of progress of implementation of large projects assisted by the Bank.  Peruse and furnish views/observations on project appraised by other banks/reputed consultants, submitted by Cos/other groups of the wing.  To undertake monitoring agency activity of companies going for IPO as per SEBI guidelines.  Upgrade project evaluation skills.  Undertake unit visits and hold discussions with the official of the company.  Guiding User Sections of the wing on project appraisal skills.  Undertake detailed techno-economic merchant appraisal of projects going for IPO as per SEBI guidelines.Project Appraisal – An OverviewTable No 3: An Overview of Project Appraisal Technical Marketing Financial Economic Management Appraisal Appraisal Appraisal Appraisal Appraisal Manufacturing Demand Capital Ratio of Qualities of an Process/Technology techniques cost of economic entrepreneur for project appraisal forecasting Technical Supply Sources of Economic Various forms 32
  • 33. Arrangements depth of finance rate of return of competition organizationSize of plant Pricing Financial Exchange Organizational policy projections rates of the setup project or resource costProduct Mix Life cycle of Ratio Comparative Management the product analysis study of problems financial and economic rate of returnSelection of P/M Brand name Break Even for the Point productPlant Layout Distribution channelsLocation of the SalesProject promotionSchedule of Project Sources ofImplementation market information Publication to study various aspects of mktg 33
  • 34. Bank’s way of Appraisal: The Branch should call for from the applicant an „Application‟ in theprescribed format covering full particulars. The application should contain thefollowing essential data/information. a. Particulars of the project along with the copy of project report furnishing details of the Technology, Manufacturing Process, Availability of Raw Material, Construction, Production facilities etc. b. Estimate of costs of the project detailing assets acquired, to be acquired inclusive preliminary expenses and working capital. c. Details of the proposed means of financing, indicating the extent of promoter‟s contribution, the share capital is to be raised from public and borrowings. d. Working capital requirement at the initial year e. Project implementation schedule f. Organization setup with list of Board of Directors, Qualification, Experience and Competencies. g. Demand projection based on the overall market prospectus together with copy of market survey report if any. h. Estimate of sales, cost of production, profitability. i. Projected profit and loss a/c, balance sheet for the operating years during banks assistance. 34
  • 35. j. Proposed amortization schedule (repayment program) k. Projected fund flow statement l. Details of the nature and value of securities of fund. Due deligence report shall be submitted in the prescribed format. Consentfrom the authorities of the Pollution Control Board and any other information.Brief History In case of already existing company the bank will collect followinginformation,  Essential particulars about its promoters and background  Its incorporation  Its subsequent corporate growth to the date  Major developments/changes in its management If the borrowing unit is new to the bank a credit report will be obtained bybank to ascertain the credit worthiness of the company. The banks will carefullyscrutiny the MOA and AOA to ensure there is no limitations have been placed onthe companies borrowing power and operations.Past Performance A summery of company‟s past performance in terms of operating capacity,sales, operating profit and net profit for the past 3 year will be analyzed by thebank. The bank will analyze the sales and profitability for last 3 years. If the trendis in ascending order the performance can be consider satisfactory.Capacity Utilisation 35
  • 36. If the actual production is less than the rated capacity, the reason for theunder-utilisation of the capacity should be examined. The bank will examine thesteps taken by the company to improve the capacity utilization. The bank willexamine the special important aspects relates to company‟s management labourrelation. Whether there was any strike, lock-outs or shut down during the past 3years and how the labour disputes were settled.Present financial position The bank will analyze the company‟s Audited Balance Sheet and Profit andLoss a/c for the last 3 years. A careful analyze and interpretation of the financialstatement would provide a reasonable clear picture of the company‟s financialhistory, present position and future trend. The bank will look into Debt/Equity ratioand Current Ratio. The bank also collects the information regarding the following,  The method of Depreciation  Record of major defaults by the company  The position regarding the company‟s tax assessment  Pending suits by or against the company and their financial implication  Qualification/adverse remarks if any, made by the statutory auditors on the company‟s accounts.Technical Feasibility If the project involve a new process or new technology, a technicalfeasibility report by a competent agent will experienced in the line will be 36
  • 37. essential. The bank will examine the technical feasibility of new project from thefollowing angle. i. The suitability of the Technology The bank will examine whether the proposed technology can be successfully employed in local condition with regard to the availability of resources, men and materials. ii. The size of the Plant The bank will examine the size of the plant in relation to the optimum size warranted be technical factors, economies of scale and production cost factor.iii. The location of the plant The bank will examine that whether it has ready accessibility to critical inputs and utilities like raw materials, supplies, fuel, water etc.iv. Technical arrangements The arrangement made for obtaining the technical know how, design and detailed engineering of plant and selection of suppliers of machinery/equipment will be examined by the bank. v. The bank will also examine the manufacturing process of the product.Financial feasibilitya. Cost of the Project Correct estimation of the total cost of the project is an important fact of appraisal as it has bearing on the means of financing and profitability. The bank 37
  • 38. will scrutinize the estimated cost with a view to ensuring that they have been arrived at realistically after taking into account all relevant cost factors.b. Total cost of the project The various components of the total cost of given below will be studied by the bank. i. Land The bank has to examine the suitability of the site. Topographical features, Availability of Transport and the sources like water, power, labour, raw materials and market for finished goods. Bank will examine that the land will be sufficient to take care of present needs. The bank has to satisfy itself that the price paid/payable for the land is comparable. ii. Building The bank will examine whether the building will be sufficient having regard to the layout and it will permit and it will permit further addition if needed. iii. Plant and Machinery The bank will examine the stated plant and machinery is required or not according to the recommendations made in the technical feasibility report in the project report and will see they will be suitable and adequate for the production programme. The cost of the plant and machinery will be examined by bank to ensure that the price paid is reasonable. iv. Technical know-how The bank will examine the basis of selection of technical consultants. It should ensure that the promoters will not get any benefit out of it by 38
  • 39. selecting subsidiary concern of the promoter as technical consultants. The bank will ensure that the fees paid are reasonable to the service. v. Preliminary Expenses These are the expenses incurred before the incorporation of the company. Expenditure incurred on project report, market survey in the initial stage. The bank will examine the cost estimated are reasonable to the organization. vi. Working Capital The bank has to estimate the working capital requirement of the company during the 1st year operations and the provision has to be made to meet the requirements.Means of Financing The bank will examine the mean proportion of debt and equity componentsof means of financing of the project. The bank will comment on the projectdebt/equity ratio is satisfactory and acceptable. As per group credit policy thedebt/equity ratio shall not exceed 2:1. i. Share Capital The bank will ensure that the promoter‟s of the company have invested atleast 25% of the total cost. The investment should be made in share capital. ii. Internal cash accruals The bank will examine whether the company will be able to meet its expenses and working capital requirements. It will ensure that the remaining 39
  • 40. part of the profit(cash accrual) will be possible to use it as part of financing for project. iii. Debenture The bank will examine the terms of proposed issue of debentures such as the nature of debenture, rate of interest, date of redemption and security offered. iv. Term Loans The power of public company to borrow by way of term loans is restricted to the amount of its paid-up capital and free reserves. The bank has to ensure that the loan taken by the company under those limits only. If the loan is provided by many lenders the information regarding that to be collected. v. Deferred payment facilities The bank has to get the details of the deferred payment guarantee. vi. Any other(Central/state sales tax loans, development loans) Bank has to specify whether it is central/state sales tax loan and will examine the term and conditions of granting the loan.Project Implementation Schedule The bank will examine the project implementation schedule with referenceto Bar chart or PERT/CPM chart by referring to actual implementation of similarprojects. The bank has to ensure that the t5ime schedule for construction ofbuilding, installation of plant and machinery and commencement of commercialproduction is reasonable and acceptable. 40
  • 41. Production Factors i. Manufacturing Process The bank has to examine the basis of selection of the process in relation to the other alternative process. If the technology is new to the country, the appraiser has to ensure about the suitability of the manufacturing process. ii. Raw Material The bank will list out the major raw materials required for the company production programme. The bank will examine the continuity of supply of the raw materials. The bank also examines the prices of the raw material to ascertain whether the fluctuations in the past years have taken into account while projecting the cost of production and profitability. iii. Utilities and Essentials The bank will examine the requirements of power, fuel, water, transport and the arrangement made by the company.Market and Demand Analysis This constitutes a crucial aspect of project appraisal as the basic viability ofthe project and consequently the repayment of the Bank‟s loan depends on themarketability of its product. The bank will study this aspect under following heads. i. Sales Prospectus The bank will examine the company sales projections and the underlying assumption with reference to the demand forecast made in the 41
  • 42. publications and through market survey. It will examine also through past consumption from imported sources and likely future trend. The bank will examine the nature and extent of competition likely to be faced by the project from the principal competitors. Bank also examines the competitive ability of the company to penetrate the market and earn market share based on price, quality etc. ii. Selling price The bank will examine the industry‟s general price trend to see that the prices were stable in the past and will continue to be same in the future. iii. Prospectus for export The bank has to comment on the prospectus for export. The bank should state how the company would meet the export commitments. The bank should state whether any subsidy/cash incentives will be available to company. iv. Marketing organization The appraiser has to give brief description of the company‟s marketing organization. If the company selling its products through distributors and selling agents bank has to examine the term of arrangement.Commercial Viability and Profitability Appraising profitability is the most crucial exercise in project appraisal. Thebank will examine estimated sales, cost of production and net profit furnished forthe project. 42
  • 43. Inter firm comparison The reasonableness of the financial projection may be cross checked by thecomparing the key financial parameters of the project with those of a similarproject or with the industry average.Debt Service Coverage Ratio The Debt Service Coverage Ratio is the „core test‟ ratio in project financing.This ratio indicates the degree of viability of project and influence in fixing therepayment period and the quantum of annual installments. Here „Debt‟ meansinstallments payable during the year and „Service‟ means cash accruals comparingnet profit plus depreciation and non cash write-off. It measures the extent of cashaccruals(service) available to cover the maturing term obligation(debt) during eachyear. Interest due and chargeable can be fully paid even in a year where theproject undergoes in loss. The bank will ensure that the profitability the projectdoes not fall to that extent where the interest can not be paid by the company. Thebank will ensure because of any genuine or valid reason the installment can bepost-phoned, but the project should be able to pay the interest as and when fallsdue. The Bank Group Credit Policy is that the project shall give an average debtservice coverage ratio of 1.5:1.Break Even Analysis Fixed + Semi Fixed Expenses Production value 43
  • 44. Break Even Sales = Contribution Fixed + Semi Fixed Expenses CapacityUtilisation 100Break Even Installed Capacity = ContributionFund Flow and Cash Flow Statement The statement which shows various sources of funds and their uses is calledfund flow statement and it‟s different from revenue statement of balance sheet. TheFFS can be based on two concepts, those are as follows.i. Change in Working Capital concept It is derived from the need for availability of liquidity and need for the liquid funds. That is current assets and current liability.ii. Change in Financial Position A promoter/banker concerned with funds not only for the working capital but for the entire funding needs. Their concern is to adding fixed asset/repayment of long term loans as per their pre-fixed repayment schedule. Movement of all the funds in the business has to be considered. The fund flow statement should be carefully examined andreasonableness of the various assumptions underlying the project should be 44
  • 45. ascertained. On the long term side, it should be ensure that fund outflow foressential expenditure on fixed asset, repayment obligation, taxes and dividends arefully provided for that the cash generation will be adequate. On the short term side,the projected increase in current liabilities/bank borrowings should be matched byprojected increase in the inventories/receivables.Cash flow estimates It is prepared to ensure that the unit will have necessary cash with it and itwill not face liquidity problem. It is necessary for the construction period also toensure availability of cash according to the requirement of the project.Projected Balance Sheet In the case of cost of production and profitability estimates and fund flowprojection, the projected balance sheet should be furnished by the company for theentire period. While appraising the following points will be checked by the bank.The cost of the project, means of financing, the profitability estimates and the fundflow projection.Others (Brief Comment)i. Quality of Management Appraiser will briefly comment on the company‟s management setup, the composition of the board and the chief executive in-charge of the day-to-day operations.ii. Credit Rating The bank will do the overall assessment of the company and rate the company according to the assessment. 45
  • 46. Disbursement: Execution of loan agreement and other necessary legal documents is notsufficient for disbursing the amount. Branch will ensure that the amount disbursedis utilised for the purpose for which it has been sanctioned.Supervision and Follow-up Projected supervision and follow-up of assisted project during and afterimplementation is indeed a important exercise to performed periodically by bank.It not only safeguard the interest of the bank but also to ensure optimum returns onthe total investment in project. Even a project well accepted at the appraisal stagemay go bad due to lack of adequate care. There fore supervision and control duringimplementation is necessary during and after project implementation it will bedone by the bank by following methods.  Scrutiny of progress chart  Analysis of annual financial results  Visit/Inspection, regulatory control  Discussion with management Murali Industries Limited 46
  • 47. The Murali Industries Limited, a Nagpur based company was initiallyestablished on 2nd December 1991, in the name of Murali Agro Products Pvt Ltd toprocess soyabean in a Solvent Extraction Plant to produce vegetable Oil and De-oiled cakes with an installed capacity of 150 tonnes per day. On 5 th January 1993the company was renamed as Murali Industries Limited when it raised funds fromcapital market through its public offer. The company entered capital market in the year 1993 through IPO andexpand the capacity of Solvent Extraction Plant to 250 tonnes per day. In the sameyear the company acquired another soya plant to strengthen its stake in theindustry. In the year 1997 MIL diversified into paper manufacturing by setting up 40tonnes per day. Kraft paper manufacturing plant, which was sold in the year 2004to SBM industries pvt ltd. In the year 2000 the company established Duplex papermanufacturing unit with an established capacity of 60 tonnes per day. In the year 2002 the company also set up a 70 tonne per day new print papermanufacturing unit, along captive power plant with 3 MW capacity to meet thepower requirements of its paper units. In the year 2004-05 the company set up 150tonne per day writing and printing paper unit along with 15 MW co-generationunits. The company is also setting up a 2.14 million tonnes per annum cementmanufacturing plant together with 30 MW captive power plant at Chandapur inMaharastra with capital outlay of Rs 578 cr, this plant is reportedly in the advancedstage of implementation and the commercial production is expected in the currentfinancial year (2008-09). 47
  • 48. MIL is has already into cement industry by setting up a 2.14 million tonnesper annum cement manufacturing plant together with 30 MW captive power plantat Candapur in Maharastra. In addition to this, company is also going in for settingup of three more cement plants of 3 million tonnes per annum capacity each, alongwith these 50 MW captive power plant in the state of Rajastan (village Barana),Karnataka (Aloora) and Gujarath (Jujarpur). The Rajastan plant shal have out lay of Rs 862.55 cr, Karnataka Rs 837.98 crand Gujarath 865.73 cr. The project will be financed by banks at these plants shallbe 575.04 cr, 558.65 cr and 577.15 cr respectively.Present proposal The credit sanctioned by the bank as under: Limit Sanctioned Rate of Interest Sl No Nature of Existing Proposed Existing Proposed Facility 1 Fund Based 150 13%Banking Arrangements The following Banks financed for the project. Table No 4: Banks arrangements for Financing Name of Banks Loan Amt Interest Rate % 48
  • 49. Corporation Bank 150 8.76 State Bank of India 300 17.54 State Bank of Mysore 90 5.26 State Bank of Patiala 150 8.76 State Bank of Bikaner and Jaipur 90 5.26 Punjab National Bank 300 17.54 Dena Bank 50.84 2.92 Bank of Baroda 300 17.54 Allahabad Bank 150 8.76 State Bank of Travancare 130 7.66Security Coverage Bank will change on the project specific factory Land & Building and Plant& Machinery. The Corporation Bank share is 183.36 cr out of the total cost2139.51 cr. The finance made by bank, interest there on and all amounts in respectthere of shall be secured inter alia by,  A first mortgage/hypothecation and charge on all the project immovable and movable properties both present and future infavour of Bank  Security interest by way of first mortgage/hypothecation, performance bonds and any letter of credit in relation to the project that may be provided by any party.  A first mortgage/hypothecation of all insurance policies taken in respect of the project asset. 49
  • 50.  A first mortgage/hypothecation and charge in favour of the bank on all the bank account in relation to the project.Key Indicators Table No 5: Key indicators (Rs inCrores) Particular 31/3/2007 31/3/2008 31/3/2009 Audited Provisional Projected Net Sales 523.93 646.47 931.15 % of Growth -- 23.39 44.04 Operating Profit 46.13 70.82 156.02 Operating Profit to Net Sales 7.84 8.61 14.89 % Cash Accruals 59.5 77.17 169.47 Share Capital 9.61 10.24 21.40 Tangible Net Worth 129.53 221.63 911.90 Net Owned Funds 129.53 224.71 821.74 Debt/Equity Ratio 1.3 2.81 1.81 Current Ratio 1.78 2.79 1.79 NOF/ TFD % 29.27 23.61 30.39Share Holding Pattern: The company has Paid-up Capital of Rs10.24 crores. Table No 6: Share Holding Pattern of the company Share Holder Category % Holdings Promoters 51.77 50
  • 51. Bodies, Corporate and Public 33.58 Individuals 9.82 Others 4.83Compliance with Group Credit Policy Guidelines Table No 7: Compliance with Group Credit Policy Parameters Banks Actual Norms Position 200 cr 150 cr Entry Level per Borrower Exposure for FB and NFB Facilities 547 cr 151.80 Maximum per Borrower Exposure (corporate) 10% of 2.6% of Exposure to Industry/Sector NBC NBC 1.25 2.79 Current Ratio 1.1 -- Current Ratio for Export Orient Units 2 2.81 Debt/Equity Ratio 1.5 1.66 DSCR 4 3.28 TOL/TNW 25% 19.66% Promoters Contribution to Project cost In this the company current position of Debt/Equity ratio is 2.81, where asthe banks norms are 2. It is less than the standard, which is not acceptable. But for 51
  • 52. the project taken up by the company the Debt/Equity ratio will be below the norms.So the project can be acceptable.Summary of Financialsa. Financials Table No 8: Financial Results of the company Particulars 2007 2008 2009 2010 Net Sales 523.93 646.47 931.25 1688.69 % growth in net sales -- 23.39 44.04 81.36 Raw Material 371.22 457.59 555.72 764.17 RM consumed as % of COP 85.10 85.35 81.71 72.12 Cost of Sales 441.51 527.77 673.12 1059.03 Cost of Sales as % of Net 84.27 81.56 72.29 62.71 Sales Operating Profit 46.13 70.82 156.02 355.28 Operating Profit % 8.80 10.95 16.76 21.04 Other Income 1.13 0.61 0.82 -- PBT 47.26 71.43 156.84 355.28 PAT 41.1 55.63 138.61 312.57 Net Profit Margin % 7.84 8.61 14.89 18.51 Cash Profit 59.50 77.17 169.47 372.17 Retained Profit 41.1 55.63 138.61 312.57 Paid-up Equity capital 9.61 10.24 21.40 21.40 Tangible Net Worth 129.53 221.63 911.90 1228.38 TOL/TNW 2.42 3.28 2.04 2.14 52
  • 53. The company has achieved a sales growth of 23.39% during the year ended31/3/2008, operating profit margin has improved from 8.80% to 10.95%, and netprofit margin has also improved from 7.84% to 8.61% as on 31/3/2008. Cashaccruals has improved substantially from Rs 59.50 cr to 77.17 cr. Total Net worthof the company improved substantially from Rs 129.53 cr to 221.63 cr. Liquidityposition of the company is comfortable with net working capital showing Rs188.84 cr and liquidity parameters may be considered satisfactory for financing theproject.b. Financial Observation i. Sales Table No 9: Sales of products of the company (Rs in crores) Name of the Product 2006 2007 2008 Duplex Paper Unit 39.59 45.52 41.86 News Print Unit 54.76 69.37 70.27 Power 30.36 33.09 36.12 Pulp Mill Unit -- -- 25.5 Solvent Extraction Units 266.04 277.34 349.70 Writing and Printing Units 119.70 148.52 123.00 The company achieving a growth in the sales (except Duplex Paper Unit andWriting & Printing Unit). The performance of the company in Solvent ExtractionUnit has been satisfactory with 53% growth. Even though there is negative growthin the units. However overall growth in the turnover of the company with 23% willbe considered satisfactory. 53
  • 54. ii. Production Table No 10: Production and Capacity utilisation Name of the Product Production % Production % 2007 Utilisation 2008 Utilisation Solvent Extraction 1253 98.66 1480 116.54 Units Duplex Paper Unit 26530 100.49 24757 93.78 News Print Unit 32647 123.66 32153 121.79 Writing and Printing 54475 110.05 42080 85.01 Units Power Generation 82970 58.2 88786 62.28 Pulp -- -- 18444 37.26 The capacity utilised by the company is satisfactory except in the pulpproduction unit. iii. Profitability During the year ended 31/3/2008 the company has earned operating profit of70.82 cr at margin of 10.95% compare to Rs 46.13 cr at margin 8.8% for theprevious year. Net profit for the year ended 2008 is Rs 55.63 (8.61%) compared toearlier year 2007 of Rs 41.1 cr (7.84%). Cash accrual for the year ended 31.3.2008was Rs 77.17 cr compared to previous year 2007 of Rs 59.5 cr. The profitability ofthe company during the year 2008 has increased and it is satisfactory. iv. Net Owned Funds 54
  • 55. Table No 11: Net Owned Fund Particulars 2007 2008 Net Worth 133.07 224.46 (-) Intangible asset 3.54 2.83 Tangible Net Worth 129.53 221.63 (-) Used for unrelated to Business (3.08) Net Owned Funds 129.53 224.71 Total Funds Deployed 442.50 951.94 NOF/TFD % 29.27 23.61 The ratio of the NOF as a percentage of total funds deployed has come downfrom 29.27% in 2007 to 23.61% in 2008. This is below the Banks norms which isnot acceptable for financing for the project. However the position is expected toimprove to 29% in the coming years. v. Debt/Equity position The debt/equity ratio as on 31.3.2007 stood at satisfactory level at 1.3.However the same has increased to 2.81 on 31.3.2008 is below the less than thebanks norms. It is not good to provide finance to the company. However byconsidering the projected balance sheet the ratio will be within the desired level forthe project in future years. vi. Fund Flow Statement The position of movement of funds is furnished as under. Table No 12: Fund Flow Statement of the company 55
  • 56. Particulars 2007 2008 Long Term Sources 301.77 548.21 Long Term Uses 188.62 472.52 Long Term Surplus/Deficit 133.15 75.69 Short Term Borrowings Excluding bank 76.70 -- Borrowings Short Term Uses 257.42 67.01 Short Term Surplus/Deficit -180.72 -67.01 Net Surplus/Deficit -67.57 8.68 Increase/Decrease in Bank Borrowings 67.57 -8.68 The overall long term funds deployment in the company is consideredsatisfactory. It has adequate sources of funds to deploy in the company as andwhen required. vii. Liquidity Position The position of current asset, adequacy of Net Working Capital and CurrentRatio discussed as under. Table No 13: Liquidity position of the Existing Company Particulars 2007 2008 Total Current Asset 247.94 287.53 Min required NWC 49.59 57.51 Actual NWC 113.15 188.87 Surplus/Deficit in WC 63.56 131.33 CR 1.78 2.79 56
  • 57. Liquidity position of the company is controllable and satisfactory throughoutwith the ratio showing above the Bank‟s bench mark ratio of 1.25. viii. Debt Servicing Obligation Debt Service ability of the company as a whole, as well as project onstandalone basis is satisfactory with debt service coverage ratio showing the benchmark ratio of 1.5. There is no adverse features reported on the notes forming part of auditedaccounts for the year ended 31.3.2008.Details of the Project The company has taken up setting up of 3 projects of 3 million tones perannum along with 50 MW captive power plant each, in the state of Karnataka,Gujarath and Rajastan. Company intends to manufacture Portland Cement at theselocation along with co-generation plans of 50 MW capacity at each of theselocation.Technical Feasibilityi. Raw Materials The major raw material for cement manufacturing is Lime Stones mines. These three plants are being located near to the Lime Stone mines. Thus this will be logistic advantage for the company. The mining will be done by 57
  • 58. conventional method. The company has installed 1050 tph capacity crusher in mines. Material Transportation The company to deliver the crushed Limestone and Marl to the Raw Material yard at cement plant, the transportation conveyor has been chosen amongst the several methods and possibilities. The distance between Quarries to plant yard is 1000 meters and plan of using of two 1000mm wide rubber belt conveyers.ii. Power The company plans to set up captive thermal power plant of 50 MW at each of the 3 locations. The required coal for power generation will be supplied by the Indian coal. This will supplement the power requirement of the plants.iii. Building The necessary buildings for main Factory Shed include Godown, Stores, Electric room, Blower Room and Work shop. The building also required for management offices, official departments, laboratories, services and welfare facilities have been estimated up to 12000 square meters.Financial Viabilitya. Project Cost 58
  • 59. Table No 14: Cost of the Project (Rs in Crores) Name of each Cash Component Estimated Cost to be Cost incurred in future Land and Site Development 31.59 31.59 Building 328.12 328.12 Plant and Machinery 1024.51 1024.51 Captive Power Plant 58.33 58.33 Miscellaneous FA 171.99 171.99 Preliminary Exp 53.35 53.35 Upfront fees 4.32 4.32 Working Capital Margin 83.38 83.38 Misce and Contingencies 285.5 285.5b. Means of Finance Table No 15: Means of Finance (Rs in Crores) Sources Amount % of Total Equity 450.00 17.54 Internal Accrual 351.00 13.68 Term Loan From Banks 1710.84 66.67 Unsecured Loan 54.42 2.11 59
  • 60. The company proposes to bring on its margin for the 3 projects as detailedbelow. Table No 16: Margin brought by the Promoters (Rs in Crores) Unsecured Internal Private Project Location Loan Accruals Equity Karnataka 21.58 117 150 Gujarath 12.33 117 150 Rajastan 20.52 117 150 Total 50.43 351 450 The company has projected to generate sufficient internal accruals asdetailed below. Table No 17: Internal accruals of the company Particulars 2009 2010 Net Profit 238.20 313.33 Add: Depreciation 61.00 59.69 Gross Cash Accruals 299.20 373.02 Decrease in term loan 134.21 118.08 Dividend 2.74 -- Others 13.33 51.29 Surplus 148.93 203.65 The balance margin would be bought in through equity investment byprivate equity investor (450 cr) as well as in the form of unsecured loans by thepromoters. 60
  • 61. The company states that the negotiations are at advanced stage for privateequity. The loan provider has stipulated a condition that the private equity. Thebank has stipulated condition that the private equity amount has to be tied upbefore disbursement of loan.Project implementation schedule As for the information furnished by the company, the Rajastan project shallcommence commercial production during the month of April 2010, that ofKarnataka in July 2010, and that of Gujarath in October 2010. The company isconfident of finishing the project according to the schedule.Business Projections and DSCRProject (On standalone basis)Table No 18: Projected DSCR for the ProjectParticular 2011 2012 2013 2014 2015 2016 2017 2018 sNet Sales 1634.6 2452.6 2458.3 2458.3 2458.3 2458.3 2458.3 2458.3 3 6 5 5 5 5 5 5PAT 141.18 255.95 275.90 298.75 320.55 343.41 365.47 371.33Cash 234.77 380.38 400.33 423.18 444.98 467.84 489.90 495.76ProfitInterest 160.07 187.12 151.48 115.84 80.20 44.55 10.02 --on TLTotal (a) 394.84 567.50 551.81 539.02 525.18 512.39 499.92 495.76 61
  • 62. Installme -- 214.54 285.14 285.14 285.14 285.14 285.14 70.60nt DueInterest 160.07 187.12 151.48 115.84 80.20 44.55 10.02 --on TLTotal (b) 160.07 401.66 436.62 400.98 365.34 329.69 295.16 70.60DSCR 2.47 1.41 1.26 1.34 1.44 1.55 1.69 7.02Avg 1.66DSCRCompany as wholeTable No 19: Projected DSCR for the whole companyParticular 2011 2012 2013 2014 2015 2016 2017 2018 sNet Sales 3398.5 4267.2 4323.5 4344.2 4377.3 4392.8 4392.8 4392.8 7 8 7 5 4 8 8 8PAT 487.92 630.47 677.76 716.13 759.20 787.55 809.41 819.43Cash 639.92 812.23 858.82 895.98 934.62 962.20 983.39 993.37AccrualInterest 160.07 187.12 151.48 115.84 80.20 44.55 10.02 --on TLTotal (a) 799.99 999.35 1010.0 1011.8 1014.8 1006.7 993.37 993.37 0 2 2 5Installme 86.18 300.72 369.08 363.87 336.46 285.14 285.14 70.60nt Due 62
  • 63. Interest 160.07 187.12 151.48 115.84 80.20 44.55 10.02 --on TLTotal (b) 246.25 487.84 520.56 479.71 416.66 329.69 295.16 70.60DSCR 3.25 2.05 1.94 2.11 2.44 3.05 3.36 14.70Avg 2.75DSCR Detailed Balance Sheet and Cash Flow Statement for the projects onstandalone basis and company as whole is furnished by way of Annexure. The business projection and profitability working furnished by the companymay be considered reasonable and achievable, as the same is based on the marketstudy, capacity being created and the demand-supply gap. The projects are individually and severally viable as revealed by the DSCRwhich is above the bench mark ratio of 1.5.Sensitivity Analysis of DSCR If the project‟s sale decreased by 10% in that the average DSCR will be 0.89which is risky for the banks to lend. If there is increase in the expenditure by 10%then the DSCR will be 1.12. Even though the standard ratio is 1.5 the company isable to pay its debt with the ratio 1. If the company sale decreased by 10% the average DSCR will go to 1.55from the existing 2.75 but it is more than the bank norms. And if there is increasein the operating expenses by 10% the average will be 1.99 so it is good for thebank to lend. Even adverse situation also the company can pay its debts.Profitability Analysis 63
  • 64. ProjectTable No 20: Project Profitability Analysis (Rsin crore) Particulars 2011 2012 2013 2014 2015 2016 2017 2018Gross sales 1992.8 2990.0 2997.0 2997.0 2997.0 2997.0 2997.0 2997.0 0 6 0 0 0 0 0 0(-) Excise duty 358.17 537.40 538.65 538.65 538.65 538.65 538.65 538.65Operating 1634.6 2452.6 2458.3 2458.3 2458.3 2458.3 2458.3 2458.3Income 3 6 5 5 5 5 5 5Raw Material 454.62 667.08 667.08 667.08 667.08 667.08 667.08 667.08Stores 16.20 24.30 24.30 24.30 24.30 24.30 24.30 24.30consumedPower and Fuel 134.51 201.76 201.76 201.76 201.76 201.76 201.76 201.76Direct Labour 12.76 17.86 18.75 19.69 20.68 21.71 22.80 23.93Other Mfg Exp 234.56 348.67 348.67 348.67 348.67 348.67 348.67 348.67Depreciation 93.59 124.43 124.43 124.43 124.43 124.43 124.43 124.43(Inc)/Dec in -6.04 -5.23 -0.06 -0.02 -0.03 -0.03 -0.03 -0.03WIP(Inc)/Dec in FG -4.53 -3.92 -0.04 -0.02 -0.02 -0.03 -0.02 -0.02Total Cost of 935.67 1374.9 1384.8 1385.8 1386.8 1387.8 1388.9 1390.1Sale 5 9 9 7 9 9 2Selling & 302.93 467.99 469.09 469.09 469.09 469.09 469.09 469.09AdminOp profit before 396.03 609.72 604.37 603.37 602.39 601.37 600.27 599.14Int 64
  • 65. Interest on WC 23.45 34.86 34.92 34.93 34.93 34.94 34.94 34.95Interest on TL 160.07 187.12 151.48 115.84 80.20 44.55 10.02 --Profit Before 212.51 387.74 417.97 452.60 487.26 521.88 555.31 564.19TaxTax (Current) 23.78 43.93 47.36 78.60 165.68 183.49 199.95 207.31Tax (deferred) 47.55 87.86 94.71 75.25 1.03 -5.02 -10.11 -14.45PAT 141.18 255.95 275.90 298.75 320.55 343.41 365.47 371.33Cash Profit 234.77 380.38 400.33 423.18 444.98 467.84 489.90 495.76 The profit after tax to net sales of the project is projected at rate of 8.63% inthe first year and it is increasing every year. The average profit after tax to net salefor the project is 12.46%, which are satisfactory returns. From the above table itshows that the company has got cash accruals to pay its loan obligation every year.Whole CompanyTable No 21: Whole Company Profitability Analysis (Rs in crore) Particulars 2011 2012 2013 2014 2015 2016 2017 2018Gross sales 4037.9 5101.8 5175.4 5201.3 5244.5 5262.3 5262.3 5262.3 6 7 4 3 7 8 8 8(-) Excise duty 639.39 834.59 851.87 857.08 866.93 869.50 869.50 869.50Operating 3398.5 4267.2 4323.5 4344.2 4377.6 4392.8 4392.8 4392.8Income 7 8 7 5 4 8 8 8Raw Material 1245.3 1464.2 1476.7 1483.9 1492.2 1499.6 1499.6 1499.6 2 3 5 2 3 7 7 7Stores 38.51 47.17 47.75 47.85 48.97 48.97 48.97 48.97consumed 65
  • 66. Power and Fuel 321.48 394.40 399.39 398.95 400.13 400.55 400.55 400.55Direct Labour 32.43 38.72 40.91 43.25 45.76 47.96 47.96 50.17Other Mfg Exp 141.53 201.89 202.19 202.55 202.93 203.01 203.01 203.01Depreciation 152.00 181.76 180.76 179.85 175.82 174.65 174.65 173.94(Inc)/Dec in -6.39 -5.56 -0.08 -0.06 -0.05 -0.03 -0.03 -0.03WIP(Inc)/Dec in FG -4.53 -3.92 -0.04 -0.02 -0.02 -0.03 -0.02 -0.02Total Cost of 1920.1 2321.4 2347.4 2356.0 2365.1 2374.7 2374.7 2376.2Sale 3 8 4 8 7 6 6 5Selling & 642.72 873.44 886.32 890.02 897.19 898.59 898.59 898.59AdminOp profit before 835.72 1072.3 1089.8 1098.1 1115.2 1119.5 1119.5 1118.0Int 6 1 5 8 3 3 4Interest on WC 68.91 71.60 63.27 54.95 49.24 48.27 48.27 48.13Interest on TL 160.07 187.12 151.48 115.84 80.20 44.55 44.55 --Profit Before 606.74 813.64 875.06 927.36 985.84 1026.7 1026.7 1069.9Tax 1 1 1Tax (Current) 118.82 183.17 197.30 211.23 226.64 239.16 239.16 250.48PAT 487.92 630.47 677.76 716.13 759.20 787.55 787.55 819.43Cash Accrual 639.92 812.23 858.82 895.98 934.62 962.20 983.39 993.37 The profit after tax to net sales for the company as whole is projected14.35% at the first year and it is increasing every year. The average profit after taxto net sale for company is 16.64%. The returns are satisfactory to provide the loan. 66
  • 67. Management The management of the company is having a full fledged Board comprisingof Promoters, Directors, Executive and Non-Executive Director and ProfessionalDirector, who have required qualification and adequate experience in differentareas. Mr Shobhagmal B Maloo is the chief promoter and chairman of thecompany. Other promoter directors are Mr N B Maloo, Mr L B Maloo and Mr S KMaloo. Executive director Mr Yashpal Dhiman and independent directors Mr B PGanu, Mr R P Gupta and Advocate M Mani are on the board. The Board of Directors are supported by team of experienced and wellqualified executives from different area of functioning, like production, marketing,finance and accounts etc. The company being a listed one in Bombay stockexchange, National stock exchange and Culcutta stock exchange, they aregoverned by the directive of SEBI for the implementation of corporate governance,which they have implemented in their spirit. The relations withemployees/labourers have been maintained very well by the company.Industry Analysis The cement industry has continued its growth over the past seven years.Domestic cement demand growth has surpassed the economic growth rate of thecountry for the past couple of years. The growth rate of the cement demand overthe past five years at 8.37% was higher than the rate of growth of supply at 4.84%as also the rate of growth of capacity addition during the same period. 67
  • 68. Cement Industry in India is on a roll at the movement. With the boost givenby the government to various infrastructure projects, road network, housingfacilities, a booming real estate sector and global demand, growth in the cementconsumption is anticipated in the coming years. Due to the enormous population ofIndia, there has been a perpetual focus on the development of civic infrastructureas well as housing facilities. The high demand for cement is coupled withfavourable Governmental policies has been favourable factors driving the growthof the cement industry in India. Production capacity has gone up and top cement companies of the world arevying to enter the Indian market, there by sparking off a spate of mergers andacquisitions. India is the world‟s second largest producer of cement after Chinawith industry capacity of over 200 million tonnes. The present scenario of cementindustry is very good in terms of demand and with the prices going above Rs 160to Rs 180 everywhere.i. Demand Supply Gap The cement industry witnessing high growth, in the last 2 years (2005-06 & 2006-07) demand for cement has grown at a compounded annual growth rate of over 10%. CRISIL research expects demand to grow at CAGR of 9% over the next 4 years, due to growth in the end user segment. Going forward, CRISIL research expects a major thrust to cement demand to come from Higher Infrastructure Investment.ii. Cement and Cement Products In the last 4 years the cement industry‟s demand supply gap narrowed, leading to higher operating rates of over 90%. In the next 2 - 3 years, CRISIL 68
  • 69. research expects nearly 70 – 80 million tonnes of cement capacities to come on stream and majority of them are expected to bunch up in 2008-09 and 2009-10. Going forward this is likely to result in the lowering of operating rates and easing of demand-supply gap. CRISIL research expects prices to decrease from the fourth quarter of 2008-09 onwords, due to incremental capacity addition that are expected.iii. Government Policies Till mid 2007, the cement industry shows a lot of struggle between cement players and the Govt. The Govt took various steps to control cement prices. It announced a differential excise duty and removal of all duties on import of Portland cement. All these steps have not resulted in any price reduction, on the contrary, they have increased during this period. The cement industry will continue to enjoy the pricing flexibility in the short to medium term, due to a tight demand-supply situation. However, price increase will not be as significant as seen in the last 12 – 15 months.Input related risks Lime stone, fuel (coal and lignite) and power are the main inputs in themanufactures of cement. The industry is dependent on the Govt for the pricing andavailability of these inputs, which accounts for a significant portion of the totalproduction cost. In the last 10 years, Lime Stone cost has not increased significantly. But asmore capacities come on stream, it is expected to exert pressure on the country‟slimited mineable Lime stone resolves. Going forward, prices of lime stones are notexpected to rise significantly. However, increased level of blinding is likely to help 69
  • 70. cement players lower their consumption norms of Limestone, there by mitigatingthe risk of a price hike. Energy cost, which account for nearly 26-30 % of net sales have been risingsteadily. In 2006-07, energy cost decreased to 21% from 26% in 2005-06. This hasbeen primarily on account of the increasing focus of companies on captive powerplant. Currently 52% of the total production of cement is through captive powerplant. Demand-Supply position of cement during 2007-08 Table No 22: Demand Supply Position (in milliontonnes) Installed Name of the State Production Demand Capacity Karnataka 12.41 10.80 11.80 Gujarath 17.76 15.40 11.68 Rajastan 24.82 25.70 10.33 Demand-Supply position in India during 2007-08 (in million tonnes) Particulars Demand Supply North India 49.79 43.61 West India 40.21 48.29 East India 25.33 26.55 South India 48.67 55.80 Total 164.00 174.25 70
  • 71. However the average per capita consumption of cement in India hasincreased from the level of 97 Kgs during 2001-02 to 148 Kgs during 2007-08. CRISIL research expects the domestic cement consumption to register aCAGR rate of 8% in the next 5 years as against the 8.2% CAGR recorded in thepreceding 5 years owing to the following factors.i. Housing Sector This sector accounts for 60-65% of the total cement consumption, is likely to be the key demand drivers. CRISIL estimates the total housing stock to increase by 3% (CAGR) from the level of 146.3 million units during 2008 to 164.7 million units during 2012.ii. Infrastructure Sector In recent years the investment in infrastructure increasing, this sector accounts for 20-22% of the cement consumption, is expected to double from the level of Rs 4.7 trillion during the period from 2002-07 to Rs 9.2 trillion during the period from 2007-12, this is expected to push up cement consumption.iii. Industrial Projects Due to capacity expansions undertaken by industrial such as steel, cement, paper and petrochemicals, investment in industrial projects in India are expected to surge nearly three fold form Rs 2867 billion during the period from 2002-07 to Rs 7841 billion between 2007-12. This is also expected to increase the demand for cement.iv. Commercial construction 71
  • 72. It is estimated that the commercial construction (Retail, Office space, Hotels, Hospitals, Multiplexes, Schools etc) is estimated to take place at slower pace in the forth coming year when compare to previous years. In order to meet the demand, capacity addition to the 115 million is expectedto take place during the period from 2008-09 to 2012-13. As against 37 milliontonnes added during the preceding 5 years. Due to the lower capacity addition,cement prices have been on an upword trend (CAGR of 11%) over last 5 years.However due to the large capacity expansion that are taking place. CRISIL research expects cement prices to fall by as much as Rs 15-20/bagover the next two years, once these units becomes operational. The company is implementing the most modern state of the art technology insetting up of the cement plants at the strategic location in Karnataka, Rajastan andGujarath. Further, the cement industry being power intensive in nature, they aregoing in for setting up in parallel captive power plant of 50 MW each, which willsupport the power requirements of these units. The captive power plant also helpsin reducing pollution and reducing the production cost. Thus the company shallhave advantage to face stiff competition from the market. The company also hasthe advantage of utilizing the existing selling and marketing set up for marketingcement and cement products. There is also possibilities that the company may beeligible for Carbon Credit in future.Business Analysisi. Production and Infrastructure Facilities Company is setting up the production and infrastructural facilities with the able guidance of National Council for Cement and Building Materials (NCB), who have prepared Techno-Economic feasibility reports. Company has 72
  • 73. made arrangements to get mining lease for quarrying Limestone, which is the main raw material for the cement manufacturing. They have well planned for housing production infrastructure with all the required amenities like, Mining, Cement plant and Labour colony. They have obtained/ in the process of getting clearance from the statutory agencies including pollution clearance.ii. Selling and Marketing arrangements With the Government of India giving thrust in the infrastructure development in the country, the demand for the cement is ever increasing; quality cement at affordable prices as proposed by the company can be easily sold in the market with a suitable brand name. The promoter/company has already earned good name for their brand for their soya meal and soya refined oil in central India. The company may encash this strength for developing good brand for cement also. Thus the market position of the company may be considered favorable for the company.Marketing Position and Competitiveness Table No 23: Company Market Position (Rs in Crores) Operating Name of the Company ROCE profit Margin % Industry Average 12 17.2 Other Companies Sri Vishnu Cement Limited 82.68 22.57 73
  • 74. Zuari Cement Limited 27.49 30.61 Murali Industries Limited 10.31 10.95 ACC 11.00 5.5 Birla White 10.40 6.25 Anjani Portland Cement Limited 24.56 18.63 Cement Manufacturing Company 44.23 39.90 Limited Dalmia Cement Bharath Limited 18.62 14.53 Deccan Cement Limited 33.68 25.91 J K white Cement works 18.57 15.21 Jaiprakash Associates Limited 13.83 14.05 Madras Cement Limited 26.30 31.06 Penna Cement Industries Limited 11.05 7.68 Ramco Industries Limited 10.29 8.22 Sagar Cement Limited 15.53 21.99 In this analysis the company operating profit margin(10.95%) is below theindustry average (17.2%), which is not acceptable by the banks appraiser. Butcompany yet to enter into cement production. Hence industry average of cementindustry may not be comparable with the company‟s financial/profitabilityparameters. Risk Analysis Risk Factor Mitigation 74
  • 75. Company proposes to use its existing asMarketing Risk well as Brand recognition to sell its products. The states where the cement plants areEmployee Risk being set up has adequate skilled and unskilled human resources. According to CRISIL research the industry is expected to add capacities equivalent toOff take risk/ Market Risk 50 MTPA in the next 2-3 years. The company is confident of leveraging on present brand recognition as well as contacts to secure firm clients for the product. Company plans to set up captive powerPower availability risk plant of 50 MW at each of the 3 locations, which will supplement the power requirement. The plants are being located adjacent to theAvailability and Lime Stone mines (major Raw Material),Transportation of Lime stone hence there will be logistic advantage. Adequate contingency provision of around 75
  • 76. 10% has been provided in the project cost.Cost Over run This will be useful for to pay extra cost Company has proposed to hire reputed engineering consultants and contractors forConstruction Risk/ Time the execution of the project. More over it isover run risk also proposed to have a well chosen team of experienced persons and in house task force to co-ordinate the implementation of the project Company is already into cement business by setting up 2.14 MTPA cement plantOperating Risk along with a 30 MW CPP at Chandrapur, which is likely to be commenced in this year, in the schedule time. The promoters are well experienced businessmen, who have shown commitment to the company and haveManagement Risk successfully implemented many projects in the past. It is also expected that they will show the same commitments and zeal to this projects as well. Suitable stipulation in the sanction term not to sell stake of 76
  • 77. promoter share mitigate this risk. Lenders are stipulating for 19.66% upfront equity from the promoters. Considering the past record of the promoters, no difficulty Funding Risk is involved in the tie up of debt funds for the project. Also the internal accruals of the company are considered adequate to part finance the project. Company does not face any problem in Environmental Risk obtaining the clearance.Ratio Analysisa. Net Profit Ratio This ratio shows the relationship between net profit and net sales whichindicates efficiency of management. Table No 24: Net Profit Ratio Year PAT Sales NP Ratio % 2011 141.18 1634.63 8.63 2012 255.95 2452.66 10.43 2013 275.90 2458.35 11.22 2014 298.75 2458.35 12.15 2015 320.55 2458.35 13.03 2016 343.41 2458.35 13.96 77
  • 78. 2017 365.47 2458.35 14.66 2018 371.33 2458.35 15.10 Chart No 9: Net Profit Ratio Net Profit Ratio 16 14 12 10 8 6 4 2 0 2011 2012 2013 2014 2015 2016 2017 2018 As per the projected Profit and Loss A/c it is estimated that the profit will beRs 141.18 cr in the year 2011. This ratio increasing every year, it shows the 78
  • 79. operational efficiency of the company. It shows that the company is earningenough money to meet its obligations.b. Debt/Equity Ratio The debt equity ratio is determined to ascertain the soundness of the long-term financial policies of the company. Table No 25: Debt/Equity Ratio Year Debt Equity DE Ratio 2011 1781.12 855.42 2.08 2012 1654.44 855.42 1.93 2013 1464.01 855.42 1.71 2014 1254.12 855.42 1.46 2015 970.01 855.42 1.13 2016 679.85 855.42 0.79 2017 384.60 855.42 0.44 2018 299.53 855.42 0.35 Chart No 10: Debt/Equity Ratio 79
  • 80. Debt/Equity Ratio 2.5 2 1.5 1 0.5 0 2011 2012 2013 2014 2015 2016 2017 2018 The bank norm for the ratio is 2, the current position of the ratio is 2.81. Butthe company‟s promoters in the projected balance sheet ensured that the ratio willbe below the bank norms. Only in the first year it was above the norm, after thatthe ratio decreasing. It is because of the decrease of the term loan. The average ofthe ratio is 1.25 which is below the norms.c. Current Ratio It measures the relationship between current asset and current liability. Theratio is an indicator of the firm‟s commitment to meet it‟s short – term liabilities. Table No 26: Current Ratio Year Current Assets Current Current Liabilities Ratio 2011 753.24 575.32 1.68 2012 1255.21 609.05 2.06 2013 1465.61 609.55 2.4 2014 1678.95 609.59 2.75 2015 1839.87 609.62 3.01 80
  • 81. 2016 1946.29 538.37 3.61 2017 1927.13 324.56 5.93 2018 2337.88 324.60 7.2 Chart No 11: Current Ratio Current Ratio 8 7 6 5 4 3 2 1 0 2011 2012 2013 2014 2015 2016 2017 2018 The standard for the ratio is 2, but the ratio is less in the first year. But stillthe company has sufficient funds to pay its creditors and current liabilities. Theratio is increasing year by year, it shows that the company has high capable ofpaying its creditors. the ratio is more in the later years it shows that less efficientuse of funds. 81
  • 82. d. Debt Service Coverage Ratio The Debt Service Coverage Ratio is the „core test‟ ratio in project financing.This ratio indicates the degree of viability of project. Here „Debt‟ meansinstallments payable during the year and „Service‟ means cash accruals comparingnet profit plus depreciation and non cash write-off. It measures the extent of cashaccruals (service) available to cover the maturing term obligation (debt) duringeach year. Table No 27: Debt Service Coverage Ratio Year Cash Accruals Debt DSCR 2011 234.77 160.07 2.47 2012 380.38 401.66 1.41 2013 400.33 436.62 1.26 2014 423.18 400.98 1.34 2015 444.98 365.34 1.44 2016 467.84 329.69 1.55 2017 489.90 295.16 1.69 2018 495.76 70.60 7.02 82
  • 83. Chart No 12: Debt Service Coverage Ratio DSCR 8 7 6 5 4 3 2 1 0 2011 2012 2013 2014 2015 2016 2017 2018 It is projected that the cash accrual will be 2.47 more than the debtobligation, which is more than the bank‟s norm 1.5. But from 2012 the projectedratio came down to below the bank‟s norm. Any way the ratio is more than 1, itshows that the company will be able to repay its term loan and the interest arise onthe loan. The average DSCR is 1.66 which is more than the Bank‟s norm.e. Interest Coverage Ratio: Table No 28: Interest Coverage Ratio Year PBIT Interest ICR 2011 396.03 183.52 2.15 2012 609.72 221.98 2.74 2013 604.37 186.40 3.24 2014 603.37 150.77 4.00 2015 602.39 115.13 5.23 2016 601.37 79.49 7.56 2017 600.27 44.96 13.35 83
  • 84. 2018 599.14 34.95 17.14 Chart No 13: Interest Coverage Ratio Interest Coverage Ratio 18 16 14 12 10 8 6 4 2 0 2011 2012 2013 2014 2015 2016 2017 2018 The ratio is very important from the lender‟s point of view. It indicateswhether the business would earn sufficient profits to pay periodically the interestcharges. The project‟s projected profit before interest and tax to interest is only2.15, it has increasing trend in the future period. It shows that the company isearning sufficient funds to pay the interest arising for the loan taken to put up 84
  • 85. project. In the year the PBIT is will be 17 times to its interest payment, it isbecause of the decrease in the interest and increase in the profits. FINDINGS Project appraisal methods try to reduce the subjectivity involved in assessingthe capacity of the borrowers with respect to repayment capacity. The availabilityof computerised software makes the technicalities of the assessment much simpleras compared to earlier. The project can be appraised by using some of the methodslike healthy discussion can be held with the members of management ofborrowings firms to get better idea about the business, its viability and the capacityof management to take decision in exceptional situation. The study revealed that the different aspects of a project are not independententities but are highly inter-related and a meaningful project appraisal dependsupon the appreciation of these fundamental facts. The appraisal of a project isundertaken by the bank with the objective of determining the market potential of a 85
  • 86. project, to determine repayment capacity of sanctioning unit and selecting anoptimal strategy. The methods of analysis vary from project to project, but thereare certain common aspects of study from the angle of technology and engineering. An analysis of a region economy provides a general framework withinwhich the assessment of any project is made. This analysis indicates whether theproject is in a potential environment, which enjoys priority for economicdevelopment of the region/state concerned. This exercise itself usually involves theinvestigation of six different aspects; Economic, Technical, Organizational,Managerial, Operational and Financial. The relative importance of these differentaspects can vary considerably according to circumstances and type of project. The study also revealed that in a large majority of cases, it is possible toquantify project costs and benefits. Future costs and benefits are calculated, usingeither market are shadow prices and on the basis of past performance in case ofexpansion projects. Further both costs and benefits are put under subsidence toinitiate the projects estimated rate of return. The latter is then compared with theminimum earning power. While the rate of return is an important test that allprojects with quantifiable costs and benefits must pass, importance andsignificance is usually overestimated. The rate of return is a necessary confirming test of projects that have to bejustified within a much wider frame of reference, in which basic project objectivesand the nature of project benefits increased employment and improved incomedistribution play major roles. 86
  • 87. It was found that technical feasibility study is mainly done to consider theadequacy and suitability of the plant, the equipments and their significations, plantlayout, balancing of different sections of the plant, proposed arrangements forprocurement of the plant and equipments, reputation of the machinery suppliersetc. The feasibility study also considers the technology required for a particularproject, evaluate technological alternatives and select the most appropriatetechnology in terms of optimum combination of project components. The study revealed that the market analysis gives a comprehensive accountof the market opportunity, as well as of the marketing strategy appropriate forconverting the opportunity into a reality. An intensive scanning and analysis of theproposed environment in which the industrial unit has to function should from thebasis for analyzing market opportunities as well as for specifying the marketingstrategy. This is because the ever changing environment, in which the industrysector functions, restricts or expands the opportunities available to and the threatsto be faced by an industrial unit. The purpose of the appraisal of financial aspects of a project is generally toensure its initiation of financial conditions for the sound implementation andefficient operation. The scope of this aspect of appraisal varies, of course,considerable with the nature of the project and whether it is revenue producing ornot. For projects, which involve the marketing of a product or services by an entity,the appraisal includes in investigation of the availability and cost of raw material,power, labour and services needed for production and the prospects for marketingthe product or services profitability. 87
  • 88. In every case, it is necessary to ensure that satisfactory accounts aremaintained for effective control over expenditure and revenue and to disclose theproject and entity carrying it out also. Since the banks finance only a part of theinvestment cost of a project, it is necessary to ensure that funds from other sourcesare available on acceptable terms to meet the balance of the cost. This may be relatively simple where the government is able to provide therest of the necessary funds from budgetary sources or it may be complicated, as ina project to expand or modernize a revenue earning concern where all the financialrequirements of the concern during the construction of the project must beconsidered. Financial appraisal also evaluates capacity of revenue producing investmentsfrom the stand point of the entity. Industrial sponsor or other investors, who wouldmake them in order to ascertain whether it is sufficiently attractive to warrant theirparticipation establishing that the entity carrying out the project is in a position tomanage its business in a cost-effective fashion is another important aspects. The efforts made by the Corporation Bank to constantly update itsevaluation procedures indicate its high level professionalism and explains why it isin a leading position amongst all nationalised banks and incase of Murali IndustriesLimited cement project bank has done efficient appraisal. The project is to set up 3cement plants at Karnataka, Rajastan and Gujarath with a capacity of 3 milliontonne per annum. The current DER is 2.81 where the banks norm is 2, it is less than the banknorm. But in coming year the ratio will be improved. For the project the average 88
  • 89. DER is 1.25. Sensitivity analysis shows that the debt servicing capacity if theMurali Industries Limited would be adequate in the adverse scenario assumed. Thepromoter/management risk, project implementation risk, operational risk, marketrisk and finance risk are considered to be normal. The overall DSCR of thecompany and project are 2.75 and 1.66 respectively, which indicates viability andits above the Bank norms. SUGGESTIONSi. Net Present Value of the project should be calculated. NPV is considered as one of the best method for evaluating the capital investment projects. It is the difference between the total present value of future cash inflows and the total present value of future cash outflows. The project should be accepted if the NPV is positive. If the bank would have calculated the NPV it would have made better appraisal. Because present value methods always provides for correct ranking of investment projects.ii. All critical assumption could be valued in the light of actual parameters for similar understanding in the same industry and sensitivity analysis can be undertaken by varying these factors accordingly. Relative comparison with other players in the industry would provide a better estimation and analysis of 89
  • 90. the project. It also helps to assess the impact of adverse changes in the operating conditions of the project on its viability.iii. In recent years, environmental concerns have assumed a greater deal of significance. The bank has to do Ecological analysis as the new project like drug and chemical industry impact the Environment.iv. The Bank should also consider the capability of management and its analytical skills of the top management in the company.v. The Costs, Profits are predicted only on the basis of the past trends. But same trend may not continue in the future. They may vary depending upon the Economic conditions, Business cycles, Government policies etc. So there should be a provision for all these contingencies. This exercise is critical as it calls for a multi-dimensional analysis of the project that is, a complete scanning of the project. CONCLUSION Project Appraisal is a science as well as an art. While the basic principles ofappraisal could be mastered in a short time span, the successful practice of the artof carrying out of appraisal requires keen observation, objectivity and decisionmaking. It is also necessary to took ahead of the project. Project appraisal is a key 90
  • 91. to broad based, balanced industrial growth of the country. In a way, it calls for ajudicious judgment and perspective outlook. The lending institutions examine the project to study its soundness onTechnical, Economic, Commercial and Management grounds. If the appraisalreport is found satisfactory, the loan application will be favourable considered. Themanager then communicates his decision to the borrower and terms and conditionswill be negotiated. The most important areas for the borrower and lender to negotiate are timingin relation to negotiation method of financing based on certificates of work done,repayment schedule, rate of interest, commitment fees, security options andmonitoring and control requirements. Financial institutions also pay attention topolitical environment and labour conditions of the area where the project is to belocated. Strikes, Lockouts, Industrial Peace and Communal Harmony in the areaplay a decisive role in examining success or failure of the project. As a lender and a development institution, the bank places particular stresson the need for an efficient organisation and responsible management for theexecution of the project. It is, therefore natural that financial institutions verycarefully appraise the managerial aspects before sanctioning assistance for aproject. If a proper appraise of the managerial aspects is made in the beginningitself, future problems in these areas can be avoided to a very large extent. It istherefore necessary that the overall background of the promoters, their academicqualification, business and industrial experience and their past performance arelooked into in greater detail to assess their capabilities for implementing theprojects for which financial assistance has been sought. 91
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