Ayush Group of IndustriesRead the case carefully and answer the following questions:(a) Estimate the cost of the project and highlight the financing structure.(b) Prepare the projected cash flows relating to long-term funds of the RBL for five years. Assume the terminal value of fixed assets, excepting land, to be 90% of the book value at the end of 5th year.(c) As a project analyst, comment on the important aspects of the project.Ayush Group of industries is planning to set up a manufacturing unit of ball bearings in Jiljil, Gujarat.The capacity of the factory would be 5,000,000 units per annum. Mr. Ayush director of Ayush Grouphas been entrusted the responsibility of bringing that factory into operation. The primary business areaof Ayush Group is construction. The construction company was incorporated as Ayush Housing andConstruction Ltd. (a public limited company) on October 1983. Real estate development continues tobe the main business of AHCL, with focus on high and medium range residential and commercialproperty. It concentrates on the area in and around Delhi, Bangalore and Mumbai. The constructionbusiness was always with a special focus on Noida, Ghaziabad, Thane etc.In October 2002 the company has launched new project called Ganga Enclave (Dehradun) in JointVenture with Dehradun Development Authority. The residential project at Faridabad involvingconstruction of about 2 million Sq.Ft of area is likely to be launched in early of 2004. The expectedturnover is approximately Rs.45 crores in this project for the first six months. In 1996, the companyhas been awarded three prestigious projects. The Razala Bridge in Karnataka at a contract value of Rs.300 million, the Rock Fill Dam in Doyang, Nagaland at cost of Rs. 1469 million and site levelling workat Mangalore, Karnataka awarded by Kudremukh Iron and Steel Company at a cost of Rs.120 million.These projects were completed as per the scheduled time.Apart from these the company executed many industrial civil construction projects for the textile,pharmaceutical, heavy engineering, chemical industries, commercial complexes, multi-storiedbuildings, effluent treatment systems, etc, which involve civil and structural work, sanitary andplumbing work, etc. The company made its entry into the overseas construction market in 1985 byconstructing a fibre-board factory at Abu Suhair. It was one of the most prestigious civil constructioncontracts awarded by the Iraqi government to an Indian company. AHCL was again the first Indiancompany to have secured a turnkey project of Hockil Dam Construction in Sudan in 1987. Thecompany has been awarded a service contract for the construction of sewerage system of Abu Aisha inLibya equivalent to Rs.1000 millions and for construction of Civil Works of Sugar Shafts & PowerHouse Complex in Haryana, amount equivalent to Rs.1984 million and the work has already beencommenced. It has received various awards from the Engineering Export Promotion Council. Currently,it is one among the very few Indian companies to have secured sizeable construction contractsoverseas. The new company is promoted by Ayush Group in a joint venture with Eastern Asian BearingsLtd. It entered into a technical collaboration with VEB Kombinat Waelzlager Und Normteile (anamalgamation of bearing companies in Germany which markets bearings under the brand name DKF).
Under the agreement, the collaborators were to supply all technical know-how and provide designs,drawings, etc to manufacture ball bearings.The company is expecting that the products find applications in motors, handpumps, idlers, machineryand the automobile industry. The companys major customers would be HMT, Kirloskar Bros, Enfield,Mahindra & Mahindra Tractors, Escorts, NLC, Bhilai Steel Plant, Crompton Greaves, Nalco, GAIL, AshokLeyland, Voltas, Tata Motors (Previously TELCO), TISCO, Hindustan Sheet Metals, etc. The newcompany, Ayush Bearings Limited (ABL), was formed on May 14, 2003 as a joint venture company. TheChairman cum Managing Director of the company is Mr. Ayush. The nominee from the Eastern AsiaBearings is Mr. Ram Jajodia. Two more nominees are supposed to join from the Eastern Asia Bearings.The project site has been finalized at Rahakana, Chhattishgarh. The site is 36 kilometers fromBilaspur. Three more manufacturing units are coming up in that locality – These are production unit ofelectric brakes from Kapoor group, Bulk Drug manufacturing company from ShameeraPharmaceuticals and the largest potassium based Fertilizer factory of German outfit Duntensdamer.The basic cost of the land is Rs. 24 lakhs. The cost of registration is 12.5%. The leveling anddevelopment work in the site is already over. It has cost the company around Rs. 15 lakhs. More orless 500 meters of approach road is constructed by the company at a cost of Rs. 5 lakhs. Internalroads of the factory are not yet done. It is expected that by the end of October 2003 this work could becompleted with a cost of Rs. 8 lakhs. The boundary wall of 8 feet height is already constructed at acost of Rs. 50 thousands. The cost of buildings and civil works cover the following: Building for main plant at a cost of Rs. 55 lakhs Building for water treatment plant at a cost of Rs. 20 lakhs Building for Hydraulic System at a cost of Rs. 5 lakhs Building for Pneumatic System at a cost of Rs. 3 lakhs Building for godowns at a cost of Rs. 8 lakhs. Building for administrative office at a cost of Rs. 5 lakhs Building for Time office at a cost of Rs. 1 lakh. Building for canteen at a cost of Rs. 2 lakhs. Garages at a cost of Rs. 1 lakhThe basic process equipments are being planned to be procured from Germany. The CNC machinewould be supplied by a Swedish company. The total FOB value of these equipments is expected to bein the range of Rs.12 crores. The support equipments like water supplying system, material handlingsystem, process automation, plant illumination, compressed air system, plant electrics and hydraulicsystem etc. are being supplied mostly by Indian vendors. Water supply system is supplied by Mather &Platt India Ltd. The cost of total supply would be Rs.3.5 lakhs. The total system covers the supply offour pump-motor sets along with separated control system. The material handling system proposedwould comprise of two EOT cranes and three mobile electric cars. Apart from these a couple ofwheelbarrows are also planned. EOT cranes are supplied from HEC, Ranchi at a cost of Rs.30 lakhs.
Electric cars are imported from Mitsubishi, Japan for an FOB cost of Rs.24 lakhs. Larsen and Toubrohave been roped in for the supply of process automation. The whole process is divided into four zonesand the controls of each of these zones are isolated. The supervisor level of control is done by a higherlevel computer monitoring the interfaces of these zonal control systems. The cost of the whole systemwould be Rs.25 lakhs. Plant lighting system is being procured from Philips India. The whole supplyincludes: Bay lighting with 500/1000 watt HPSV lamps, Room lighting with 2x40 watt tube lights, stairlights with 100 watt sodium lamps in flowering brackets etc. The whole package would cost thecompany Rs.5 lakhs. The compressed air system would be supplied by Crompton Greaves India. Thesystem consists of two compressors with a common drying unit and a comprehensive cooling watersupply system. The supply also includes its own control unit in electrical panels. All of these puttogether would charge the company around Rs.7 lakhs. The company is planning to get the plantelectrics requirements from Siemens India. The motor control centers and power control centers arethe primary elements in this package. The company has to commit an outlay of Rs.3 lakhs for thissystem. The hydraulic system would cost the company around Rs.6 lakhs. The cost of pipe lines forwater supply, compressed air supply and hydraulic lines would be Rs.2 lakhs. The exhaustive electricalsystem would demand a large usage of cables of different types. The company is planning to get thecables from Hindustan Cables at a cost of Rs.3 lakhs.The customs duty applicable on imported capital equipment is 35% of basic cost. The average rate ofexcise for indigenous machines is 16%. The average cost of octroi, freight, transportation, loading,unloading and forwarding charges is 4%. The erection charges on an average come to 10% of the basiccost of the plant and machinery. Under miscellaneous fixed assets the office equipments, furnitureand vehicles worth Rs.50 lakhs have to be purchased.Legal charges for drafting agreements for memorandum and articles of association would cost thecompany Rs.50,000. The cost of market survey was Rs.200,000. Reily and Associates had preparedthe feasibility report of the project. Total expenditure for the preparation of feasibility report wasRs.80,000. Other expenses expected to be incurred by the company till the date of commencement ofcommercial production are as follows: Travelling expenses to the of Rs.125,000 Postage, Telegrams and Telephone expenses to the tune of Rs.50,000 Printing and Stationery expenses to the tune of Rs.70,000 Advertisement expenses to the tune of Rs.10,00,000 Insurance premium during construction to the tune of Rs.3,00,000 The cost of electricity is Rs.5.90 per KWH. The slabs for power requirement are as follows: Capacity Utilization Upto 60% 60% to 85% 85% to 95% Above 95% Daily Power 1500 1323 1100 1000 Requirement (KWH) The cost of consumables per unit of final product is Rs.4.
Project Execution Schedule Activity Start Finish Land Development July15, 2003 August 10, 2003 Civil Work August 1, 2003 September 10, 2003 Equipment Erection August 5, 2003 December 15, 2003 Equipment Testing December 2, 2003 December 30, 2003 Integrated Trial January 20, 2004 February 20, 2004 Trial Production March 1, 2004 March 20, 2004 Commercial Production April 1, 2004Additional Information1. The capacity utilization is expected to be 80%, 90% and 100% in the first, second and third year respectively. Thereafter the capacity utilization of 100% is expected to be maintained.2. In order to provide for escalation in cost, contingencies are to be provided at 10% on fixed assets yet to be created, excluding land.3. IDBI Bank has agreed to extend a term loan of Rs.10 crore to ABL. The implicit rate of interest is 14% per annum. The principal amount of the loan is to be repaid in 5 years beginning from the end of first year in equal annual instalments.4. The promoter’s contribution is Rs.8 crores.5. Project cost excess of promoter’s contribution and term loan is to be raised through public issue of equity capital. Cost related to issue would be 5% of the size of the public issue.6. The average expected sales price per unit of ball bearings is Rs.85.7. The cost of repairs and maintenance in the first year of commercial production is 2% of the cost of plant and machineries. An increase of 5% is to be provided every year.8. The depreciation rates applicable are as follows: Buildings Machineries and Other Assets Company Law Purposes 3.34% 10.00% Income Tax Purposes 10.00% 10.00%9. Salaries and Wages are estimated to be Rs.11.25 lakhs per month in the first year of commercial production. An annual increase of 5% is expected in the coming years.10. Administrative overheads are estimated to be Rs.60 lakhs in the first year of commercial production with an increase of 4% every year.11. Selling overhead is calculated at the rate of 3% on the sales value.12. The cost of raw material is 50% of the sales.13. The following periodicities have been estimated for the computation of working capital:
(Period in months) Particulars Periodicity Raw Materials 1.1 Consumables 2.5 Finished Goods 0.5 Debtors 1.2 Expenses 1.014. Axis Bank has agreed to finance 75% of the working capital requirement from 2nd year onwards. Rate of interest on the bank borrowings for working capital is 12%15. Working capital requirement during first year should be included as margin money in the project cost.16. Average asset beta of the companies engaged in the manufacturing of ball bearings is 0.80.17. 364-day treasury bills return 5.2% in the market.18. Premium on the market portfolio is 6%.19. Tax rate applicable to the company is 35%.20. The company has decided to distribute 20% of the profit after tax as dividend.